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Hello, and welcome to the Asetek Q1 2023 Earnings Call. My name is Alex. I'll be coordinating the call today. [Operator Instructions] I'll now hand over to your host, Peter Madsen, CFO, to begin. Please go ahead.
Thanks, Alex, and thank you, everybody, and welcome to this Asetek Q1 2023 Earnings Call. Sorry about the slight delay. My name is Peter Madsen, and I'm the CFO. We have on another location, Andre Sloth Eriksen also; Andre, can we hear you?
Yes. Good morning.
Perfect. Good morning. So we are about to start this call. As you will know, if you've been following us, we preannounced the figures on April 18 and the figures as such are not changed significantly. But of course, there's always some news. With that, Andre, I'll hand it over to you.
Thank you. So we're looking into our first quarter revenue of just shy of $15 million, up 16% from last year, where it was just around $14 million. Our gross margins increased to 44% as of 38% last year. We have a Q1 EBITDA adjusted of just shy of $3 million compared with an EBITDA loss of $1 million in the same quarter last year. SimSports revenue of $1.3 million, essentially reflecting that we have started shipping, and yes, in this case, 8 new products. And we also had 23 new liquid coolers that began shipping in Q1. As a surprise to no one, I guess, we laid off significant portion of people last year. We are now seeing the full effect of that, the same as we put our litigation efforts to rest. So we have actually seen an OpEx reduction of 25%. Last week, we completed a successful listing at the NASDAQ Copenhagen after completing our rights issue, and yes, raising $20 million in gross proceeds. We maintain our '23 outlook with a revenue growth of between 5% and 15% compared to last year, with an operating income between $2 million and $4 million and of course, we will get back to that also. Next slide, please. So if we look a little bit into what does the world look like for Asetek right now. We see a good interest and a lot of positive feedback, both for liquid cooling as well as our SimSports products. We do see signs of the liquid cooling market improving with, for sure, increased order activities and our customers are reinstating and executing on previous product launch plans. And it seems as the recent forecast we are receiving indicates that they have burned through their inventories and things are normalizing a little bit. Some of you may already then wonder and say why are we then sticking to the forecast? And without spoiling all the fun in the end, I can say that it's because we have low visibility as always. So right now, for example, the first half looks really good. Second half does not look bad, but we just don't have visibility and it's not 100% clear to us yet that our customers, so our OEM customers that they have actually seen a pickup. So for now, Q3, Q4, still low visibility. We are executing on our SimSports product rollout plan for sure. The situation is clearing up there as well in terms of the supply side. And that's what we've been basically doing and is basically doing -- basically shipping against the order backlog that was created during Q4 and Q1 last year.
We essentially continue where we started. We continue all the time looking at new product developments, launching more products, executing that's really what we do. we focus on, of course, efficiency, supply chain capacity and capabilities. Needless to say, with 25% of the company laid off, and we were already running fast, and now we're running even faster. So instead of always running fast, we, of course, also always trying to see where we can improve. We strengthened our balance sheet with the rights issue, of course. And we have been warning for a while that we would start shipping out of Malaysia mainly because of customer delays, it had not really happened in volume, but I'm pleased to say that right now, we are shipping in volume out of Malaysia, basically during our existing contract manufacturers just having sites in Malaysia. On the market backdrop, of course, the war is still going on. We are not seeing the same amount of supply chain issues, but what we are seeing is that we always had a super strong supply chain that could scale and was very flexible. And we are seeing that in China that sub-suppliers are not able to scale as fast as they used to be. So there's still a lag there. Of course, we know there is reduced consumer spending. And as I just mentioned, we do see limited visibility. That is not new, though. It's always been like that. So because we come from, let's say, a low place with last year, then, of course, we're a little bit careful. But the sense that we don't have visibility into Q3 and Q4 at this point in time is nothing new, that's business as usual. So as I just alluded to last week, we did open up for trading in NASDAQ Copenhagen, and that followed our fully underwritten rights issue, where we raised NOK 214 million or roughly $200 million in gross proceeds, strengthening our balance sheet and liquidity. And we, at the same time, issued roughly 71 million new shares. We did receive strong support from our shareholders in the sense that 99.3% of our shareholders actually subscribe to their share of the new round. We are only the third company to join the Danish main list so far in 2023. The initial trading will be in the form of entitlements because we, at the moment, are dual-listed, and we're also listed in Oslo, of course. And shareholders have ways to trade the shares on NASDAQ, they have to transfer their shares. They have to go to the bank and let them know that they want to transfer the shares to the Danish register instead of the Norwegian. We have started the delisting process from Oslo. And as a company, we do encourage shareholders to move their shares from Oslo to Copenhagen. And if you are in doubt on how to do that, at our IR pages -- our Investor Relations page, there is an FAQ on how to do that. So just very briefly, our current focus is on the gaming equipment. So liquid cooling for enthusiasts and gaming PCs. And let me just remind you that before SimSports, that segment was referred to as gaming and enthusiasts. Now we call it only what it is, it's a liquid cooling for 2 types of customers: one of them is as a stand-alone liquid cooling product, and that is meant for end users who are building their own PCs or operating their own PCs with a liquid cooler. And then there is the OEM side, where we are selling, let's say, in brown boxes our liquid coolers to an OEM, where the OEM is then building it into their product and their product is typically a gaming PC. And then on the right-hand side, we obviously have the SimSports business where we are selling steering wheel, pedals wheel bases, et cetera. So not much new to report on this slide. We are a global company, at least that's what we like to call ourselves with sales and product management and management in the U.S. and the West Coast. We are represented in Texas in [indiscernible]. We have product management, R&D, quality, management, finance, branding and so forth. And now in Malaysia, we do have, let's call it, a substantial manufacturing site and, of course, also quality. And just to remind everyone, why are we in Malaysia? First of all, to let's say, get more robustness than just being in China, but also because -- and mainly because of the situation, the tax situation between the U.S. and China where there is a penalty on products manufactured in China imported into the U.S. So what we try to do now is to build our U.S. [ bound ] products in Malaysia. And then in China, we still have, of course, the vast majority of our supply chain. And then in Taipei in Taiwan, we have sales and product management still. So if we start with our main business, the liquid cooling business, for sure, we have seen an increase in release activity. We had 23 new products starting shipping in the quarter, 4 of them with our latest eighth generation technology, our most advanced technology to date with higher performance, less power consumption and less noise also. We have 16 new products that we plan on shipping in Q2. So it's everything from our OEM customers to SIs, system integrators, as well as we are rolling in a new customer. And as always, we are investing in product development and our branding to expand with key customers and get new ones, of course. And if you look at the slides a little bit, I think what it does say is that we are remarkably higher in new product launches compared to the last 2 years. And -- that in itself is a mix of what I believe the market coming back, customers coming back, not that we lost them, but in the sense that they have started to invest again, but it's also for some customers, it's just product refreshes, et cetera. So it's a little bit of everything, but for sure, a good signal and much more fun than last year for sure. Next slide, please. So when we look on our customers, we are currently shipping to more than 20 customers this year in '23. So far, 92% of our revenue goes to our big -- top 5 customers. Our ambition, of course, is always to increase diversification. And as such, I'm happy that this year, we are, as it's planned for right now, we are expecting to launch with a new customer. And when I say expecting, that's, of course, because we have not started shipping yet, but just to be clear, we are building the products as we speak. So I don't see a big risk there. And in my opinion, this customer will enter right into the top 5 list right away. So I think that's a good sign of what we've been saying all along that there are still plenty of opportunity in our liquid cooling business.
Next slide, please. Just staying with our liquid cooling business, I think it's important to remind ourselves and also remind you guys that we do have a very robust and solid liquid cooling business. We have, as we all know, spent some money on the data center business, we have invested heavily in that. We have started off the SimSports business. We have started off the headquarter construction. But if we just look at the Liquid Cooling business, it actually produced almost $75 million of EBITDA during the last 4 years. So it's a pretty strong business, I would say.
Next slide, please. On the liquid cooling side, not much have changed in how we are approaching things. Of course, we want to be the best. We want to be the biggest. That's what we're focusing on. And the way we do that is making sure we have the best products. And when I say the best, I mean, not necessarily in terms of pricing, but in terms of performance, in terms of quality, in terms of customer support, in terms of branding and marketing, and it seems to be working really nice.
And as I just said before, we have landed a new customer that we're going to tell you the name of a little bit later this year. So that's a nice position. And from my perspective, I'm pretty happy with how the business looks right now. Just a little bit of SimSports as well. We have been and we are super busy on the SimSports side also because we have 8 new products that started shipping and if you compare that to the liquid cooling, this is a very different ball game in the sense that liquid cooling, we have been doing for 20 years. And when we have 23 new products, for example, I mean the core technology is the same, the technology behind it is the same. We have huge experience base where if we say 8 new products on the SimSports side, that could be anything from pedals to steering wheels, to components, to wheel bases. So that's truly different products and with 0 experience base, that's kind of interesting, let me put it like that. And just like on the liquid cooling side, our manufacturing strategy, and that's always what's worked for us is that as long as something is new, so when we're launching, as long as something is, let's say, complex and difficult, we do actually roll out the first manufacturing in Denmark. And then when all processes are like we want them to be, then we outsource and then we transfer the mass manufacturing to a contract manufacturer. And we are -- we have done that partly with the pedals and we are engaged and working on right now, effectively manufacturing the steering wheels in Malaysia. But for now, pretty much everything is made in Denmark. We have 3 new products that's set to start here in Q2. And one of the things that I'm excited about, I'm actually going to shoot a video about it tomorrow, that will be launched soon, is our quick release system, where we enable our wheelbase to be used with a lot of different steering wheel brands, from competitors, of course, but it's really what the market needs, it's what the end user needs. And to me, I don't see it as a lost sale when I say a quick release. I see it as a sole wheelbase because people will be using our wheelbase. And especially on steering wheels, there are so many steering wheels. You cannot please everyone, and it will be impossible for us to make 50 different steering wheels. So there will be an industry enabler for sure and we are quite excited about seeing how that will be received. We have a design win with a major U.S. retailer. I'm not going to talk a lot about it right now. We will tell you more later. It's for sure, I will not say, a shift in strategy, but I would say it's a new opportunity that came up that we are now pursuing and see how that will turn out. We have nothing against retail as such, but retail is a different animal. We have competitors who're selling direct to end users. So competing through a retail challenge is really tough in terms of the margins but I think we have found a way through and now, for sure, we're going to try now.
We have worked hard actually since Q4 last year on a deal with, I would say, [ Larry ], well-known racing car driver where we will launch a complete series with his name and branding on it, so that's also exciting. I can say it's not Kevin Magnussen for those of you who thought it would be. In terms of revenue, our Q1 revenue was $1.3 million. We currently have a backlog in excess of $1 million. And for sure, our gross margins, they are in the late 30s somewhere and don't read anything into that. As I just said, I don't think we can manufacture anywhere more expensive than in Denmark. So the fact that we can reach these margins with low volume, let's say, high panic manufacturing and still be in the late 30s is actually pretty good, in my opinion. Next slide, please. So I'm not going to spend a lot of time on this slide. We are executing on our strategy in the SimSports by delivering a lot of new products that sets themselves apart from the competition, we believe. And our focus is to have a full ecosystem as soon as possible. And I would say, by the end of this year, we are close in the sense that we then have a few different pedal sets, few different wheelbases and a few different wheels. So we're getting there, for sure. Next slide, please. Yes. That's over to you, Madsen.
Yes. Thank you. And we'll start out with an overview of our revenue and our EBITDA margins, how they reflect market volatility. It's important to remember that our numbers go up and down for a reason, and that reason is most often the revenue. You can see the revenue has increased lately. It's still a low number at just about $15 million, but it has increased and you will also see that the EBITDA margin has gone up correspondingly and that actually started already in Q4 last year, reflecting our cost savings program as we initiated last year. And the P&L, starting on the top line. Revenue at $14.8 million versus $13.9 million the same quarter last year, 6% up or $900,000 and that number is a combination, most of all, of course, of the Liquid Cooling revenue, but also then this year of SimSports. This year, it does not include any Data Center revenue, whereas last year, there was more than $1 million of Data Center numbers -- revenue in numbers. Unit sales, almost flat a little bit on a decline, 4% of decline in the unit sales quarter-over-quarter and that means that something else must turn up, and that's the ASP, the average sales price, which is now at $60 versus $53 of the same quarter last year. And that is a change in product mix, go into higher performance products, more complex products. Be careful, though, don't confuse higher sales prices, the ASP with also leading to higher gross margins. That doesn't always lead to that, but it often does, of course. SimSports revenue is $1.3 million versus $200,000 last year in 3 major product groups. Andre also alluded to that. And of course, we still see the number -- the revenue number is low, being impacted by some of the things that we have seen going on in the inventory, destocking and potentially also the lower end user demand, which Andre also alluded to. Gross profits of $6.5 million this year versus $5.3 million last year, that's $1.2 million coming in from that line. I'll come back to the gross margin in a second. Overhead expenses down to $5.4 million versus $7.2 million the year before. That's $1.8 million of reduction. We've been talking a lot about this because it was hurtful. It was a reduction in staff -- significant reduction in staff and then also a reduction in litigation activity. Litigation is down by $1.2 million, pretty much -- it's pretty much all gone. I would say in Q1, I think we spent less than $100,000 in litigation in Q1, where we spent $1.2 million the year before. And then the rest of the reduction is -- I call it staff because that's pretty much what it is. It's a reduction in headcount and all associated costs there with. That leads us to an operating income of $1.1 million versus a loss of $1.9 million last year. And in EBITDA, I should also mention that, of $2.8 million this year versus a loss of $900,000 last year. Income before tax, $750,000 versus a loss of $1.9 million last year. So it's all pointing in the same direction here. Gross margins is always an interesting topic. We are at a high point this year and this quarter at 44%. It's the highest we've seen for a while. It is -- and granted, we are comparing with a very low 38% gross margin in the same quarter of last year, which it was low due to shipping and other factors, but mainly shipping was last year and surprisingly higher last year. The increase this year is a change in, yes, ASP sales prices, we spoke about that, but actually more impact from product mix, where we are selling more complex products. They tend to get more expensive, yes, but they also tend to get more margin-rich for us. So it's the complexity of the product and should be looking for not only the sales price of it. As Andre alluded to, the SimSports gross margin is a little bit lower than the average here, but it's not pulling it down significantly. It was in the high 30s he said, which is true. And then gross margins, other impactors like shipping and stuff like that is more on a normal level this year than it was the year before. And then you can see the yellow lines here. This is just to put a little bit of emphasis on the gross -- not -- yes, the impact on the gross margins from foreign exchange rates. We do all we can, of course, to -- if there is an increase of price due to foreign exchange, if there's an increase of cost price, then we turn around and transfer that over to the customers as much as we can. That's just the nature of doing business. However, there's a lag in that function. And that lag in time turns out with the effect that if we see a lower cost of the Chinese and remember, then that turns into a higher gross margin for us. That's just a system of it. It's a systemic relation here. It's not 1:1, it's not quarter-to-quarter, but over time, we have seen that if the price -- the cost price in the foreign exchange rates are lower, then that turns into a better gross margin. We pay our bills in U.S. dollars. However, there is a built-in system so that if renminbi is changing, then our cost price in U.S. dollars is also changing. It's built on -- there's a time lag built-in, so it's not, again, month-to-month or quarter-to-quarter. And there's a threshold system build-in so that we don't see all the spikes in either up or down in what direction. But as you can see here, with the link -- there is a link between ForEx and gross market. Balance sheet. And this balance sheet you're looking at here is from March 31, meaning it's before the capital raise that we did here in May. We had -- that's an important measurement here, we had $5.3 million in the bank at the end of March, which is down approximately $2 million versus December '22.
We're still investing in our balance sheet here. We've invested $5 million in Q1 in the headquarter, and we invested roughly [ $1 million ] in R&D. And we will continue to invest in both. You can see our current assets from there, I just report that our measurements on the current assets, meaning our inventories and accounts receivables, are stable. Inventories a little bit higher here at the end of March than they were at the end of December by roughly $2 million, I believe. That's only natural because we have changed -- or we're shifting into the SimSports segment, which is a segment where we need inventories on our own books. And again, this is before the capital raise, $20 million gross, $17-ish million net, which are flowing into our accounts as we speak and of course, they will have an impact on the balance sheet.
Financial strategies. Not so much change here. We are at a period now where our margins are high, at least at the higher end of what we've seen before. We're adding customers. As Andre said, we have rightsized the organization. It's slimmed down, and we are performing well on our balance sheet measurements, meaning that what we need now is top line growth. and that's what we're working on. And with that, Andre, I'm sending it back to you for a summary.
Thank you. So just to sum up what we talked about in the last 30 minutes. We are, at the moment, seeing a good end-user interest in both liquid cooling as well as SimSports. We are seeing signs of stabilization in the sense that we can see our customers are keeping us busy again, as always, we do not have a long visibility. And of course, coming from, let's say, at a low place in terms of revenue. We are, of course, more, let's say, conservative than we would used to be. So we need to see and hopefully, we will see this carrying on into Q3 and Q4, and we can, let's say, rightfully claim that the business is back to where it should be. But for now, at least, it looks good. We focus on scaling the SimSports business, both in terms of products as well as end-user-connection points, so resellers, distributors, et cetera. We now have the rights issue under our [ wealth ], providing the needed liquidity to complete our headquarter. We optimized our cost base. Well, that's actually almost a year ago, but now we're seeing a full effect. And we focus on being even stronger and nimbler and efficient than we were before. We, for now, maintain our guidance, which is 5% to 15% top line growth and an operating income between $2 million and $4 million. We still believe that our long-term average growth expectation should be around 15% when the markets normalize. And we don't see why we should not be able to at least maintain that for the years to come. So with those words, that was the Q1 presentation, and I think we'll go into Q&A now.
Yes, let's do that. And Alex, the operator, if you can handle if there are any verbal questions for us?
[Operator Instructions] Our first question from today comes from Yiwei Zhou of SEB.
I have 2 questions here. Firstly, you mentioned a new sales strategy for SimSports. Would you please elaborate a bit on this? And secondly, the expectation for a long-term gross margin of SimSports, do you see any margin potential when the business is getting more scale?
So on the first topic, I'm not going to elaborate more on it, as I said during the presentation, we'll get back to that. And in terms of margin for the SimSports, it's still too early to say. As I just explained, we're doing all manufacturing in Denmark at the moment. And at least, I don't know of any more expensive place to do it.
So I would say, and as I've said before, I think that we should be able to be at least the same places as we are with liquid cooling. It's still a very new business for us in the sense that we are still trying to figure out where is the sweet spot in terms of margins when you have resellers. Do we have 1 reseller linked only? We have retail in between? How much do we sell online ourselves, et cetera? So it's still very much, let's say, in motion where we should be, but as I said before, to me, being in the high 30s is a good start considering -- yes, considering everything, I would say.
Okay. Is it possible to say the manufacturing partner for SimSports, where they are located?
So as I said on the call, in Malaysia.
[Operator Instructions] [indiscernible] have no further verbal questions.
Yes. Let's move on with the written ones.
Sure. And Andre, for your benefit, there's a refresh button over on the right. Can you take question number one, maybe?
Yes. So there's actually 3 questions in number one. Number one, how much of a threat to the long-term value creation of Asetek is the expiry of key patent/IP in the coming years? I don't really think it means anything because, first of all, the reason why we initiated these lawsuits was because especially couple of competitors, pretty much there as they pleased and they have been copying us, I would say, for the last 20 years. So I don't think it makes any difference. And that's also why we, of course, put the cases to rest. If we have won the cases, we would have gotten some money, yes. But in terms of the competitive landscape, I don't really see any major difference at all. I think our IP, so our patents, in the beginning, they were super important to us, but right now, I would say, our key IP is our supply chain, our manufacturing, our relationship with our customers and for sure, our quality. It doesn't take a lot of Google searching to figure out that several of our competitors have done field recalls because of quality issues, et cetera. And I don't want to exaggerate, but I don't think we, in the 20 years of our liquid cooling business ever did a product recall. So I think our customers are willing and able and happy to pay for the quality. In terms of SimSports, it's simply too early to say anything. And we, for sure, have not seen a slowdown. As I just said in the presentation, we are still working on fulfilling the backlogs. So we are not at a point yet where we can say we have fulfilled our all orders, and now we need to see what happens. So it's simply too early.
In terms of what measure does the Board take to put the future focus rather on shareholder value creation than maximizing nonequity salary? I don't understand the question number one. And number two, I cannot speak on behalf of the Board, I believe. So that's something you have to talk to the Board about. Then in -- we can sort the questions, Peter. There's 1 about litigation cost, you can take that. But in terms of order intake. I don't really understand the question. We had a revenue of $1.3 million in the quarter. And then there is -- number four, congratulations on adding the new significant customers we' shipping from Q3. Have you lost any customers in the quarter? No, we have not. There appears to be a lot of moving parts in the gross margins. If you assume stable currency, do you see any material change in gross margin going forward?
It's an impossible question to answer. Number one, the currency is not stable. Number two, our bill of material is huge, and there are parts from more or less all over the world in the product. So no, I don't see any change, but there are a lot of wheels in motion all the time. And I think going 15 years back, our margin has hovered above or just below 40%, and that is our goal, and that's still our goal. Then there is around the new headquarter sale and leaseback. Right now, as I think everyone knows, the sale and leaseback market is not attractive at all because of the high interest. And I have no intention whatsoever to commit to a 20-year on lease -- or a 20-year lease with an inflated interest. Why would I do that? The point is we are talking 16, 18 months out in time here. It's very difficult. At least I'm not able to predict what's going to happen 18 months out in time. What we will do is, we will look at the options. Will we do a sale and leaseback? Will we do a mortgage? If we do a market, we'll also free up a lot of cash. So it's too early to speculate 1.5 year down the road. And we could do the opposite exercise, just look 18 months back and see where we were compared to right now. So I'm not going to speculate in that. We will do what we think is best at the moment. And if we commit to something that involves 2 or 3 decades of commitment, then for sure, we will not do it until we are 100% sure that it's the right way to go. Then -- so there is a new question on the headquarter. If we've had any valuation upon completion? I think there is a misunderstanding. The whole point is, it's not complete. It's complete in 18 months from now. So -- yes, question does not make sense. Peter, then there's one on OpEx, and there's one on litigation cost. I think you can...
I have them. Yes. And I said during the presentation, the litigation is -- in this quarter was below $100,000. And I just looked it up, it's actually below $50,000 for the quarter, so much lower than what we have seen for a long time. And then there was a question about -- should we expect the Q1 OpEx as the new average level going forward?
And there are a number of impacts to our OpEx, and we have mentioned them earlier today also. One is litigation. We don't have any current plans of going into litigation again. So that would indicate a flat line on that. And the other one is headcount. 2/3 of our cost, apart from litigation, is headcount-related, so we can just look at the number of new heads coming through the door to see how the OpEx is going up and down. And we don't have any plans of adding or laying off, for that manner, staff at this point. So in totality, yes, I expect that the current level of OpEx is the one we'll see in at least in the near future. And then I just hit the refresh button. Question #9. Andre?
It's whether we see any risk in the completion of the headquarter being bankruptcy after construction company, legal matters with the authorities and so on? No. I think the best way to guide you is there is a prospectus that's just been signed by half the lawyers of Denmark where we include the risks and everything around the business. But if you don't want to spend your time on that, then the short answer is no. Of course, I cannot predict the feature. But no, I don't see that.
I agree. I have been hitting the refresh button for a number of times now and nothing else is coming up, that means that this ends the Q1 presentation of Asetek. Thank you for now, and thank you for your interest in Asetek.
Thank you.
Thank you for joining today's call. You may now disconnect your lines.