Napatech A/S

OSE:NAPA

Earnings Call Transcript

[Operator]

Hello, everyone, and welcome to the Napatech Q4 2024 IMF. My name is Seb, and I'll be the operator for your call today. [Operator Instructions] I will now hand over to Lars Boilesen, CEO of Napatech to begin.

[Lars Boilesen, executive]

Good morning. I'm Lars Boilesen CEO of Napatech. I'm pleased to welcome you all to the Napatech's presentation for the fourth quarter and full year of 2024. Joining me today is our Chief Financial Officer, Heine Thorsgaard. Our fourth quarter and financial year 2024 report was released earlier this morning on the Oslo Stock Exchange and is also available on the Investor Relations section of Napatech's website. For your information, a recording of this webcast will be available later today.

Slide 2, please. There will be a question-and-answer session following the presentation. [Operator Instructions]

Slide 3. Please note that this presentation contains forward-looking statements that are subject to risks and uncertainties. Our actual results may differ from those discussed in forward-looking statements.

Slide 4, please. With today's presentation, I complete my full first year as CEO of Napatech. I'm looking forward to today's presentation to share what we accomplished and where we are heading. Today's agenda will cover 4 main areas: First, we'll provide a business status summary for the fourth quarter full year of 2024 with focus on the major news items that show progress by Napatech towards achieving our goals to transform our businesses. Next, we will provide a business outlook that shares information about the opportunity ahead of us. We will then provide detailed information on the fourth quarter and full year financial results. We will then conclude with a question-and-answer session open to the attendees of today's call.

Slide 5, please. We have made considerable strides in meeting important milepost of our strategic plan that strengthened our position as an early leader in the emergent and evolving market for Programmable NICs. This includes both improving our core business in the second half 2024 and making measurable progress towards new design wins that underpin our growth aspirations. While some of our operating targets for the year were not met, we are pleased that our core customers are returning to long-term historical norms and we signed 4 new interesting high-volume design wins in 2024 that combined give us confidence in achieving our growth ambitions.

Slide 6, please. Our priority for 2024 has been to execute our strategic plan as it underpins our long-term growth aspirations. To achieve those goals, we remain focused on 3 key areas, and I would like to share with you a few details from each pillar. First, in our strategic plan, we had to service our valuable installed base of customers who are the early adopters of Programmable NICs solutions. They are proving ground for the technology and the value that our solution brings to their network and businesses. I'm pleased to report 4 notable items on our existing and mainly packet capture business.

We have these customers' needs in product fulfillment, technology development and professional services. We have captured many new design wins in their product upgrades. We are working with many of them in securing new design wins based on our new offering. We have worked closely with all of them, including our largest to gain visibility and confidence that the consumption has remained high, and they are nearing completion of the inventory reductions. Second, we had to accelerate our engineering in soft hardware technologies that extend our products into new areas that align with the highest projected growth segment for Napatech Solutions. We successfully were able to add the necessary resource to our organization. We did it cost actively and according to plan.

Finally, we continue to develop an ecosystem through partnerships that expand our go-to-market reach via marketing, business development and sales, enabling us to win new designs that would be challenging to achieve on our own. These partnerships include technology leaders in hardware, software and other IP, none more important than Intel and Altera. It also included an array application and services companies, those products and solutions require next-generation server platforms powered by Programmable NICs.

Turning to our results in Q4 and calendar year 2024. Revenue for the quarter was USD 5.4 million and $16.8 million for the year. Gross margin for the quarter were 6% and finished the year at 68% the gross margin in Q4 was impacted by a planned write-off loss of all components due to the end of life of a 13-year old product line. The net gross margin for Q4 was 75% if we exclude these old components. Our full year was impacted primarily to our largest customers burning through inventory buildup during COVID had those companies beyond would be reporting significantly different results. Our fourth quarter revenue was also impacted by low order from our biggest client back to normal levels like we also saw in Q3 later in the presentation.

Next, I would like to highlight some progress towards growth from our new solutions in the emerging Programmable NIC market. In the first half of 2024, we extended our collaboration agreement with Intel and Altera for the next-generation Programmable NICs including IPUs. This project was done in cooperation with an Napatech announced Tier 1 server manufacturer. Throughout 2005, our expanded R&D team has been ahead of schedule in building these new products and solutions for the server manufacturer. So this lighthouse client could evaluate and ultimate develop their new products later this year, creating new sources of revenue for Napatech in 2026 and beyond.

Our R&D team has delivered multiple stages of [indiscernible] and product type units to this lead customer, allowing for their testing and validation in parallel to our ongoing development. As a result, today, we are involved in 4 plus individual projects with this lighthouse prospect. For the remainder of 2024, we saw continued validation of the emerging market opportunity from industry megatrends that consistently brought forward new applications and use cases, all increasing the demand for Programmable NICs beyond hyperscaler cloud operators. This has had an impact on our business as we have secured a record-breaking number of new product design wins within our existing packet capture business.

Outside our existing business, we also secured 4 high-volume design wins in 2024. This included unlocking the opportunities at the already mentioned Tier 1 server manufacturer. Also and artificial intelligence and machine learning provider, [ myrtle.ai ], a big data analytics firm, [ sigmax.ai ]. And in Q4, we won a new design win with a European security provider who are targeting 1,000 to 2,000 units annually in big production. We anticipate others making their design decisions in the near term as well. In total, we achieved 36 design wins in 2024 across all Programmable NICs portfolio hardware and software with the potential to consume 40,000 to 60,000 units with production. These notable strides toward our design win goals are the launch path to new volumes of demand for our Programmable NIC solutions.

In addition to new design wins, we continue to expand our pipeline of opportunities across an increasing base of customer types, applications and use cases. I'm also pleased to report that we expand our company leadership to support Napatech's next phase of growth, most recently with [ Shannon Pulling ] joining our Board of Directors. Shannon is no stranger to Napatech. Our work together began many years ago with Shannon in his role as Vice President and General Manager at Intel Altera.

As today concludes our 2024, we remain confident in our vision, goals and plans to achieve them. There are undeniable signs that Programmable NICs are changing the way modern data centers are designed. The early adopters have already decided, and many of them have standardized on the Intel Altera architecture. The mass market is emerging in the wake. While we know that it takes time to secure new design wins and move them from ideas to production, we know also how advancers -- our starting position is from our own long history combined with the boost provided by our partnership with Intel Altera. As each new segment of the mass market unfolds, Napatech has made the investments in people, products and partnerships to be in the best position to capitalize on this new demand.

Slide 7, please. We welcome many new followers of Napatech today as we both reflect our 2024 results and set our aspiration for 2025, it is helpful to make a moment to outlay where Napatech fits in modern data center network designs and how it related to the opportunity opening to us. Napatech products are critical for server performance. The image to the right label F is a standard server. Servers are the primary system in modern data centers and are used to deliver the applications, services and revenue to business in cloud, enterprise, telecom and government networks.

Historically, the most important part of the server were the central processing units, or CPUs. The CPUs from companies like Intel act as the brains of the server and are label E in this image. The CPUs are surrounded by memory label D memory stores data, including network traffic for the CPUs to process. A new and well published area inside of cells are the expansion slots shown as C. These expansion slots are the most used today for acceleration cards based on GPUs or FPGAs for artificial intelligence, machine learning, training, large language models and more. Napatech products are increasingly being evaluated for the use in these locations.

And finally, the Slots label A and B show the network interface cards or NICs. In this image, 2 of Napatech's NICs are shown. Napatech builds a new type of NIC known as Programmable NIC, together with Intel, Napatech is delivering 2 types of Programmable NICs, including SmartNICs shown in B and infrastructure processing units or IPUs shown in A. Napatech has played a crucial role in modern data center and server design. They are linked between the outside cloud and enterprise networks, providing access to critical CPUs and GPU resources that deliver artificial intelligibility and other services.

Slide 8, please. Programmable NIC started to take off when introduced by hyperscalers in order to deal with the explosive data demand, hyperscalers experience in the data centers. Their designs change the performance abilities and economics of network design. These grew at a normal scale and drove most of the early market demand for Programmable NICs. These benefits, however, were not in any way, relegate to these [ early adopters ] and innovators. The same benefits are now in demand by network operators of other types and scale. Intel Altera is a leading provider of SmartNICs and IPU solutions to many of the top hyperscaler network operators, where they have grown significantly and at a fast pace.

To expand beyond the small number of large volume hyperscale operators, Intel, Altera has partnered with Napatech to provide complete, commercial, production-grade solution to the mass market beyond these early adopters. Several megatrends are igniting a new wave of locations and use cases that are creating the demand from the next wave of customer types. Let's describe some of Intel Altera's and Napatech's potential target segments outside hyperscalers.

First group are OEMs who build network appliances and servers. While the hyperscale operators build their own appliances, switches, routers, NICs the OEM build and branded solution for sale to the mass market who are not going to build their own solution from components like the hyperscalers. The second group has emerged are the Tier 1 or next wave of cloud operators. While the hyperscalers are often defined as a small group of 8, the next grade operators have numbers in the hundreds of thousands and deploy a massive number of servers and appliances with largely the same product and technology requirement as the hyperscaler network operators.

As cloud architectures have shifted from an all cloud to a hybrid multi-cloud architecture. Server and appliances solutions based on Programmable NICs have emerged within Fortune 500 enterprises. Telecom operators largely in their 5G mobile packet core networks require Programmable NIC for the user plane functions or UPS, and within their telco data centers. Many performance latency and security sensitive application with government and defense networks have also emerged. And finally, in the long run Fortune 5000 enterprises are envisioned to deploy Programmable NICs as more of the locations and use cases created by these segments become turnkey and generally available.

The use case of fueling the growth, Programmable NICs within these customer types were described in a recent industry analyst report from Dell’'Oro the predicted generative AI will drive Ethernet and adapter and SmartNIC market to surpass $16 billion by 2028. While it is still early in this market, there are clear signs of the industry megatrends unlocking new application force, different customer types, increasing a demand for programmable and SmartNICs and IPUs.

Slide 9, please. Several industry megatrends require new architect for networks and data centers and the servers and appliances used to build them. And within these new servers, a new type of network interface card is required a Programmable NIC. Artificial intelligence is changing every aspect of [ net ] in communication, AI applications, services and use cases now projected to make up most new server deployments. These servers require the network connectivity to reach into the processors being used for AI, often called the front-end network, which is an ideal home for Programmable NICs. These back-end networks are also ideally suited for Programmable NICs to deliver high performance, low latencies and adaptable processing required in rapidly evolving standards to support new AI implementations.

Cloud and edge computing are the genesis of Programmable NICs. Adopted by nearly every hyperscale cloud operator, Programmable NICs are used to provide the highest performance and lowest latency for tenant services. Including offload and acceleration for storage, network and security services for virtual machines and containers. 5G mobile infrastructure is architecturally specific on standard server technologies that require Programmable NICs over standard NICs to meet the user scalability requirements in addition to the stables of high performance and low latencies. While the telecom sector have experienced low IT spending over the last few years, the last few months have brought rays of sunshine from [ us ] and the vendors that serve. Several suppliers of solution for mobile packet core have been going to roll out their new offerings.

The cybersecurity market offers a wider set of verification and use cases that benefit from Programmable NICs. And this segment has been 1 of the most successful for Napatech in the past, making the deal target to expand our legacy packet capture solution to meet the new requirements in this high-growth and high-volume markets. Financial services has also long been a hot bed of Programmable NICs, especially those based on FPGA technology. Napatech has more than 50 leading customers in this segment. Our legacy packet capture solution delivered great value in smaller segments and are being enhanced to extend it into larger and higher growth segments among these users.

Big data analytics is relatively new and an emerging area for Programmable NICs. One recurring theme within IT is that users and their applications are doing record amounts of data and that data is expected to create transport store analyze. Programmable NICs address the technical and financial challenges in each of these areas. Monitoring and recording of so much data in flight is a critical requirement for regulator and compliance, quality insurance and more. With nearly every aspect of business and personal communication online in some form, monitoring and recording of applications are on the rise.

Longer key area for Napatech packet capture solutions, this segment is generating new design wins for Napatech legacy and new products. As you consider each of these 7 megatrends, 2 themes emerge, a common requirement for high-performance, low latency programmable solution are a necessity for server connectivity in modern data center designs. Napatech's long-proven history in packet capture designs is a baseline that is winning new valuable designs in that legacy use case but is also being expanded upon and enhance to tech into new applications and services for new and old customers alike facing these industry megatrends.

Slide 10, please. We just showed you in the previous slides that there is going to be a big programmable SmartNIC market outside hyperscalers. We also showed you that this market expansion is fueled by the many big mega trends. In addition, Napatech already has the needed Programmable SmartNIC technology. Napatech has been delivered Programmable NICs into niche segments within monitor and recording, fintech and cybersecurity during the last 15 years. These deliverables has all been programmable NICs in application required a narrow but important set of features called packet capture. Those same important features are baseline requirements in the new segment.

Our R&D effort has been to expand and enhance those features with new capabilities to allow our Programmable NICs to be deployed where they have a history of winning and also in the higher volume and higher growth segments that are emerging. Beyond our packet capture legacy business, we are deeply involved in engagement for network-based firewalls, micro services, [ big ] firewall, AI infrastructure, multiple storage opportunities, encryption and decryption and a big [ crazy ] mobile designs. We aim to continue a stream of new design wins in 2025. Based on our [ work ] for 2024, we continue to see validation from prospect customers, partners and industry analysts that increase the market projection for Napatech products and solutions, provides all the inspiration and motivation we need to press forward with our plans.

Then please. To support our aspiration of the leader supplier of Programmable NICs to the mass market, our people, capital and partnership investment have been laser-focused on this area. Our product strategy has 3 primary areas of focus. We have application has just shown, there are no shortage of applications or services across a few customer types that require Programmable NICs. Napatech is investing in the hardware and software from a combination of the largest number of location from largest and highest growth areas. We are software-focused. Make no mistake, we sell Programmable NIC. We are a NIC company, but our most defensible strategic advantage is our software.

We have more than 20 years of valuable NIC software IP built exclusively for FPGA-based NICs that are used in a number of valuable niche segment for Programmable NICs. Those packet capture NIC features are largely or entirely acquired in many of high-growth segments we are targeting. Our software investment has been developing the incremental features and capabilities that are needed to allow them to win in new segments. We are hardware independent. That simply means we build the best Programmable NICs based on the leading technology from Intel and Altera making sure our software IP is available on Programmable NICs, in the SmartNIC and IPU configurations.

All the product announcement you have seen from Napatech during 2024 where new SmartNIC and IPU hardware platforms and software packages that power them. In the third quarter, we introduced N3070X Programmable SmartNIC. The new 400-gigabyte N3070X AI SmartNIC is based on the latest technology from Intel Altera. The SmartNIC is engineered for the challenging demands in artificial intelligence, infrastructure as well as traditional SmartNIC use cases. Network operators evaluating early network architecture for AI have been challenged by vendor lock-ins based on proprietary in [ InfiniBand ] and RDMA over Converged Ethernet implementations. Napatech solution conform to a vision for a standardized Ethernet infrastructure utilizing ultra Ethernet.

It has a created design that allows it to be operational configured with an Intel sign CPU converting it to a high-performance IPU. The product was first promoted at the recent Intel Altera Innovator Conference held in October and the headquarters in Silicon Valley. Also in the third quarter, Napatech released our linked in-line production grade software solution on an Intel-based NT400E13 Programmable SmartNIC, powered by Intel Altera at GLX7FPG. This software enables 5G mobile network operators to offload and accelerate their user plane functions. The new offering provides an improvement of more than 60% over previous solution, helping operators to dramatically reduce the cost, size and power requirements when delivered 5G service to an increasing number of subscribers.

Slide 13, please. In addition to our core business, 2024 was heavily focused on R&D projects to build the hardware and software products that allow us to begin structuring new design wins in 2024. And that allow our new designs to begin ramping production in 2026, and we have positive news to report on each front. Our current business continues to provide a solid base for more than 400 buyers in the last 2 years. Our pipeline continues to expand. Both organic Napatech and Intel Altera sourced opportunities are being added on a regular basis. Our pipeline consists opportunities and value. It includes both Programmable SmartNICs and IPUs being developed in partners -- in our partnership with Intel that are powered by our innovative software packages.

In Q4, we record 8 design wins in cybersecurity, monitoring and recording, 5G and other telecom use cases. These designs have the potential to deliver more than 3,500 units per year in peak production beginning in 2026. In total, in 2024, we secured over 36 new projects and product design wins from new and existing customers and from many of our customer types education and use cases shown today. While design wins are long and complex, we measure important milepost that indicate progress toward the end goal of opportunities from programs and projects to production solutions. The improving base business plus constraining pipeline of opportunities and early success in new design wins provide great optimism towards realizing our growth ambitions.

Slide 14, please. In the next 2 slides, I'd like to briefly highlight examples that stick together today's information. In both example, industry megatrends are working a new application and use case that require a Programmable NIC that is best served by Napatech's product power by Intel Altera. The first is known as AI infrastructure. Artificial intelligence is changing every aspect of network and communication. AI application services and use case now projected to make up most new server deployments. These numbers require the network connectivity to reach into the processes being used for AI, often called the front-end network, which is ideal home for Programmable NICs.

These same AI server pools now have a back network mesh that provides a scale-out connectivity among the AI processors. These back-end networks are also ideally suited for Programmable NICs to deliver high-performance, low latencies and adaptable processing required in rapidly evolving standards to support new AI implementations. Napatech is working on several high-volume design win use cases with leading suppliers of AI [ inferencing ] solution based on standard servers and their own custom AI silicon.

Slide 15, please. Napatech has provided free recent closure about our solution for 5G mobile packet cards, often referred to as UPF offload and acceleration. The announcement can be found on our website on January 18, February 11 and February 18. The slowdown in telecom spending is well noted and has impacted many IT vendors in 2023 and 2024. Across all the areas of our business, we are seeing signs of a solid turnaround for 2025 and hearing similar news from partners in the same space. To that end, we're also seeing leading hardware and software vendors lining up the solutions to place their own bets on standard servers with Programmable SmartNICs as the platform of choice for the telco and private network operators of 5G networks.

In the picture shown above, the blue NIC represent the many location within the 5G public or private networks where 100 to 1,000 Programmable NICs may be required to meet the performance latencies and use the scalability requirement for UPF application. The first announcements was for a complete solution for a 5G networks, a leading provider of distribute and 4G/5G core network software running on a Dell XR 8000 standard high-volume server powered by a Napatech Programmable NIC based on Intel FPGA technology. The second announcement featured a complete solution based on Druid software, a leading provider of private seller network core software solution for enterprises, optimized for [ Red Hat ] device edge and Napatech's Programmable NICs.

The third news released last week, they closed another complete solution based on [ Contran's ] popular ME-13 10, Multi-access Edge accelerated by Napatech Programmable NIC to optimize the 5G core application from [ True Mine's ] software system. The combination of these disclosed solutions show some of our top suppliers of solutions in these markets, lining up to place their bets on the demand for these solutions and to a ready when the market unfolds. Napatech's effort in this base go beyond these 3 recent news items with more than 20 hardware and software customers and partners in place.

Slide 16, please. To conclude today's presentation, I invite you to visit Napatech in 1 week at Mobile World Congress. If you plan to attend the event, we do have guest passes available for you. We would love to host you at our booth to speak with our experts on hand, we will be showcasing our complete line of Programmable NICs and the top use cases for them in mobile and telecom networks, including 5G packet core, UPF offload and acceleration, network and application performance monitoring, cybersecurity, signaling, gateways, lawful interception. In addition to 2 of the compelling and powerful complete solution that we discussed, we will be shown in the booth featuring leading global leaders, Dell and Red Hat.

Slide 17, please. And now I'll hand over to Heine, and he will go through the financial data.

[Heine Thorsgaard, executive]

Thank you, Lars. Slide 18, please. Revenue in Q4 was up 11% compared to Q3 and amounted to DKK 37.7 million and in USD 5.4 million. At the start of the year, our revenue has been growing each quarter throughout the year. And with the Q4 performance, we had a yearly run rate of USD 22 million. Compared to 2023, our product revenue for the full year of '24 was down 22%, but we see clear signs of improvement in the market, especially within the U.S. finance and telcos markets. Adjusted for the end-of-life product costs, our gross margin in Q4 ended at 75% and the adjusted gross margins for the full year of 2024 ended at 71%.

in 2024, we retired versions of our NT20 and NT40 SmartNICs that reduced from 2014 to 2016. Altogether, we've shipped more than 40,000 of these products over the past 10 years. Our staff costs and other external costs in Q4 amounted to DKK 44.8 million compared to DKK 43.2 million in Q3. Compared to 2023, staff costs and other external costs for the full year were up 20% in 2024. This growth in costs follows our plan to accelerate our development activities significantly and bring new products to the market quickly to serve the increased design win pipeline. EBITDA in Q4 amounted to a negative DKK 17 million, which was an improvement compared to Q3. For the full year of 2024, EBITDA amounted to negative DKK 86.3 million.

Slide 19, please. Net cash flows from operating activities in Q4 amounted to negative DKK 32.9 million and to negative DKK 202.8 million for the full year of 2024. Adjusted for the working capital development, net cash flows from operating activities in Q4 were negative at DKK 8.9 million. Net cash used in investing activities in Q4 amounted to DKK 3.9 million compared to DKK 3.5 million in Q3 and DKK 2.5 million in Q4 of 2023. Net working capital at the end of Q4 was DKK 98.6 million. The net working capital reflects our inventory of new products ready for immediate delivery. Cash and cash equivalents at the end of Q4 2024 amounted to DKK 64.3 million compared to $42.4 million at the end of Q4 2023.

Back to you, Lars.

[Lars Boilesen, executive]

Thank you, Heine. We are guiding revenue of DKK 150 million to DKK 190 million. Our existing business is expected to grow with around 30%. This growth is coming from our biggest client who is expected to finish their inventory and safety stock in Q1 2025. We are also assuming a full year impact performance from our other big existing clients which had a slow first half year in 2024. In addition, we are counting on F5 orders in 2025, which was delayed in 2024. These factors are expected to get our existing business into the lower part of the revenue range. Initial trial orders and NRE fees from our new business will help to bring us well within the guidance range.

For our new and high-volume business, 2025 will primarily be another year for winning high-volume design wins. Gross margin are expected to stay at approximately 70%. We have proven to deliver all our critical deliverables on time in 2024. Therefore, we do not plan to significantly expand our workforce in 2025. Staff expenses and other external costs are planned at DKK 170 million to DKK 180 million. These assumptions and the performance in the middle of the range will give an EBITDA of minus DKK 46 million and secure funding throughout 2025.

This ends our presentation, and we will now open up for a Q&A session. Over to the operator.

[Operator]

[Operator Instructions] First question is from Øystein Lodgaard, ABG.

[Øystein Lodgaard, analyst]

I would like to start with few questions on the guidance for 2025. You -- like you just mentioned you anticipate a recovery in kind of your legacy business, and you also have ramping up the orders, and that should get you to the guided revenue. Does that mean that you expect no contribution from starting to ramp up these new IP volumes in time? And how does that impact 2026? Because if production doesn't start to ramp up during '25, then I guess you won't be able to reach a full run rate in 2026.

[Lars Boilesen, executive]

Let me take that question. So last year, so let me take you through the guidance. So in 2024, we ended up just below DKK 17 million. So what we're saying is on the existing business, that our biggest client have been burning off of safety stock that we expect to end here in Q1. So we will expect a few more millions from them in 2025. Then also the F5 production was delayed to 2025. We expect orders this year. So that will bring us -- so -- and then -- so that will also help. And then the third thing is that we had a very weak first half year in 2024. We expect that our clients, which was in the second half of 2024 back to normal volumes that they will continue that throughout 2025, meaning we have full impact from all our clients in 2025. So all that will bring us into the low range of the guiding range.

What -- then NIE fees, trial orders will bring us in the middle and the hopefully, the upper part of the range. So we do expect trial orders, and we do expect NIE fees from new design wins and from design wins we did last year. And then production will be from 2026 and forward. So clearly, the design wins we will sign at least here in the first half of the year can be in production next year.

[Øystein Lodgaard, analyst]

Okay. And just to clarify that when you're ramping up these large volume design wins, I guess, that takes some time to reach full production. So does that mean that if you're only going to have trial orders this year and not starting to ramp up production that you won't be able to reach full production at least not at the beginning of 2026. Maybe you'll reach it sometime during '26, but I guess that means that you can't have full production for '26 as a whole.

[Lars Boilesen, executive]

I mean, then you're referring to what we call [ production ], right? Then you're referring to more called [ predict production ]. But if you have -- if you're delivering a product, let's say, before summer and the by [indiscernible] orders, et cetera. And they -- if this is a client who sells these products and they get big volume orders, then we will be -- we will, of course, manufacture and invoice that in '26. So will they have peak production in '26, but it could be very high production for us if they need to deliver to their clients in '26.

[Øystein Lodgaard, analyst]

To ask the question in another way. How long time does it take to ramp up production on these very big accounts where you're talking about like 10,000 cards or more for this first big design win that you announced a year ago with a large server manufacturer. How would the -- long would it take you to ramp up production there?

[Lars Boilesen, executive]

I mean, we are delivering the final products, for example, for that specific client. They're already -- we're already delivering a fully operating product type. End of last year, we are delivering the final product in May. So that means it's ready for production, right? So that doesn't take -- it's ready. If they place orders, we can manufacture in high volumes in months.

[Øystein Lodgaard, analyst]

Yes. And then you can get -- then you could already be at the start of like full-scale production at the beginning of 2026?

[Lars Boilesen, executive]

Yes. But let's take that because I see there's another question on the webcast. So let me try to combine some of the questions, right? There is 1 from Perella Gines who's saying, have you started to get orders from the Tier 1 you want in that design win you won in '24. So the status of that is that we delivered a full operating prototype which declined, stay in their lab are now doing testing and what you call bring up. And there will be a final deliverables in May, and everything looks fine for that. Right now, we are -- that prototype is being tested out in 4 BUs in this -- with this Tier 1 server manufacturer. So they need to -- then you make a decision around that and hopefully, they will do that. And then there will be trial orders and hopefully then production in '26, '27.

[Øystein Lodgaard, analyst]

Can I have 1 more question. How much revenue do you expect from the F5 contract in '25 and almost if you would like to comment on that.

[Lars Boilesen, executive]

It's very hard for us to have insight on. That was a very complex project because they had a life of a CPU they used. So that delayed the project a lot. So they have made a last buy of that CPU and that these components are now in our factory, right? So we're just waiting for them to give us a green light on that. We also are working with them on their next design. So this is more like business as usual. But the important part is now to get the order for this last buy. And that is in the -- that is all depending on them how many units we just need to wait for that.

[Operator]

Currently, I have no other questions on the phone line. So I hand over for any further webcast questions.

[Lars Boilesen, executive]

Yes, I can try to handle that. We have 7 questions. Some of them, there are some overlap. So 1 question about this server manufacturer is when will the name we made public. And this is entirely to the client, but most likely, when we basically get the first order from them, then they will do testing, et cetera. So when they actually will launch it is most likely when they actually launched product with our NIC included in the server. So that's all we can say about that. Then there's a question from Lars Knudsen, you have DKK 70 million worth of inventory that is quite up in a bit in the quarter. Why is that? And how much revenue is DKK 70 million inventory equal to? Would you like to take that, Heine?

[Heine Thorsgaard, executive]

Our inventory was actually up DKK 1.7 million in Q4, but it is true that it has been growing notably throughout 2024. However, this is almost exclusively related to our new products, the IBUs that we have ready on the inventory, ready for immediate shipments. So basically, the growth, if you compare end of 2024 to end of 2023, that is related to the new products and IPUs.

[Lars Boilesen, executive]

Okay. The next question from Lars Knudsen is, do you expect to get additional engineering fees from partner? And if is that included in guidance? So that was what I referred to before that the existing business will bring us into the low range of the guiding range. And then NIE fees, trial orders will take us further up in the guiding range. I will also say that probably a lessons learned from last year is that when we go into design win discussions now, we will definitely work very hard on getting trial orders while we sign statement of work where we have to do work, we want to get preorders on units when we enter this agreement going forward. And that should be possible.

Yes. So another question in the same range from Nicolas Salbo. Giving that your 2025 revenue guidance in line with what 1 could expect from your legacy business? Is it fair to assume that you expect no revenue from your business line in 2025? So we do expect NIE fees trial orders from new design wins and from the new business in 2025. But it's fair to say that production in volume is expected from '24 forward.

Another question from Nicholas Salbo. Is your working capital guidance in regards to inventory reduction based on actual orders?

[Heine Thorsgaard, executive]

Yes. So the expectations to the development in the working capital is based on basically our revenue expectations and our production planning. Now production is done 2, 3 quarters in advance. So we have a clear picture of the productions being planned for 2023 combined with the expects to revenue. That is what we are communicating in the working capital expectations there.

[Lars Boilesen, executive]

Okay. Question from Anders Knudsen. How do you see Q1 progressing? Will Q1 grow versus Q4? Or should we expect a usual start to the year with Q1 lower than Q4? So Q1 is still impacted by our biggest clients safety stock. We expect them to end that in Q1. So that -- so what I think there's still 1 month to go. So we do things -- good things to happen in March. So I think for now, we can say at least it's going to be better than Q1 last year.

Question #8. Do you -- will you have a capital increase in 2025? Is that expected? So if you look at our guiding, we do expect in the middle, if we -- if you manage to be in the middle of the range, we have funding throughout 2025.

I think that ends the number of questions here.

[Operator]

Thank you. And confirming we have no further questions on the phone line. As we have no further questions, we will conclude the call here. Thank you all very much for joining. You may now disconnect.