Asetek A/S

Ladies and gentlemen, thank you for standing by, and welcome to the ACETEC Q3 2020 presentation conference call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question-and-answer session. And without any further delay, I would now like to hand the conference over to your first speaker today, Peter Mudson. Thank you. Please go ahead, sir.

Thank you, operator, and thank you, audience, and welcome to this ACETEC Q3 2020 conference. The board they met last night, and they discussed the report we are about to give you, and we released it a few minutes ago. My name is Peter Madsen. I'm the CFO here, and I have with me André Slot-Eriksen, who is our CEO and founder. Good morning. Good morning, André. So if I lean out over and look out the window, then I can see quite a lot of sunshine, and that pretty much reflects the mood we're in over here at ACETEC, because the report we released this morning is quite a strong report. What we're going to do now is that Andre, he will go through the presentation. After that, and I will do the financials after that, we have a Q&A session where you can follow the lead by the operator and post your questions verbally. Or maybe even easier, you can go to wherever it is on the website you're following the presentation at and type in your questions there. Then we'll read them out and take them one by one. With that said, We'll go to the first slide. And, André, you were up. Yep.

So before doing anything else, I would like to say thank you to my team globally. I think everybody knows it's difficult situations out there and a difficult environment. And I'm actually very happy and very proud that we've been able to pull this off. It's not been as easy as it's printed on the paper. I can guarantee you that. But it's obviously fun and exciting to be a part of. So let's dive into it and look at the highlights. If we look at the quarterly revenue, it's a new record for us, 21.5 million, and reflecting the growth of, yeah, pretty much 108% over the same period last year. Our gross margins went up over last year. We have a record EBITDA. We have a yet-dead revenue of 45%. As you already know, we adjusted upwards our revenue expectations for the year to a growth of between 25% and 30%, which will be a new record for us also. So I don't know if it's good or bad that we have to start with COVID-19, but let's do it anyway and see how we are doing as a company in this situation we are all in. So if we look at our contract manufacturers and the whole China division, it has actually had limited impact on our ability to supply so far. And as China seems to continue to reopen, it means that our production capacity is also good. And I think needless to say, We have been able to improve our supply chain capabilities quite a bit to service the demand. I mean, it's a lot of liquid coolers we're shipping right now. Internally, if I should call it that, like everybody else, we are obviously focusing on our employee health and safety, so we have done a lot of measures here at our headquarters We are fully operational, but people have the flexibility to work as home or from home as they please. Needless to say, I guess, there's not a lot of travel activity. We're trying to manage everything online. Also, needless to say, I guess, we have a very high sourcing activity. There's a lot of things going around sourcing. And we have also hired quite a few new people, and we're continuing to do so. And we are updating our continuity plans all the time and, you know, following how the situation is, including market research also, but we'll get back to that later on. On the OEM side, so in other words, both on the customer and direct customer and our end user side, We keep to see positive signals from the gaming and enthusiast market and our direct customers as well. That's obviously also what's reflected in our numbers. And on top of that, we also see increased data center activity. So all in all, there's not much to complain about from an Asetek perspective. If we look a little bit about the revenue and profit outlook, we are now down to having one quarter left, meaning that it's pretty easy to do the math for everyone. But as we expect, a 25% to 30% growth, it corresponds to pretty much $68 million to $71 million range. And in any case, it will be a new revenue record for the company. Our gross margins are expected to increase to roughly 47% from roughly 42% in 2019. And our income before tax is, let's say, roughly $10 million, up from $1.5 million last year. So for sure, it's going to be a record year no matter what. And, yes, there's uncertainty related to COVID-19, but fortunately we are at a stage right now where, you know, it will almost require a plane to crash into our buildings to destroy this. Now it looks good, and we feel pretty comfortable about it. Looking a little bit top down on the business, we have more or less three legs to stand on right now. It's on the left, on the slide, we have our enthusiast and do-it-yourself OEMs, so gaming and enthusiast OEMs. To rehab, it's for end users who are building their own PCs, small system integrators and things like that. But, you know, in the essence, people who are building PCs from component level and up. Then in the middle, we have our gaming and performing PC OEMs. There's a few of them here. There's Alienware and MSI. So that's for end users who are buying a complete gaming PC for their gaming system at home typically. And then we have the data center market where we have a few OEMs as well. The most exciting because it's the newest is, of course, HP, Hewlett Packard Enterprise, who has started shipping in the quarter, but I'll get back to that as well. If we just look at how we are organized briefly, I don't want to go into too much detail, but we have sales and marketing in Silicon Valley in the U.S. because it's close to a lot of our partners and customers. And most importantly, that's where we can get the best employees for that type of jobs. Then in Texas, we have our COO close to HPE and close to Dell. We have sales in London. And here in Olbo, where I am, we have R&D, prototyping, sourcing, in-house manufacturing, quality order management. We have most of the management team, and we have marketing and branding also. So as you can see, that's actually expanding quite heavily also. Then in Asia, we also have quite a bit of R&D, actually. We have sourcing. We have our contract manufacturing, of course. We have quality auto management, and then in Taipei, in Taiwan, we have sales. And if you would think if we have a lot of end users in Taiwan, no, we don't have more end users in Taiwan than everywhere else, but pretty much all the big OEMs have R&D facilities in Taipei, so therefore it makes sense for us to be there as well. If we look at the quarterly revenue development, of course, it's nice to see how it develops. But as you can also see, it is fluctuating quite a bit up and down. But I think the closest quarter is actually Q2 2018. But even compared to Q2 2018, you can see the revenue is a couple of million dollars higher. So it's a very strong quarter for sure. Diving into the gaming and enthusiast segment first. What are we doing and how are we doing? We are currently shipping to more than 20 OEMs. And if you think about it, if each of these OEMs have, let's say, between two and four products, it means that we have more than 80 different products just for these OEMs. Top five of them represent roughly 80% of the revenue, pretty much the same picture from 2019, although the composition is not the same. Our ambition, of course, is to increase customer diversification over time. It has proven to be difficult, though, because we are pretty good at picking the best in the market, and obviously as we pick the best, we also get the highest revenue share from them. But that's a luxury problem to have right now. We obviously, as we always are, are looking at the IP situation all the time, and we're If we look at the top five composition of customers in alphabetic order, you have them here, Alienware, Asus, Corsair, Fractal, and NZXT. I would say, though, that if we look at the last quarter, this is not how it's reflected. This is pretty much a picture of the year up until now. We have not only been busy in manufacturing and sourcing, we have also been very busy in R&D. And when we're busy in R&D, it also means we're busy in sales. So pretty much the entire company has been running around to make all of this happen. And just to give you a little picture or a flavor of what's going on, just here in Q3, we had nine new products started to ship, four of them for a brand-new do-it-yourself customer. And three of the new products out of the nine, so a third of them, is actually for NVIDIA's new Ampere GPUs. We also have a substantial pipeline of new products scheduled to start shipping in the next quarter, so in Q4. So, yeah, super busy. As you may remember, what was it, one and a half year ago, we decided to – to get our brand more forward, so making sure that the end user got a choice instead of just choosing between the different OEMs out there. We felt it was important that people know when they're buying an ATT&CK product, and I think that's also a part of our success, that even though we may shift customers, people stay loyal to our brand. We can see that, so for sure that's been a good strategy. and something we're going to pursue even harder in the future. If we look a little bit more on the, let's say, strategic side of the things, our goal, of course, is to continue our growth in the space. And there are a few ways we can do that. We can look at R&D. We can look at branding and marketing. And, of course, we can get more customers. And, yes, needless to say, we're doing all of it. And on the R&D side, we are looking all the time, new innovations, new routes to go, new things to try. On the branding side, as I said before, we are going to push it harder, so we're doing even more co-branding. We are connecting directly with gamers and enthusiasts via our forums. So I think we are well-positioned to monetize our brand. Yes, we are, of course, always looking at new customers all the time as well. Looking a little bit on the data center side, as we can see here on slide 16, HP has started shipping now, and they are online with their products, including our products, obviously. And We have received the first orders also, so that's pretty much progressing to plan, I would say. And in general, on the data center side, we have so far announced nine orders with a revenue of $5 million. We have announced three orders in Q3, and two data center orders announced in Q4, totally different. I think it's actually supposed to mean shipping in Q4. But anyway, we have an increased pipeline on the data center side, and that's what we have been seeing all year and basically what I've been reporting since the beginning of the year that – we are starting to see a pickup here. It's too early to talk about how much and how fast, but the tendency is clear. So that's really good and really nice to see. If we look at the strategic development of the data center side, yes, the goal, of course, is to keep pushing and to keep winning orders, to keep winning OEMs and to penetrate the market. We do that in different ways, but I will still say from an overall perspective, I still believe that what we're doing, meaning the OEM way, is the right way to do it. And, you know, I think HPE is a good example that the more successful they become in the market, the more successful we become. And that's a much better way than us being out there pushing end users. What we should do instead, and that's what we're doing, We influence the influencers and, of course, the whole political side of it as well. As I mentioned at the last call, probably three months ago, there is actually happening quite a lot in the EU behind the scenes, and I am continuously very optimistic that we will get through with some legislation about the use of waste heat and the use of liquid coolant. But it's a big machine, and it takes time. And therefore, of course, it's really nice that while we are doing this big push on the political side, that we are getting orders on the HPC side. So that's really nice to see. And then before I'll do the final wrap-up, we'll have Peter go through the financials. Yes, absolutely.

Let the numbers do the talking, they say. But I will... I will add a few comments, however. Starting on the top line, this quarter we came in at $21.6 million, which is 108% more, more than a double of what we did the same quarter last year for the year as a whole until now, the first nine months. We did almost $45 million versus $39 million last year. That's an increase of 16%. And, of course, with the guidance that you know about, we're expecting a 25% to 30% increase on the top line. We are leading up to what is a very, very busy Q4 also. Growth margins, growth profits, I'll come back to that on the next slide, just shifting the attention down to the operating expenses. We have actually throughout the year up until half year, three months ago, we've been running pretty lean and we've actually been spending less money than the year before. That picture has changed a little bit now where we are spending in this quarter $5.8 million versus $5.6 million last year. Not a big increase, but worth noticing anyway. Some of the increase comes from foreign exchange. The Danish kroner has increased in value, hence making the cost over here in Denmark, which is around 60% of the overhead space, more expensive. We've then saved some money on other components, travel, for example. We've been rather limited in travel, as you all know. The reason why it's interesting is that we're adding resources. We're adding resources to the branding side. and marketing department and we are adding resources to our R&D groups. It's more about innovation, further more and more as it has been last year of innovation and new products and new branding and getting stuff on the road that we can sell in the future. And you'll see more of that. We do our overheads. We do expect our overheads to increase modestly going forward for those exact same reasons. All this brings us to an operating income of $4.3 million in the quarter versus a negative $1.2 million in the same quarter last year. And for the year as a whole, the first nine months, we are at $5.3 million versus pretty much a zero last year. So that brings us for the year, the first nine months, to $0.12 in income per year. At this point in time, after the first nine months, we still have, of course, Q3 to go, or Q4, sorry, to go. We are indeed very happy to record these numbers. Gross margins, we've been talking about those at our recent earnings calls, too. The Q3 gross margin was about 47 points versus 42 last year. And the first nine months up until now has been around 49 again versus 42 last year. You can see a sort of decline in Q3 as expected and as reported. We had 47 now, and we were at 51 in Q2, which was extremely high, as we also spoke about at the last call. Reasons why it's going down. Down in this case is to some extent driven by the Chinese. Remember, that has been increasing in value pretty much since March or something like that this year, and that kicks in and affects our unit cost price from Q2-ish, and I'm sorry, from Q3-ish, and especially here in Q4 that we are in right now. So as we have communicated before, we are expecting a level around 47 for the year, which indicates that Q4 is around 45 or something like that. Of course, the Forex is out of our control. There are other impact factors also, product mix being one of them, and the United States import tariffs also being a significant impact on our growth patterns. And that still remains uncertain how that will look in the future, next year. I'll think about next year. Balance sheet, well, we update the numbers every time, every quarter, but apart from that, the picture is the same. We are very strong cash-wise. We have almost no low interest in debt, meaning we are a very solid company from a balance sheet perspective. Also, that creates flexibility to develop our company, of course, and to defend our IP, should anyone have those such thoughts. It gives us stamina, you could say, and it also creates a platform for considering our portfolio going forward. Just a quick comment on the Share Buy Back program. Back in May, we launched the Share Buy Back program and invested $4.5 million in buying back shares to cover and hedge our employee option program. We have just this morning announced that we are extending that program. Technically, it's a new program where we, over the next period from now until early March next year, will invest $4 million in acquiring additional shares. That is in motion, so we should start out today. And then just a final slide on the financial priorities. And this was made early this year, late last year, where we were looking into a down year. and that certainly has changed. Q1 and Q2 was a little slow, but it certainly has changed here in Q3 and even more so in Q4. But at that point, we were looking into protecting our business, optimization of what we had. It's worse like those that we have in here on the top line, and it certainly is changing. We are adding staff, as I said, both blue-collar and white-collar to support the business in all our product groups, Cost-based optimization was another target we talked about, we have been talking about, and we have definitely taken the lid off the cookie jar in terms of allowing more resources in R&D and branding, all with the purpose of expanding our business going forward. Just one comment on cash flow, which, of course, is a typical CFO job. We are back in the saddle. I can report in half a year, at half a year, we were a little behind on performance when it came to working capital. And we are back where we should be. Our cash conversion cycle is now down to 10 days. I think it was 27 at the end of the half. So we have certainly made improvements there. With that, André, back to you for a summary and outlook.

Yes. So if anyone joined late, I can at least repeat that we have a strong quarter and a record quarter. The good news, however, is that I expect us to beat this quarter quite significantly because since we have guided for the full year and we only have one quarter left, I have done the math for you, meaning that the Q4 revenue should be between $23 and $25.7 million. So another record. our business model transition I don't want to go to details because we've mentioned it so many times and most importantly our higher data center prices have contributed to increased growth margins and our profits obviously we have a substantial pipeline of new G&E products and our data center pipeline is actually growing as well so that's good and I think one of Our weaknesses seen from a shareholder perspective is that it's very difficult to predict our business. And there's nothing I would love more than talk about how much the growth rate would be next quarter or the quarter after and why we are seeing the growth rates that we are seeing. And the problem is I'm not really equipped to do so because I don't have the numbers, unfortunately. But what we have decided to do is to start a commission research so there will be at least one independent source in the future that can talk about these things. And then at least you have one more data point than just listening to what I have to tell you. I don't have the exact date, but, you know, it's sealed and signed, so it will happen. And I expect it to happen early next year.

Very good. Then we will call up the operator and see if there are any questions via the phone. And when that is done, we will direct our attention to the questions as they have been typed in online. So operator, if you would please ask if there are questions.

Thank you. Ladies and gentlemen, for questions, please press star 1 on your telephone keypad. Once again, if you have any questions, please press star 1 on your telephone keypad. We have a question on the line, sir. I come from the line of Anders Knudsten from SEB. Please ask your question.

Anders, I think you're muted. We can't hear you.

Anders, your line is now open. Please ask your question.

I just had to wait for the line to get open. Can you hear me? Yes, sir. Good. Well, first of all, a big congratulations with the amazing numbers. They are truly a assumption. But on the data center, you say that the pipeline is increasing. And I know you say it's too early to give any numbers, and I completely appreciate that. But perhaps you can tell us a little bit about why is the pipeline increasing?

Well, I... I'll get back to your answer, but let me start another place. As I've said for many, many quarters, it's not right to judge Asetek quarter by quarter. You have to look at things in a bigger perspective because we are a growth company establishing new markets. And as you may remember last year where the pipeline was not so strong, if you looked at that quarter by quarter, that was not a good story. But one of the explanations was that when Intel, for example, is launching a new platform, and especially in the HPC market where high performance is everything, then people are just waiting. So this year they launched a new platform, and that in itself makes the pipeline bigger. Then obviously, and that comes down to pure math, the more OEMs we have, the more customers we have, then obviously also the more the pipeline grows. And I think most importantly, or at least most interestingly for the future, is that it seems as liquid cooling is becoming more and more accepted and, you know, more and more widespread. So hopefully one day we will see the catch-up effect really take off. And I hope it's the beginning of that we are seeing. Again, let me emphasize, it is too early to say, but... You know, I think you can see just in the amount of orders we announced this year. Of course, it's more fun to announce a $2 million order than a $200,000 order. But actually, at this point in time, I don't really care. To me, what's important is that every time we announce a new order, it means a new data center somewhere in the world has built a new data center with liquid cooling. So I think that's the interesting thing here. That was a long answer. Sorry.

No, but I guess what you're trying to tell us is that, though, of course, we're still waiting for the catch-up effect, there is actually something happening on the line in the market. There is definitely some underlying traction. Is that fair to say?

Yeah, absolutely. Absolutely.

Okay. Perfect. Thank you very much, and congratulations again.

Thank you. Thank you.

Once again, for any questions, please press the star 1 on your telephone keypad.

Should we continue, operator, over here?

There are no further questions over the phone, sir. Please continue.

That's perfect. Thank you. Then we'll change the direction here to the questions that we have received online. And I'll simply start from the top. Could you please put some perspective on the historic growth of the company? I was thinking if you could give me the 5, 10, and 15 years growth figures to try and understand the journey of the company. That's very specific. I actually do have the numbers in my mind. But, Andre, do you have any comments?

Yeah, I think in the context of what I just said, that instead of looking too hard on the quarters, and that's obviously also why we stopped the quarterly guidance, I believe for the last five years, correct me if I'm wrong, Peter, but I think for the last five years, the company has seen at least an average growth rate of 15%. And if we go back 10 and 15 years, I think our growth rate has been between 20 and 25. And if you look at that, that we've been able for the last 15 years to sustain growth rates, let's say 20 to be conservative, then although the past doesn't say much about the future, I don't see why that would change so rapidly. You know, to be very specific, the growth rates have been the last five years around 15, and when we look 10 and 15 years out or back, it's been between 20 and 25. Very good.

Question number two here goes to data centers. So the data center orders, are they related to activities in Europe since you are commenting on how the EU is moving but slowly?

I would say there's no connection yet. The data center orders we are seeing right now are HPC, so high-performance computing, and people there are buying liquid cooling for two reasons. One is the added performance, of course, the added density, and, of course, also to save power and to save money on electricity. But I would say it's too early to make a direct link between the EU because they don't really have any orders or legislation out yet. But for sure, our direct customers, the OEMs, they obviously know which direction it's taking.

Very good. Then there is a question here that involves a few components, one of them being, Any signs of a slowdown in demand on the gaming enthusiast side? No. Next one here. How much is the GPU cooling driving the growth in the coming quarters?

I would not say it's driving the growth, but I would say that in the quarter, we have shipped a double-digit number of thousand units. So at least it's no longer just a gimmick. We are selling real products. Yeah.

And to gear a little bit to the data center side, how much of a negative earnings contribution do we see from data center business, and how much has that come down, the negative impact, from the higher prices on sales side and lower cost base? Do we want to comment on that in specifics? We are not commenting specifics on segments at this point. But you are right. The sales prices have gone up. The cost base has gone down. Consequently, the negative impact has also decreased. Can you please comment on the visibility around the 25 to 30% revenue guide? We are now in October. Yes.

Let's put it like this. Let's say there is a human side to it and a business side to it. From a human perspective, that means me. Why would I destroy a fantastic year going out with a new guidance if I was not secure? That would be kind of stupid. And from a business perspective, of course, the money is not in the bank, but just so everybody understands how we guide and why we guide. I actually don't like revenue updates all the time because it, for some, could signal that we don't know what we're doing. So I actually prefer that we go out in Q1 and say this is the range we are in, and that's how the year is going to pan out. Obviously, positive adjustments are more fun than the opposite, but the way we look at it is that we give you a revenue range, and the very moment that we can see that we are going to surpass that based on real customer forecasts and based on our experience with, okay, how likely is it that these forecasts are going wrong? As soon as we have a good feeling about that, we adjust the revenue guidance. Of course, in Q3 and Q4, we know much more about how the year will end than we do in Q1. So let me give you an example. Let's say that we came out next year and say that the year will be flat, for example. That's not what I'm saying, just to be clear. But for the sake of the example, let's say it was flat. Let's then say that in Q1, we sold 20% more than we had in our internal budgets. That would not trigger a revenue update because there are simply three more quarters to come, so it would be too early and too immature to say something for the year. The same if, let's say, we sold 20% less in Q1 compared to what we had projected internally. That would also not trigger a revenue update. But when we are in Q3 heading into Q4 and we can see that there are solid forecasts from solid customers and we are getting closer and closer into the window where they can actually not change anything, then we update. And that's what's been going on here. So as I actually said earlier, for this not to happen, something completely out of our hands would need to happen. And, yeah, I don't think that would happen. So we feel pretty strong about it.

Very good. And we continue in the guidance track, so to say. Can you guide on the revenue outlook for 21? No. We are just starting up in the middle of, of the planning process for next year, and it would be way too premature at this point to start talking about that. But when we can, of course, we will guide as appropriate.

Yeah, so what I can say is that we are going to do a capital markets update this year, sorry, next year, and that will be the appropriate time for us to talk about 2021. both in terms of revenue and earnings, but also what the strategic outlook is. So we're going to do that there. Of course, everybody wants to know how 21 is going to look, and that includes me, of course. But if you look in our presentation here, what we say is, and there was a question before, Do you see any change in demand? And we don't. That does not mean there will not be any change up or down, but for now we don't see it. I think that's the closest I can get.

Yep, very good. We're coming to the end of the questions list here. There's one more. Any update on the legal case against tool IT?

Yes, there is one update, and that is we've had a settlement conference online with the court in San Francisco, and we did not settle. And there is a new settlement conference scheduled, a forced settlement conference scheduled, in a couple of weeks that I will attend again. And that's, again, something that the court is ordering to try to settle the case before all of us spend too much money in a court. I'm not hopeful that it will settle, but let's see.

Very good. And I have pressed the refresh button a couple of times here with no new questions coming up. That means that we have arrived at the end of the presentation this time. Thank you very much for your interest in ACETEC. Thank you. Goodbye.

That does complete our call for today. Thank you for participating in the Audits Connect.