Adtraction Group AB

Hello and welcome to the presentation of Attraction's second quarter results. Today's presenters are Andreas Hagström, CFO, and myself. My name is Simon Gustafsson. I'm the company CEO and one of the founders. So we have received some questions before via email. We'll do our best to answer those questions. And there's also a messaging box in the viewer that you can ask to ask questions during the presentation. So we'll finish this session up by a Q&A session. So I'll get straight to the point here. Q2 was not a great quarter for attraction. We saw a very weak market, both for e-commerce clients and consumer credit clients. And this resulted in negative growth for attraction. The good news is that attraction remains profitable in this market. And we can do this because we follow our sales and gross profit in real time. And we know exactly What are cost bases? So the question now is, will the market improve at some point or will the market forever be like it was in Q2? If the market stays like it was in Q2, Attraction is a company that can make 10 or maybe 15 million in EBITDA per quarter. If the market improves, I believe that we can make substantially higher operating profits. And perhaps needless to say, we believe that the market will turn at some point. There are some indications with the lower inflation rates, lower interest rates, and perhaps some consumer confidence picking up. We focus on what we can control though, and that is what we do. We try to find new customers, new partners, and make new matches. We also closely monitor our cost base. So this was a little bit of an introduction to the special situation. And with that said, I'll start talking about the state of attraction. The weak market led to a drop in sales of 14%, a drop in gross profit of 11%, and the divestment of Clara Loan explains around 40% of that drop, or around 4%. Attraction remains profitable. Again, we made an EBITDA of around 10 million and a margin of around 3.5 million. EBITDA dropped by 34%. And what we see here is the flip side of what we call operating leverage. So once we have covered our fixed cost base and the GP increases, the percentage increase in EBITDA will always be higher. This is simply the flip side of that equation. When gross profit decreases, EBITDA will increase at a higher pace. The solution for this is to get back to growth. And this is why growth is so important. Cash flow from operations was around 4 million negative. Second quarter is never great for cash flow generation. And I would say that this is a normal seasonality. Andreas will dig in. a little bit more into this because there are some one-off items here also. Yesterday, the board of directors made a decision to pay the second tranche of dividend on October 31st, which means that the share will trade X on October 28th. At least this is what we're planning for and this is what we expect will happen. And Attraction enjoys a strong financial position, as Andreas will highlight later on, and paying this dividend is important. totally unproblematic. Internally, we focused a lot on what we call Project X, and Project X is us moving everything from ad services platform to attractions platform and the integration of the organization. So I think that Project X has been a success. We've now moved everything to attractions platform, and eventually we will close down ad services platform. The integration work has also been successful. We're no longer ad service and attraction. We're one team and everyone is working towards the same goals. A result of Project X and the integration work is that Kasper Gröd has decided to leave attraction. I will say this about Kasper. Kasper thinks primarily as a shareholder. His question is not What is good for me as an employee? His question is, what's good for the company? And what's happened here is that he's delegated most of his responsibilities to his colleagues as part of the integration progress. So Kasper found himself in a position where he needed to either find a new role within Traction Group or maybe take a break from this industry after having worked here for 20 years or so. Casper chose to take a break and he will leave us by September 30. I will say this about Casper also. I believe that Casper has done everything he said he would do in connection with the transaction. And I expect that I will seek his advice also in the future. And I'm very confident that I will get that advice. The reason that Casper thinks as a shareholder, of course, is that he is a shareholder. So he owns around 10% of the company and he's interested in a continued success of attractions. So I just want to say thank you to Kasper and wish him the best of luck going forward. I'm looking to see what you'll do next. Again, going back to what we're trying to do here, we saw challenging markets in Q2 and the main focus is to get back to growth because the primary driver of EBITDA is growth. in gross profit. So this is what we're trying to do. Of course, we cannot swim upstream, but we will do everything that we can to get back to growth. And we will also try to monitor our cost base. So I would say that I'm not worried. We're in a good spot because we can keep delivering profitability in a good market. And the reason that we can do that is, of course, that we have a great business model. We call this business model partner marketing. or affiliate marketing. And the core here is that we help brands, which are e-commerce companies and consumer credit companies, increase their sales and they only pay for actual results. We also help partners, which are companies and people that own sites and other digital services, monetize their traffic and content. Attraction stands out because we're doing something that we call active partnership management. The partner marketing ecosystem is fairly complex, and it's not easy to know what the right commission levels are, what the right traffic mix is, and attractions know all of these things. And we're managing that through active partnership management. Attraction is a platform business, and this slide illustrates the core business of attraction. Fundamentally, what's going on is that partners own sites, a user shows up on that site, clicks an ad link, and ends up at an advertiser. If the user buys something, then the advertisers will happily pay a commission. The advertiser will be happy by this because their marketing spend is 100% efficient. The partners are happy because they made a commission and also they provided a useful service for their user. Of course, Attraction is also happy because we helped the advertisers and partners reach their business goals. And also we made a platform fee as a result of the transaction. The core functionality of Attraction's platform is matching. That is, we make sure that an advertiser works with the right partners and we make sure that a partner works with the right advertisers. A part of this equation is also setting price expectations and volume expectations. Another core functionality of the platform is tracking. We track which click result in an order or a sale and where that click originated. We manage payments and invoicing and we manage taxes and VAT and everything else that needs to be done. On top of this, we add services. And we call those services active partnership management. And a good way to explain that is to look at a sample of our partner universe. This slide shows a few partners. Most of them are very important, but it's still a few limited number of partners. I believe we have eight or 9,000 partners in total. And navigating that environment is not so easy. I think that Attraction and Attraction's account managers can take basically any account and improve the performance of that account. That is active partnership management. We have a great business model. Then the question is, how does that fit into the marketing mix of a brand and the customer acquisition of a brand? I'm going to spend a little bit more time on this than I usually do because some things have happened in the last couple of months and I just want to comment on that and explain our world view. So if you're in an online business, you're an e-commerce company or you're a consumer credit company, chances are that you rely heavily on American giant platform companies to acquire traffic. Of course, those companies are Meta with Facebook and Instagram and it's Google and Google is a monopolist and has a market share of more than 90% of search in most geographies. And Google also behaves like a monopolist. And that is not without problems in my opinion. If I were an e-commerce company, I would be a little bit hesitant to rely too much on Google to acquire traffic. And here's why. Google changes the rules almost randomly and without explaining why. Google changes prices. And when this happens, everyone else just needs to play along because Google is a monopolist. And I think that partner marketing is a great way for brands to diversify traffic acquisition and reduce risks. Now, when we look at this slide, we see that in this example, advertiser partner marketing represents around 10% of customer acquisition for this particular advertiser. And that means that the advertiser is working with a couple of hundred brands. And that looks a little bit complicated. I'll get back to that too in a minute. But first I want to talk a little bit more about Google. So the other day I searched for Bosch skruvdragare, Bosch screwdriver in English, in Google. And this is what popped up. Everything that you see within the box here is paid search. And there's a couple of problems here. So first of all, this is not a good search. user experience for me as a consumer. I don't know what to click, so probably I'll click everything. And what happens then is that someone is paying for those clicks and without getting much benefit. So what was happening here, because Google is occupying so much digital space with their ads, there's more clicks before a transaction happened. And of course, the result is that the cost per transaction increases for advertisers. Also, I don't know, 10 years ago, organic search totally dominated the search results. Now it's almost difficult to find those organic search results. And you can see a tiny little thing at the bottom here. So what Google here is doing is not good for the consumer because it's not a better user experience. It's not good for the advertiser because they pay more without getting more for it. It's only good for Google. So Google essentially is using its monopoly position to make more money and higher earnings. And this is problematic because they are moving away, in my opinion, from the core idea of serving its users and its customers. I think another example here is J4. J4 is a web analytics platform. Before we were talking about Google Analytics, but about a year ago, J4 Since about a year ago, GA4 is used by most companies. And according to GA4, I'm simplifying things a little bit here, but this is the main story. According to GA4, Google is responsible for all sales that happens for an e-commerce company. And this is simply not true. Attraction and many other traffic sources deliver a lot of sales to companies, and that is simply not reflected in GA4. So if an e-commerce company is making sales budget allocation decisions based on what's going on in GA4, then those decisions will simply be wrong. In the past 12 months or so, we had to show that a couple of times. We actually shut down our traffic to certain e-commerce companies. And you know what? That traffic disappeared. Turns out it wasn't Google that was delivering those things. I think that by now, most companies understand that GA4 is not a good tool to analyze the source of uh traffic companies also use need to look at other attribution models again i think that this is the monopolist behavior also we see some seemingly arbitrary changes that's going on and there's there's some recent examples here that i would like to to highlight uh google decides who gets traffic for a certain keyword so a couple of months ago google decided that voucher code sites that's affiliated with a magazine or a newspaper should not get any traffic anymore and what happened is that the companies have been building a business for many years and then all of a sudden google changed the rules because they feel like it without really explaining why attraction this is not a huge problem because there are other voucher code sites and that get the traffic instead but it's really problematic to build a business in this google environment i think another example is third-party cookies google has been talking for i guess four years that that third-party cookies would be phased out businesses adapted to that and then last week google said you know what we're going to keep third-party cookies and It's still a little bit uncertain exactly what will happen here, but I think this is, um, it is problematic with a company as big as influential as Google, just randomly changing the rules. And if, um, I would like to highlight also about the third party cookies that, that attraction has built solution so that we can track without relying on third party cookies. So this is not a problem for us. I'm merely trying to illustrate what, what Google is, is, uh, doing. And if I were an e-commerce company, I would be very hesitant to put all my eggs in the Google basket because things like this keep happening. I think that most companies have experienced the loss of traffic because Google changed something and then they have to crawl their way back one way or another. So if I were an e-commerce company, I would rely more on partner marketing. Partner marketing is easy if you work with attraction. Attraction coordinates everything and optimizes accounts. And you know what? Maybe it's a good idea to actually increase the spend on partner marketing and make that the bigger part of your total traffic acquisition. This is what I would do. And I think that others are seeing that Google is exploiting their position, and I expect that there will be alternatives fairly soon. Interestingly enough, OpenAI said the other day that they will... will introduce, they will have their own search engine. And I think that options like that will be attractive because Google is no longer focused solely on the user and their customers. So the main point here is that it's risky to rely solely on Google and it's good to work also with other traffic sources and then Attraction fits very nicely into that picture. so because we have a good business model we have a nice positioning and we also stand out from competition through our active partnership management we also have ambitious financial goals and of course when sales is dropping by 14 it feels a little bit ridiculous to talk about a sales target of 20 but we're sticking to this because we fundamentally believe that we can do this and we also believe that we can reach an ebitda of seven percent i would like to emphasize again that um growth is more important and i think i explained that initially that why growth is important growth is important because it leads to a higher ebit day over time so we saw a negative growth in q2 and let us dig down to that a little bit more we divested clara loan in q1 and the impact of that is a negative growth of gross profit growth of four percent um We're still doing geographical expansion. So France and Italy are growing for sure, but they're still too small to have an impact on the total group. And growth in existing markets was 7%. And this is our focus. This is what we need to fix going forward. So again, I want to put this into perspective. So yeah, we've had two fairly poor quarters here, but we've been growing for a long time, and we've easily beaten our sales growth target of 20%. If we look at the slightly longer period, it's clear that we've grown every single quarter since the beginning of 21. As a matter of fact, you could extend this graph to 2009, and you would only see one or two dens along the way. Attraction has a long history of delivering growth, and I'm convinced that we will continue to do that. The EBITDA margin ended up at 3.5% for the quarter. And again, this is not where we need to be, but I think I explained why this happened. You may recall that Attraction enjoyed good momentum in Q3 and Q4 of last year. And in connection with that, we also improved our margin close to our goal of 7%. So that goal remains, and I think that we can reach it once we get back to gross profit growth. The other side of the EBITDA equation, of course, is costs. The biggest cost for attraction is employees. And we've been a little bit careful when it comes to recruitment for a few quarters when the markets have been weak. So some people have left attraction and we've chosen not to replace those people with the new recruitments because it made sense to reduce the staff a little bit. And I think that this is also reflected in our cost base. Cost base have been fairly stable perhaps shrinking a little bit. So this is what I had to say and now Andreas will take over and talk about the financial development.

Thank you Simon. And as Simon has already mentioned we have a slight tough quarter to present in the numbers. And I'm going to start with the net sales that is at 276.6 million. That is a 14% negative growth. Looking at the gross profit, it's 52.8 million. That is 11% negative growth. And if we exclude the vertical other, which leave us with the core business of attraction, the network, we have a slightly less negative growth of 7%. Looking at EBITDA, it's at 9.8 million. That is a 34% decrease from last year and an EBITDA margin of 3.5%. As Simon has already mentioned, we usually enjoy operating leverage in our business model. However, this quarter, we see the flip side of that coin and the EBITDA decrease more than the gross profit percentage-wise. We are confident that we will again see positive market in e-commerce and finance. We're not going to speculate as to when that is, but when it turns, we will again enjoy the operating leverage in the platform business. Cost-wise, we have been able to maintain good cost control, so also in the second quarter. And looking forward to Q3, we expect the cost base to be similar as the second quarter. The adjusted net result per share is at 0.47 kronor. There's a 31% decrease from last year. And digging down to the verticals and starting with e-commerce, we have 28.9 million in gross profit. There's an 8.5% negative growth. We grow in three out of our 12 markets, and it's the smaller markets where we see growth. And in the bigger markets, we follow more of the market as a whole, and we see slight negative growth numbers. In the finance vertical, we have 23.6 million. There's a 5.4% negative growth. We grow on five out of 12 markets. We should also add here that we are quite small on a few of those markets due to regulatory reasons. And in the other vertical, we can see that the divestment of Clara Loan has made a big impact. This is everything that is not network related, and it leaves us with a gross profit of 0.3 million. And looking at the geography, starting with the Nordics, it's at 39 million in gross profit. That's a 15% negative growth. Excluding the other vertical, it's at 9% negative growth. And as the market leader in the Nordics, we have a tougher time to grow as the markets are sour. Looking at Europe, we have 13.8 million in gross profit. That is the same as last year. Here we grow on four out of our eight markets and it's the same outlook here. It's the smaller markets where we see growth and small negative growth on the bigger markets. Turning to cash flow and then starting with the operating cash flow, it's at minus 3.8 million. I will dig more into that in the next slide. Investing activities is at minus 1.7 million. That is due to the investment in the new Stockholm office. And the financing activities, we have minus 16.6 million. That is the dividend paid to shareholders in April. And that gives us a total cash flow of minus 22.2 million in the quarter. And there's still a strong net cash position going out of the quarter of 93.6 million. this graph we want to show the fluctuations of our cash flow it has a reoccurring seasonality as you can see with the second quarter usually the weakest quarter of the year so hopefully also this year and we want to emphasize here that we have a strong correlation between the adjusted net result and the operating cash flow over time and these fluctuations are mainly due to our payment model, where we get paid by our clients first and pay our partners later. We can also see a slight negative effect coming from the migration of the ad service client base to the attraction platform. Here we have fallen behind a little bit on invoicing. These are processes that we will focus on in the second half of the year. As of now, we can also add that This doesn't really have a significant impact on the operations as they stand and go now. And I'm going to end the financial part of the presentation with this table of the EBITDA contribution of Clara Loan. I'm not going to dig into details here, but as you can see, Clara Loan has only had a slight contribution to the attraction group profitability over the last five quarters. With that, I'm going to leave the mic back to you, Simon.

Thank you. Just to conclude this thing, I will say this before we get into some questions. For Q3, we expect our performance for e-commerce and finance to be in line with Q2. This is what we're seeing so far in July. And we also think that the vertical other also will be in line with Q2. We're also confident that we have profitable operations. Of course, our focus is to get back to growth. And I will also say that recently, some M&A discussions have popped up again, and we're seeing more activity in that regard. So we will see what happens there. So that was what we had to say here. I remain optimistic about the traction in our business model. I'm confident that we can deliver higher profits and I'm confident about the strength of our business model and our positioning. So with that said, I will try to address some of the questions that we received. And I will start by saying that I think that we have received good questions. I think that we now have shareholders and others who fundamentally understand our business model. So let me dig into those. So first, there's a question regarding the revenue per advertiser and partner during 2024, where this person is asking for an estimate or feeling in percentage to grasp the impact of the weaker market. That is very difficult to answer because there's a great variation. Some advertisers are seeing great growth. Others are dropping by 80%. And I guess it's the same on the partner side that we see some strong variations. And I think the best proxy is to assume that advertisers on average develop as attraction and the same with partners. Of course, that proxy is not entirely fair and perhaps not not even useful but that's that's the best answer i can get then there's a question about google and i talked a lot about google today so i'm happy to talk more and the question is this google makes it harder and harder for partners what's your view on on your on this dynamic long term and i think that um i i addressed this a little bit i think that google fundamentally behaves as a monopolist and and i don't think the focus is what's best for customers or users anymore. The focus is what's best for Google. When companies start behaving like that, they undermine their own position long-term, I think, even if they are monopolists. So if I were Google, I would be a little bit worried about what OpenAI is doing in search because it's clear that Google search has developed in a strange way. So that's my take on that. I will say that... Partners slash affiliates are very good at navigating this environment. Partners adapt and find traffic. And this is actually the beauty of our business model that the partner portfolio is so rich that they will find traffic wherever it is on the internet. And then there's another question about Google. Could you talk about how you view Google's increasing shelf space from paid ads, AR results, own comparisons, and as that's our effect in the SEO and has the traffic for your partners? So again, Google is a tricky company to deal with because they changed the rules, but our partners are smart and flexible. And as a matter of fact, there's a lot of partners in Attractions Network who actually acquire traffic. from Google. So I think that the share of paid traffic versus organic traffic has dramatically increased the last few years simply because Google is making more money off of that and then partners needed to adapt. And I think the general answer here is that, again, partners are smart, flexible, and they will find traffic wherever it is. A question here, could you elaborate on the difference in partner quality and how you have worked and developed in recent years? Clear examples are appreciated. So I'm not going to name names when it comes to partners, but I can talk a little bit about how we work with this in general. And I'm actually glad that we get this question because we focus a lot on partner quality. In a network like ours, there's always a risk. or fraud, we try to strike down on that very hard. We simply do not accept fraud and we have a rigid process to control that. And the key here is transparency. We need to understand where the traffic is coming from and we need to be certain that the commission is right for that type of traffic. And I will give you one example. There's something called sub networks, which is basically a publisher that gathers many other publishers and then sends that traffic through attraction to advertisers. And we are very hesitant towards those, at least in the Nordics, because transparency and traffic quality is not good enough. So we're closing them down. Our competitors are not doing that to the same extent. And we will keep moving in this direction because this is actually the way to do things. to have a clean network and be transparent. And we will talk more about this going forward. So thank you for that question, because I think that highlights one of the many advantages of attraction. Then we have another question here. Can you elaborate on what is affecting the number of transactions the most? Is it that advisors decreased their partner marketing budgets compared to last year? So less transaction can be executed or do we see less traffic from partners and this is a complex question but there are some some broad statements that i can can make about this so first of all we do see a difference between e-commerce and finance for e-commerce there's been some budget restrictions we've seen some big e-commerce companies pause their campaigns temporarily because they need to fix something and that obviously means that the decrease for attraction is 100% until they restart those programs. I'm confident that they will restart them at some point. So I would say that there's also, so it's a combination for e-commerce between budget, lower budgets, and also less demand because of weak consumer demand. So we probably see fewer searches and so on. In finance, it's a little bit different. There's still a big demand for loans, but because of the different risk environment, loan providers are less likely to pay out loans. So I would say that the demand, the number of clicks is almost the same as before, but because of the new interest rate environment, it's more difficult to actually approve loans, so the approval rate is lower. So that's sort of the big picture, and I hope that answers the questions. Then this person says that we're talking a lot about operating leverage. Can you elaborate on the dynamics of this? Don't you need to increase the headcount when you increase the number of advertisers partners? Well, that's of course true to some extent. I think the point here is that we can always do a lot more with our current employee base and at some point we obviously obviously i expect that we can significantly increase our gross profit with approximately the same number of employees that's that's the first thing obviously we will need to to hire more at some point but i think that what we've done historically is is we've been managed to to grow the gross profit quicker than the cost base. And this is also what we expect going forward. I hope that answers the questions. And that's actually all we had for today. So I'm going to say thank you very much for listening in and see you next quarter.