Asetek A/S

Ladies and gentlemen, thank you for standing by and welcome to the ASATEC Q2 2020 presentation conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. I must advise you that this conference is being recorded today. I would now like to hand the conference over to your first speaker today, Peter Madsen. Please go ahead.

Thank you, Angelica. Thank you, thank you. And welcome to this ACETEC Q2 and half-year 2020 results presentation. My name is Peter Madsen. I'm the CFO. I have here with me our CEO and founder, André Eriksen. Good morning, André. Hello. We're coming to you from a very sunny Aalborg, Denmark today. where our board met just a couple of hours ago and discussed and then approved the half-year and quarterly report, which we are now going to present to you. These meetings happen via web phase during the COVID-19 situation, of course. So the way Angelica, the operator, just spelled it out, the way we're going to run this is that we will do the presentation. We will then have a Q&A session where you can either follow the instructions that she will provide and then verbally speak to us, or you can, during the presentation, go to the web presentation here with the app and type in your questions in the section directed for that. Those questions we will see as they pop up, and we will then address them at the proper time. With that, André, I'll hand it over to you.

Yes. So looking at the highlights for the quarter, it was a revenue of $14.1 million compared to 17.1. And our gross margins increased quite a bit, actually, nine points from 42 to 51. And our EBITDA is more or less the same as last year, 3.1 versus 3.3. But the interesting thing is last year included almost a million dollars in litigation settlement, so quite a strong EBITDA. And the first half, 23.3 million versus 28.3, we have announced our collaboration with HPE, and we have raised our expectation to our revenue and profits for the four years ahead. I will get back to all of this. If we just start with perhaps a little bit more sad and boring part of COVID-19, let me just spell out how we are doing as a whole company, not just us, but also our suppliers, et cetera. In terms of our contracted manufacturing, we had a little bit in early Q1 and our employees in China were sent home But other than that, we've not really seen any big impact from it. In-house, we are obviously doing the necessary safety precautions, and we have not really done anything special. Other than that, we have not laid off people. We have not hired people. It has been pretty steady, I would say. And in terms of our OEMs and end-users, I will get back to that a little bit. But let's just put it like this. Demand is actually pretty crazy right now. And we cannot really hide that. We are pretty enthused about that. But I will come back to that also. If we look at the revenue, what we said earlier in the year was that we saw a 5% to 10% decline. Keep in mind, we had a tariff situation. We still have that, by the way. We have COVID-19. We have our biggest customer more or less leaving us. So our hopes were, and what we could see, were that if we could do a 5% to 10% decline and still have positive numbers on the bottom line, we would be happy and thought that we would have coped really well with the situation. And then fast forward, what we have guided is actually now a 5% to 15% growth compared to last year. And on top of that, an income before tax between $4 and $5 million growth. So it has been a pretty strong development, and it still is, I would say. But again, I'll get back to that. Looking a little bit from the top down on our business, we have the gaming and enthusiast division, if we should call it that. That's, again, divided into two. It's divided into the enthusiast and do-it-yourself users division. where people are going to a store or online buying our customer's product and go home and build their own gaming PC. And just to name a few, you can see here ADATA, ASUS, EVGA, Fractal, Gigabyte, NZXT, and Thermaltake. And that's just a few of them. And then on the PC side, where end users are actually buying a complete gaming PC, we have, among others, Alienware and MSI. And then the other side of our business, the data center business, we are only selling OEMs. We are not selling to any end users where we have Fujitsu, HPE, Intech, Xenon, Supermicro, and Intel, and others. I know there are some new investors on the call, so although this may be repetitive for some of you, then the way we are organized I would say thanks God right now because we are not able to fly. We fortunately have people more or less all over the relevant places. We have our sales and marketing in the U.S., in California. We have people very close to our big customer, Dell, and HPE in Texas. We have salespeople in London, here in Denmark where I am. We obviously have management, R&D. We have some sourcing companies. in-house manufacturing, quality, order management, and so forth. And then we have a rather big site in China where we also have R&D sourcing, all our outsourced manufacturing, quality, order management, et cetera. Although I'm not necessarily a big fan of spreading a relatively small company all over the globe, I have to say it's really a big force right now. And, of course, our traveling budget has been pretty light this year, but we are actually functioning really well the way it is right now. If we look at the quarterly revenue development, I think this is – beautiful picture of why we are no longer guiding on quarterly levels because it's fluctuating up and down as it always have been and as it probably will also continue. But I think the most interesting in this slide is really the EBITDA margin of 22.1%. Is that a record? I believe it is, yeah. It's probably the highest EBITDA margin we have ever had. So that's something I'm really happy about, of course. Diving a little bit into the segments, if we look at the gaming and enthusiast segment, the goal has, of course, been and still is to widen and diversify our base of customers. And right now, we are currently shipping to more than 20. Top five of them represent 79% of the revenue. It was 81% a year ago. and we are obviously trying to all the time improve this picture. As always, we look and monitor our IP situation, and we are still moving ahead with our business model transition. I've mentioned it quite a few times, so I'm not going to spend a lot of time on it other than instead of supplying more direct customers with information fully-fledged products, we are giving them now our core technology, and then they're doing the customization on their part. That means our revenue per unit is going down, but our margin per unit is going up. And that's obviously also why we have guided a decline in revenue. So it's actually pretty strong that we are able to both increase our margins and our revenue. because it's kind of counterintuitive. If we look at the whole innovation part of the business that we talked to you about a year ago or so, we have just launched with Alienware what we call the RADCARD GPU cooler. I will not spend a lot of time on the mechanics of it, but the point is that instead of having a radiator in a fan space in your PC chassis, we now use a PCI Express port which allows, let's call it, very powerful GPUs in a very small form factor. It just started to ship, so we'll see how it goes. But so far, it has been received pretty well. We have gotten good reviews. If any of you are interested, you could go to a YouTube channel called Linus Tech Tips. They just made a review of it. We have started shipping two new products for ASUS, Republic of Gamers. We are powering a whole new series of coolers for fractal design, and we have a massive pipeline of new products to start shipping in the second half of this year. I don't remember the exact number, but I believe it's more than 20. A parallel to the innovation side was also this, you know, building our own brand in the channel without compromising our direct customers. So we are executing this dual branding or brand behind the brand strategy. So now when we are launching new products with our customers, we are actually on the box. And as you can see, our enthusiast, Dennis, in this beautiful picture, is holding a and a cooler from Asus, and as you will see, there is this AC Tech logo on the box, so people actually know that they get the real deal and not some cheap copy from China. On the strategic development in the gaming and enthusiasts, our goal, as always, of course, is to continue to dominate the market, and we have different handles we can pull, and the The key one, of course, is R&D and innovation. It's also the branding and the marketing, and it's obviously also widening our customer base. And I think, personally, I think we're doing pretty well on all of these. We are quite busy. Where we have perhaps not succeeded a lot is on reducing single customer dependency. What you cannot see from the slide is that we still have one big, large customer that we are depending on, But within a very few months, we have actually swapped from one customer to another. So it's actually a big success story. And the reason why this customer is so big is actually because they're just selling like crazy out there. So from that perspective, I'm obviously happy that we have lost a significant portion of our revenue to one customer that we've been able in no time to swap it over. If we look at the data center site, The most exciting for now, of course, is our collaboration with HPE, to be precise. Our announcement was a little bit, what should we call it, timed in a weird way because the plan was to announce it later in the year when HPE is actually launching products. But because HPE... wanted to mention this in a conference in Asia somewhere, we obviously also had to announce it so it would not come to the back door, so to speak. So that's why it just came out of nowhere. But the thing is, our solution is incorporated into the Apollo server platform. And, yes, it's running on track. We have started to ship in small volumes now. pre-production units for, for qualification and on their production sites. And, um, we announced it in January and, uh, a server platform typically lasts between 18 and 24 months. And, uh, so far, uh, we have nothing else to say then, uh, that the estimates, uh, indicated revenue between four and $5 million for this program. Um, If we look at the data center business, although that we stopped guiding on them specifically and just to refresh your memory, the reason is that as long as one business is 5% of the rest, then there's no point in guiding on them individually. When and if that will happen, we will change as we see fit. But for now, we ship just shy of a million dollar order that we announced in April and we have announced additional orders in Q2 of 1.2, 1.1. And what we see is still an increased pipeline of potential projects. And I would say that the higher activity and increased sales prices have resulted in quite good financial performance, at least compared to last year. On the more strategic side of the data center business, there our goal is and still will be to obviously create a meaningful and big and profitable business over time. And the strategy is that we need to influence the influencers, be it politicians or press or whatever, obviously increase end-user adoption with existing and new OEMs, take advantage of the leadership we already have, and explore growth opportunities beyond HPC. I would say that our work in the European Union is obviously a little bit handicapped by the fact that it's really difficult to set up meetings and travel there, etc. But I actually just got a status report this morning, and we actually believe that we have come pretty far As you all remember, it's not an easy task to go to Brussels and ask them to implement liquid cooling in data centers. But nevertheless, there are many initiatives in that direction, and I do believe we will end up there where it will simply be legislation at some point that if you have a data center of a certain size, you simply need to reuse the waste heat. So that's an ongoing thing. With that said, I will leave it to Peter.