Asetek A/S

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's ACETEC Q1 2020 presentation. At this time, all participants are in listen-only mode. The meeting will be followed by a question-and-answer session, at which time, if you wish to ask your question, please press star and 1 on your telephone. I'd also advise your presentations being recorded today on Wednesday, the 22nd of April 2020, And I would now like to hand everything over to your host today, Peter Madsen. Please go ahead. Thank you.

Good morning, everybody, and welcome to this presentation of the Q1 2020 Asia Tech Results. Our board met a few hours ago and approved the presentation and the report, and the report was made public one hour ago. I'm Peter Madsen. I'm the CFO, and I have with me here André Slot-Eriksen, who is our founder and CEO. Good morning, André. Good morning. Very good. Thank you. Today, by the way, is also the day of our annual general meeting. We'll start in one hour and 30 minutes, and you're all welcome to dial in and listen if you so desire. There's a phone number and a web link on our website. When we're done with the presentation here, then I'll hand the word back to the operator for a Q&A session. and she will help us with that. Otherwise, you're also very welcome to post your questions in the app that you are presumably looking at right now. With that, Andre, the floor is yours.

Yes, thank you. So let's dive right into the highlights for the quarter. A revenue of $9.1 million, a decrease of 18% from the 10 quarter last year. Don't read too much into that. I'll come back to that. Growth margins increased to 49 from 43 to 1. Basically, as we have alluded to earlier, it's driven by higher data center prices and our business model transition in G&E and obviously a stronger U.S. dollar also. We had an adjusted EBITDA of 0.2 million compared to 0.3 to 19, so more or less the same. Our cash position increased to 26.2 at the end of Q1 from 24.5 at the end of 19. In terms of corona, we've not really seen any substantial supply chain or operational impact. In the middle of the quarter, in the early of the quarter, Q1 that is, there was obviously a lockdown in China and our Chinese employees were forced to stay home. So Q1 is affected a little bit by that, but other than that, we have not really seen anything yet. And as such, we maintain our group expectations for the year. Also, we are initiating a share-by-back program launch to offset the stock options that we are granting. Talking a little bit about the COVID-19 situation, Obviously, we are prioritizing the health and the safety of our employees, so we have really used a lot of home offices lately. Here in Denmark, though, we are basically more or less, like all of us, we obviously use social distancing, including in our manufacturing and on our manufacturing lines, and, well, Needless to say, there are travel restrictions both in the company but also on government levels, so that speaks more or less for itself. I would say that our group functions are fully operational. I would say in terms of communication and execution in the company, we have not really seen anything going down compared to where it used to be, and I really think and believe it's because despite being a small company, we are spread all over the globe. So we are used to communicating and we're used to working this way. So good job to our team, I would say. If we look at our supply chain and operations, if we look at the external manufacturers or contract manufacturers, I would say that we have a limited impact on our abilities to meet our customer demand so far. As I said before in the beginning that In Q1, we had a few orders that were delayed because, yeah, essentially the whole of China was on forced holiday. So roughly a little bit more than half a million dollars is moved into Q2. So that's a little bit of the explanation about the decline in revenue in Q1. We see definitely the situation in China improve, and they are and we are slowly reopening Q2. So I expect that we'll be back on full steam at the end of this quarter. We have seen some capacity, or sorry, component shortages, but not something severe yet. Of course, we don't want to be overconfident. We don't know what we don't know. Like the rest of you, we cannot predict the future. All I can say is that so far, so good, and so far we have not really seen a big impact. At ACETEC, Basically, in Denmark also, as I said, we are basically fully operational and back to where we used to be, I would say. We are constantly looking at the scenarios and how the business is evolving and how the market is evolving. So far, we've not laid off any people, so there's not been any adjustments, and we have no plans to that effect. What we have done, though, is we have said that this year there will be no salary increases in the company, and that's company-wide. And I think, number one, that's a good signal. Number two, I think it's also important to keep our cost base in check because things are uncertain. We still have money on our bank account, as you will know, but still, I think it's a good measure. In terms of the market, we are still seeing positive signals from both the gaming and enthusiast OEMs. The purchasing pattern pretty much in line with what we had expected. In terms of the data center, as you will see a little bit later, we think the pipeline looks healthy, but of course, due to the lockdown in various places on the planet, it's really difficult to predict what's going to happen. Yes, as I said early on, we have a strong financial position. we're not going to go out of business anytime soon, no matter what's going to happen. And of course, it's not a sleeping pillow, but in these uncertain times, it's nice to know that we have a strong cash position. So if we look at the year so far, we have Q1 under our belt and we are on our way into mid Q2. And as I said, we have a few special components that's been affected. However, it's not been critical in the sense that we've still been able to supply. We are seeing some of our customers having problems with some of their components. So that could be a rebel effect down to us that if our customers cannot supply, then of course. So let me give you an example. If a PC builder cannot get a memory stick, then, of course, he doesn't need liquid cooling because then he cannot ship his PC. So that's the ripple effect. But, again, it seems to be manageable right now. The gaming and enthusiast demand looks good. People are gaming. People are having fun at home when they can't work. They are building and tinkering with their computers. So we are seeing positive signals from the OEMs. That being said, our visibility is as it always is. We can look a few weeks out, and that's it. In the data center side, we are seeing increased activity. More projects, so specifically HPC, but I'll get back to that, more projects are getting tender. However, it is uncertain how many will move to final award this year because of the COVID-19 situation, but at least so far it looks good. Of course, it also means we have limited visibility for the second half of the year. What we can say, though, is that historically, the second half of the year is typically 10% to 20% stronger than the first half of the year. Of course, in these times, the uncertainty is a little bit more, but, yeah, it looks good. And the net of this is that we maintain our guidance for the year. As you may remember, and as I have said earlier, we have stopped doing quarterly guidance. First of all, we cannot predict what's going to happen. We know that our quarters are always fluctuating a lot, and as such, we have basically turned over to full-year guidance. And our full-year guidance this year is a decline of between 5% and 10% compared to 2019. Considering the current macroeconomic developments, our business model transition that I'll get back to, and reduce demand from one big OEM customer. That's how we landed on this. And, of course, the uncertainty related to COVID-19 just makes things even more insecure. So net-net, we expect a positive income year. And I think if we can get out of this year meeting our guidance being profitable, I think we've done pretty good, actually. If we look at the long-term drivers, and I think that's important to remind ourselves right now, new hardware is constantly required. Gaming and enthusiasts, that market is still strong. As I said earlier, right now we are definitely not seeing a demand problem. It's more a supply problem, if anything. And the need for more sustainable data center solutions is definitely also there. So long-term drivers are the same. If we look at our business overview here, as you can see, it says gaming enthusiast, 95% of sales, data center, roughly 5% of sales. That's what we've said more or less for a long time, but it is fluctuating. And these numbers are also not representative for Q1. And as such, we have also stopped guiding on segment level. Sorry, reporting and guiding on segment level. And when the data center market takes off and we have a meaningful business, we will, of course, get back to it. But for now, the lion's share of our sales is the gaming enthusiasts and, to a less extent, the data center. As you saw this morning, probably, we just had a data center award. So, of course, we'll keep sending releases when we get design wins. but it doesn't really make sense to report on it. If we look at the past, Q1 basically reflects the high market volatility that we have seen, but as you also know already, our business model transition, the fact that we pushed over 600K of orders from Q1 to Q2 basically explains why the quarter is lower, so there's not really drama behind the numbers. Looking at the gaming and enthusiast market, we are currently shipping to more than 20 OEMs right now. Top five represent 81% of the gaming and enthusiast revenue in 2019. And that's a decrease from 85% in 18. And why is this important? Well, it's obviously important because we are focusing on not having or having too much customer concentration. And as you can see on the bars at the right of the slide, we are actually quite successful in that. Some of it is not, let's put it like this. Some of it is a volunteer effort and something we are forced to buy it. especially this one big customer, but I'm actually quite happy and quite proud that we've been able to mitigate it as strongly as we have. And if you're in doubt about what I'm talking about, I think most companies, if they lose their number one customer, representing 60% or 70% of the revenue, and we are still going as we are, I think that's pretty damn good. We launched the highest performance and the most advanced liquid cooling to date within GXT. We're very excited about that, and we're very excited to see how it's going to go in the market. In terms of our branding efforts, I don't know how closely you are following us or you are following the market. It's not something that we are doing a lot of, let's say, investor marketing activities. But definitely in the market, it's going pretty good with our branding efforts. We have done a lot with Alienware and different press sites. Right now, I think we have co-branding agreements in place with seven OEMs. We are connecting directly with gamers and enthusiasts via our CoolNation forum. So we are really trying to position ourselves to monetize on our brand going forward. Talking a little bit about the data center market. In February, we began delivering waste heat from our in-house data center to the district network in Aalborg. That was, in my opinion, quite a big milestone because there are a lot of skeptics out there. There are a lot of people who are trying and companies who are trying to invent stories of why this cannot be done. Now we're doing it. We are selling hot water basically. It's working really well and there's been a lot of interest in it. We see a lot of interest from political side. We see a lot of interest from data centers across Europe specifically. Unfortunately, due to the coronavirus, a lot of meetings have been postponed and a lot of meetings have been canceled. But nevertheless, The global sustainability agenda obviously tightens in. Again, because of COVID-19, I think it's taking a backseat position right now, but as soon as we get to more normal conditions, it's definitely going to be right there immediately. In terms of market adoption, I think it's unchanged. We still need to do our political efforts, And if you're wondering, well, how does that make sense when we just announced an order? The way I look at the market is HPC, so high-performance computing, is obviously a data center. But for us to be hugely successful, we need to get into the environmental agenda, not just HPC where it's about high performance and density. Speaking of which, If we look at the HPC market, as you know, we landed a big OEM recently, and that is actually progressing nicely. Of course, this specific OEM is also in lockdown, and their employees are working at least partly from home. But what I wanted to convey is that it's definitely not standing still. It's moving ahead as planned. As most of you know, we launched an order last night and published it last night. We launched an order in January for another HPC. And as I alluded to earlier, we do see an increased pipeline of potential projects. So that's really nice. Personally, I hope we will see a lot of final awards this year. But there is a chance that it will be moved out because of the situation. But again, so far, so good. And with that said, I will leave the work to Peter for a moment.

Yep. Thank you. And we'll start off with the income statement. As André, he said, and we see supporting on the segments. Just about 5% revenue from the data center segment made a lot of confusion, I would say, around a lot of focus on the data center segment that was not really warranted. So we combined the segments into one big revenue stream. It also gave a lot of information to competitors and others which were not business-wise beneficial. So we see quite a significant improvement here on So revenue is $9.1 million versus 11.1 the year before. That's 18% down. Andre alluded to the reasons. We have a business model change. We have the COVID situation where we push out some revenue to Q2, and then we have all the normal fluctuations going up and down in various quarters. Our average sales price in the gaming enthusiast, The business line decreased slightly. That's this business model transition starting to kick in. The gross margins were up at 49% versus 43% last year. There's a number of reasons behind that. I'll come to that on the next slide. Our operating expenses are down by 6%. And that is, one could ask if it's COVID-19 related, and yes, we have had a little bit of less travel here in March and stuff like that, but it's not that driving the whole thing. It's primarily the U.S. dollar versus Danish kroner foreign exchange rates, where the kroner has been 3% cheaper this year than it was the year before. And then also there is a mix of input from lower amortization and capitalized development costs. So all in all, that ends at an operating income of $920,000, which is pretty much the same amount the year before, where it was a negative $1 million. Income before tax is a negative $700,000, which is also pretty much the same last year, 814 to the negative. All in all, income per share of negative 3 cents per share versus 3 cents per share last year also. changing focus to the margin development. We've seen quite an increase in margins up to 49.3 versus 42.7 last year. And it comes from all the business lines or product lines, especially though the data center products. In the gaming enthusiast side, we see, as I said before, an increased margins from the business model change. And the logic here is that if we reduce the revenue by pick a number of 5 to 10%, but remain the same earnings in dollars, then of course the gross margin will increase. We've also seen positive impact from the dollar versus renminbi foreign exchange cross, where the renminbi has been 4% cheaper this year, and that is a significant impact to the gross margins in that business line. Data Center has impacted us positively due to the fact that we increased our sales prices over the course of late 2019, and that's starting to kick in now. Will it continue to be at this high level? Well, that remains to be seen. I don't have anything on the agenda right now that can indicate a reduction in revenue, but 49% overall is a very impressive number, actually. But let's see where it goes. Balance sheets. Coming back a little bit to Andre's comments on the COVID-19 preparedness, we had $26 million in the bank, and with a company like ours with a high gross margin where every time we sell for $100, then we spend half of it on cost of goods, and then there is like around 30%, $30 back to to fixed expenses, overheads, that creates a situation where $26 million in the bank will carry us for quite a while. We have money in the bank to sustain operations for over a year, and if you combine that with the fact that we are primarily in Denmark, where the labor market is relatively flexible, and we could, if need be, we haven't been there yet, we're not there yet at all, but if need be, if we had to reduce staff, then maybe half a year or something like that. It's quite flexible. And all this creates stamina, I would say. And of course, that is a good situation to be in right now. We are launching shortly a share buyback program. We're wanting to do that for a while. We need to hedge our employee option program. It's a common thing to do. It's a normal thing to do. It's a good thing to do. And we haven't done that for a variety of reasons. We're doing that now. We are targeting to repurchase 1 million shares at a value of up to $4.5 million, and we will complete that by September 2020. I should add also, though, that those of you who have been following us will know that we have a tax situation around double taxation from U.S. and Denmark, and when it comes to our dividends, tax situation that you can, that you will know about, then that is unchanged. We consider a buyback of shares for an option program to be a non-taxable net, and that's how we can proceed with this, with this setup with the share buyback program for the option program. We're simply keeping and buying the shares and keeping Financial priorities, nothing much has changed here. We have combined the two segments into two product lines in the same segment. And, of course, the approaches between those two product lines are slightly different. In the gaming enthusiast product line, it's about leadership. It is about innovation, revenue growth, and margin protection. You'll see the margin go up. We are quite happy with that. In the data center product line, it's about OEMs and adding revenue. And, of course, all this goes with a cost-based optimization exercise where we think we have a quite lean machine and we remain fruitful, of course. All this adds to our enormous focus about cash flow and cash flow improvements. In this situation with all this COVID-19 going on, of course, we need to pay attention to cash and cash flow. All in all, pretty traditional chores of the CFO. And then, André, back to the summary and outlook.

Yes. So, most importantly, we maintain our guidance for the year. Our higher data center prices and our G&E OEM business model transition support increased growth margins. Let me just carve it out for those of you who may not have a strong memory what this business transition is. Normally, we would be selling our product with all the bells and whistles our customers would want. So that would be software, it would be LED lighting, it would be a lot of commodities that's not really invented by ACETEC, and it's commodities for us that would be really hard to have a high gross margin on. So what we did was we agreed with a number of our customers and said, you buy the core product from Asetek and the core product only, and then you supply the beautiful box and you supply the LED lighting and your own software. By doing that, our customers are happy because then they don't have to pay a double price for a commodity. And we are happy because it means we can get the gross margins we deserve and But for sure, in a transition period, our revenue will not look as pretty. But it's not all about revenue. It's about making money. So that's what it's all about. And, yes, as we maintain our guidance, we also maintain that our goal and objective for the year is to be profitable. And then, as Peter talked about, we're launching the share buyback program. And with that being said, that was today's presentation. Let's move to the questions.

Yes, operator, if you will facilitate the questions, that would be wonderful.

Certainly. Ladies and gentlemen, if you'd like to ask a question, please press star and one on your telephone and wait for your name to be announced. It is star and one for any questions. And we currently have no requests.

Okay. Next. hang on a few minutes to see if questions come up. Via the web, we have a question from Germany around legal actions. Andre, is that something you can comment on?

Sure. I can comment on it very hands-on in the sense that I personally should have been in the U.S. for mediation in the ongoing lawsuit, but since I cannot leave the country and since the U.S. does not want to see me and because the courts are shut down, then the court cases are currently on hold. That does not mean our lawyers are not working, but in terms of court action, not much is going on right now.

Very good. And then there's another question here, and I have to admit I don't fully understand it when I just read it, but the gist of it is I believe if this COVID-19 crisis has an impact on our business, would there be a business opportunity here in the fact that – And HPC is going up over time, maybe.

Well, let's say that I don't think the environment is less important than it was four months ago. But what I see, and I think it's obvious to all of us, is the politicians have their hands full. talking to hair dressers how to cut people in a safe way rather than how do we become more green. So I don't see it's less important, but for sure I can see the priority among politicians, et cetera, is definitely in a different place right now.

And that was also one of the questions I can see here now. It's going back to core business, you could say.

Yeah. And in terms of crisis driving data center demand, I don't see that at all. it's not that short term. The HPC businesses we are winning right now are business opportunities that have been focused on for a year or more already. So short term, I don't think it means anything.

Very good. Question from another gentleman. Can you please comment on the new data center corporation you announced some weeks ago? That will be back in January.

Yeah, so what I can comment on is basically what we already announced is that it's a It's a global tier one server OEM that is designing parts into their HPC line, and hopefully we will launch it later this year.

Yep. Question on this larger gaming customer that has ceased buying from us. Any comments on that?

Well, they have not ceased buying from us, but they have gone from a big portion to a lesser portion. And what I can say is that they have decided to buy from another vendor. That's what we know. And what we can also say is that, yeah, I'm confident to say that I believe they violate our IP, and that's the situation in itself that we will, of course, address. But instead of sitting back and crying, we have gotten a lot of new customers. At the end of the day, I think we will stand as a stronger business with more customers, less risk. But of course, as usual, we don't want people stealing our IP. So I have to look into that. And as soon as we'll get back to normal, we will do that. Very good.

Then a question from Denmark. When will the share buyback program start? It will start as soon as practically feasible. We are getting ready to roll. It will take some time, obviously, because we cannot buy shares in an amount where it affects the pricing, so it will take quite some time. Another question, you mentioned interest from data centers in Europe. Can you elaborate on that a little bit further or comment a bit more on the pipeline in data centers?

Yeah, let's separate the two things because our pipeline is mainly HPC, so high-performance computing. That's also data center. It's all good. It's money in the bank. But HPC is not our big growth opportunity. That's, let's say, more general data centers. So the interest I see from data centers across Europe, the comment I made, was that specifically after we launched our own data center where we reused the waste seed, you know, municipalities, cities, and politicians, also data centers, have contacted us and reached out and said, we would like to come and see it. What about this? What about that? So there is an interest. But as I said, for practical reasons, we cannot really fly and they cannot really come and visit. So, of course, there's a lot of phone meetings, but there's also a lot of things that's been postponed. But for sure, there's been a good interest.

Very good. Going over to the gaming enthusiast product lines, can you comment on customer inventories? They reduced last year due to tariffs, but have they normalized? And what is the current status in terms of tariffs?

So if we start backwards, in terms of tariffs, there's no change. And in terms of our customer inventories, I can't really comment on it because I don't know. I think everything is up in the air with everyone right now. And, you know, our customers are not really telling or talking too much about their inventories to us because, of course, they know we are selling to a lot of their colleagues also. But as I said before, we are not in lack of demand. That's not our issue right now. So, yeah.

Very good. We ran out of questions via the web here. Operator, should we just try and listen to see if there are any oral questions at this point?

Once again, ladies and gentlemen, if you'd like to ask your question, please press star and 1 on your telephone. We have no telephone requests coming through. Please continue.

Okay. And while, yeah, we had one further question here. Esports is gathering more and more attention during the lockdowns occurring around the world. Is there a larger opportunity opening for esports as a result?

Well, I partly agree with that statement, but only partly because, yes, online gaming, if we call it like that, is definitely growing and getting more attention right now for obvious reasons. But in terms of tournaments and in terms of people attending, not so much because everything is in lockdown. And then the question is, if there is a larger opportunity opening for ACETEC in esports, let me remind you that the way we see the end user market is that gamers and enthusiasts is what we call them, G and E. Gamers are in our opinion, people who like to play games, they can build their own computer or they can buy it from, for example, Alienware. They're still gamers. Whereas the common denominator for our customers is they like to build their own PCs. So there are a lot of people who are building their own PCs and there are a lot of people gaming on their own built PCs. But esports as such is, you know, When there's a lot of people gaming, there's also a lot of more people building new PCs, but there's not a direct link to esports and then . So I would say that way around, I would say no.

Very good. Question on gross margins, impressive gross margins in Q1. We agree. Thank you. But also driven by the U.S. dollars, as we mentioned. Do you see any reasons for why it should be below 45% again

It's difficult to say because, of course, we don't know what's going to happen to Forex going forward. But from a business perspective, no.

I agree. Systemically, there shouldn't be any reason why to go under 45 again. But the business line data center has been fluctuating quite a while. And even though we've seen more stable and higher growth margins over in data center, then they will continue to fluctuate, I'm sure.

I can put it like this. In my bonus contract for the year, that's a high number.

That's often a good driver. Question again. There will be a new console generation coming out that are said to be so much more powerful. It should also allow new games to be more demanding on hardware. Will it also impact the PC business and make liquid cooling more interesting?

What I would say is that In a gaming PC, liquid cooling is already interesting. If you buy a real gaming PC today, there is also liquid cooling in it. If you go to, for example, in Denmark to some of the computer outlets, you can actually buy a lot of gaming PCs without liquid cooling. And the reason is obviously cost, that they just want to compete on low cost, low cost, low cost. But yes, I do believe that it will open up for that. While at it, at the consoles. Let me just refresh your memory why we don't see it as a threat, but why we also don't see it as an opportunity. We don't see consoles as a threat because, as I said before, our customers are people who like to build their own PC. Buying a console does not really fulfill that demand. So therefore, building a PC versus buying a console, we do not see that as a threat. We also do not see it as an opportunity. And the reason for that is I have personally been in contact and visited Microsoft Xbox, Sony PlayStation, and all of them many years back and also a few years back. What it always comes down to is they would rather accept a higher failure rate and a high noise level than to spend a few dollars more on a cooling solution. And the reason is, just quoting them, is that they make no money on the hardware, so therefore they are not willing to invest more in the cooling system, whereas the money is made on software. But for sure, technically spoken, a console could definitely benefit from liquid cooling. You have it in your house, you have it in your living room, and they are extremely noisy. But business-wise, at least so far, there's not been room for it.

Very good. If you can hear my mouse clicking, it's me hitting the refresh button, and there seems to be no more questions. As always, we have our website, ACETech.com, and you can ask us questions at the investor.relations at ACETech.com email. We shall do our best to reply. With that, we conclude the presentation of Q1 2020. Thank you for your interest in ACETech.

Thank you.