Asetek A/S

Welcome to the ACETEC Q2 2021 financial reports and earnings call. Throughout the call all participants will be in listen only mode and afterwards there'll be a question and answer session. I'll now hand the floor to our speakers. Please begin your meeting.

Thanks, operator. My name is Peter Madsen. We are coming to you from Aalborg from the Acetek company here today. I have with me Andre Slot-Eriksen. Hi, Andre. Hello. Earlier today, our board met and discussed the plans and the progress and the strategies and all that good stuff. And they approved the report that we sent out a couple of hours ago in the presentation that we're going to give you now. you will have the option to type in questions in the app on which you are following the presentation. And you would also be able to find a call-in number on the invitation that was sent out some time ago. So please ask your questions via whatever means fit you. And if you change the slide operator, there's a wonderful disclaimer. Please go ahead and read that. And when you've done that and change the slide again, yes, thank you. And with that, André, over to you.

Thank you. Yeah, you can go ahead to the next slide. Thank you. So just very briefly about the quarter, a new record revenue of 23.2 million, which is a 64% growth over the same quarter last year. An EBITDA of 3.2 compared to 3.1 a year ago. Our first half year revenue basically more than doubled. And the EBITDA increased 140% as well. We are investing in our sim sports. The R&D part of that investment was 0.7 million in Q2. And we still expect to launch products later this year. We also invested or increased our investments in general in the G&E to basically support The crazy growth we're in as well as future growth as well. We keep our revenue expectation 20 to 30%. I will talk much more in detail about that in a few slides. Same about the gross margins. We have gotten our hands down a little bit. The world has also come to us, so to speak. And therefore, we have adjusted the midpoint of our earnings expectations with three million. And I will also come much more back to that in a second. Next slide, please. So if we look at the things external to ACETEC to the left, so our manufacturing I think everyone in the world and also on this call knows about the shortage of semiconductors. I will not go into a lot of detail why that is, but the fact is that it's there. And up until last quarter, I remember talking about it and getting a lot of questions about it. But until last quarter, we have actually not seen it a lot. But we are seeing it now. And the way we are seeing it is actually twofold. But one of the sides that we are seeing it is that when we have to source our components now, we have to do it basically, let's say, all kind of alternative channels to make sure we can supply. I think the fact that we have doubled our business the last half year, it says it all that we are able to supply, but it also comes at a penalty at some times. We don't expect any situations where we cannot supply our customers also in growth scenarios. But we are buying components on the spot market sometimes. We are obviously focusing on strengthening our supply chain, both capacity and capabilities. And then the US tariffs are also hurting us quite a bit. And I'm no politician. None of us are. We had hoped. that with Biden on board, that they would figure out the trade war between China and the US. But it seems as it's not going to happen. So we are right now starting to look into all kinds of various scenarios for how to avoid that 25% penalty. It does not really make a lot of sense that we are working like crazy in our supply chain to save every cent that we can. And then on top, we pay a 25% penalty. So that is something we're looking into. Needless to say, in AC Tech, we have high activities right now related both to R&D, sourcing and quality. We are expanding our workforce both to meet the increasing demand and growth as well as our new sim sports business. Our headquarters, sales and in-house manufacturing, etc. are fully operational. I'm not 100% sure if our Chinese office is open or closed right now. Okay, so it has reopened. But I think as of last week, they were actually sent home. So for sure, the pandemic is still over us. And as such, we continue to focus on our employee health and safety, of course, and first most. So one side of the way we are being impacted about the component shortage is what I already told you. But there's also the other side, and that's with our customers. Our customers that are typically selling PC peripherals, if the end customer cannot get a new graphics card, as an example, they are, of course, not building a new PC. And if they're not building a new PC, they are not buying PC peripherals. So that is making some of our customers a little bit nervous and rightfully so. It's not something that we feel directly on our business. As I just mentioned, we get the components that we need. We have a record pipeline of new GNE products coming out. I'll get back to that. The data center activity is, yeah, it's still binary. It's still a very small business and it's lumpy. However, for the first time for, I would almost tend to say many quarters, there are positive news. in the sense that the work we have done in the EU seems to have paid off because in the new Green Deal proposals, there are actually legislation language around reuse of waste heat in data centers. So that's obviously very positive. If we look on the next slide, please. Just to give you some insight into the world that we live in and also to continue our style of being open and transparent, I already revealed that we are, let's say, holding on to our guidance with 20 to 30 percent growth, which equals a revenue of 87 to 95 million. Those of you who were on my last call, you may remember I said I was very bullish on the demand and the pipeline. And the fact is that the pipeline is record high and actually beyond our guiding. That's, of course, positive. The thing, though, is our customers are getting nervous by increasing shipping rates, not for us or from us, of course, but the increasing shipping rates, component shortage in the channel, etc., So right now we see a lot of moving around and pushing around of orders from our customers. And, you know, today we have August 12th and I still don't know how Q3 is actually going to pan out because people are moving things around. But the net of it is if we look at the total forecast for Q3 and Q4, it looks very strong. We have decided to maintain our guidance in this situation because with so low visibility, we just kind of have to stick to our best assumptions. So that's what we have done. In terms of gross margin, we expect them or they are normalizing from from 47 percent in 2020. And, you know, we have 43 percent this year compared to 51 in the same period last year. I think it's important to remind everybody that our margin goal on the gaming and enthusiast side is 40%. It's always been 40% gross margin. When we have the combined business, our target is higher because we want and expect much higher margins on the data center side. However, in periods where the data center sales is slow, then needless to say, the overall margin will be closer to the 40 than the 50. No rocket science into that. We have looked at our operating income and with the challenges we are facing and with the deliberate choices we have made. I'll get to that in a second. Then we have adjusted from the previous 11 to 16, from now 8 to 12. which is still in the range, but of course, the midpoint has moved. If we go to the next slide, I have tried to detail a little bit where our margin expectation come from or the bottom line expectation come from. I have categorized it into two boxes. We have something that's happening external to the company And then there's something that we have chosen to do inside the company. And if we look at the external actions first, the cost prices for us have gone 2% up and very simple reason. We are trading in dollars and towards the Chinese currency and towards the Danish currency for that sake, we have to pay more than we used to. That does affect our gross margin.

Can I stop you? I just saw a typo and I'm sorry. It's my fault. I'm very sorry. It says it's 2% higher than Q2 of 2020. It should say Q4 2020. Compare the two quarters, second quarter last year and second quarter this year. It's actually up against 8 or 9% higher. Okay. So it's a much.

Yeah. Yeah. So when we have to pay more for the goods, of course, our margins go down. Then, as I mentioned in the component price on the spot market, it's not a huge amount. It's, you know, when we buy the ICs for the motors, for the pumps, for example, we have to pay a little bit more for the IC. But with the volume we have, it all adds up. And then on top of that, we have the increased pressure from our customers, of course, to participate in this whole tariff party, because it's not our customers fault that we build in China. On the flip side, it's not our fault, our customers are in the US, so that's why we do this split. And as I said, we have made an offset of $3 million to the expectations. And here you have $1.5 million of the explanation that it's really the Forex, it's the component pricing, and then it's the tariffs. One thing that's super important to realize is This has nothing to do with price erosion or, you know, price pressure from our customers or anything like that. Our ASPs are stable. They are not stable from a mathematical point of view in the sense that in some quarters people are buying more high end products than they are buying low end. But that's called product mix. So our ASPs are stable. It's just compared to last year. We did have the let's say the tailwind of the Forex. We did not have the added component pricing. And the pressure around the tariffs were not as high because at the time, everybody thought it would go away. Then we have some internal actions and priorities. And that's something that we have chosen to do. That's not a negative. That's a positive. As an example, we are actually accelerating our Simsport investments. And the reason is that we can see that we can get to market quicker with new products and enable new partnerships, etc. So therefore, we are investing. It is not huge. If we just jump to the right again, the net of these three points is one and a half million dollars. We're also investing more in the gaming and enthusiast products. So what does that mean? Well, that means we are taking on new customers. It means we are taking on new products. And to do that, we obviously need more manpower. We are also defending our IP. That's something we've been doing for years. But during the pandemic, the burn rate of IP defense have been really low because, as an example, I have not been able to travel to the U.S. The courts have been shut down. They are now open again, and we have started that. So all in all, these things added up is a $3 million deficit of what we thought only three months ago. So there's not really any black magic to it or anything alarming in my view. And that's why I made this slide just to share with you what's actually going on. Next slide, please. For those of you that are new to ACETech, just very briefly, we have our office in Silicon Valley where we have sales, product management, customer support, branding and marketing, finance, and some of our management. In Texas, we have management and actually also some from marketing now. We have sales in the UK. In Olba, where I am, we have product management, R&D, of course, prototyping, sourcing, manufacturing, quality, order management, branding, finance, and management. And then in China, in Xiamen, we have product management, R&D, sourcing, manufacturing, outsource manufacturing, obviously, quality, order management and finance. And in Taipei, Taiwan, we have sales, product management, customer support and R&D as well. And I would actually like to emphasize something. In Denmark, where we have our VP of global operations. Just imagine he's not been able to travel to China for more than a year now. Still, we are growing like crazy and we are cranking out the double amount of products that we ever did. I think that the highest month right now, we are approaching 200,000 units in one month, even with teams that are only working remotely. I think that's pretty strong and I think that's worth mentioning. Next slide, please. So again, mainly to those of you who are a little bit newer to the story, we have three businesses, so to speak, or three business areas. We have the enthusiasts, so gaming and enthusiasts, that's primarily end users who are building their own PCs. So tinkerers who like to game, who like to build hardware, et cetera, and they would go and buy our product from one of our OEMs and install it into their own PC. And then in the middle on my slide here, we have, you know, pre-built gaming PCs. That's for gamers who like to game, but who's not necessarily interested in building anything themselves. So they would buy a PC that's already purpose-built that could typically be from Alienware, which is Dell, or from MSI in this case. And then on the right hand side, we have the data center, which is a pure OEM business where we sell to OEMs like Fujitsu, HPE and Supermicro. And then they go and sell it to their data center customers. Next slide, please. Yeah, I think we've talked enough about the margins and revenue for now. So let's go to the next slide. Next slide, please. And the next. Yeah, so just to dwell a little bit on the GE business, I would say that when you look at our quarters over the years, there's something that I've always been saying, that is there's always a weak quarter in the year, but you can just not say which one it is. And I think that's the story of our life, that we don't have long visibilities. At the end, it all turns out to be good, which is nice to know, but it is. It is a frustrating situation sometimes to be in a business where we can see that there's a huge revenue forecast, but they're going up and down more or less daily. Next slide, please. As I alluded to before, we have a very high activity of new products coming in, which, by the way, does not make forecasting easier for either us or our customers. It's, of course, really positive. There's so much new stuff coming out. In Q2 alone, there were seven new products that started to ship. And we have 19 new products estimated to launch here in Q3. And I talked a little bit about the further investments we're doing in our G&E business. So what is that actually? So it's really the whole brand behind the brand initiatives. It's social media. building up communities, participating in live events, videos, basically entertaining and communicating the gaming with the gaming community. And then, of course, it's also hardcore technology that we are pressing the accelerator to push the limits. So when I say push the limits, it's typically performance limits, the performance of our products. Next slide, please. Right now, we are shipping to more than 20 OEMs. Top five represented 86% of G&E revenue in the first half versus 81% a year ago. And I don't know if we can apply a lot of science to it other than our largest customers have done and felt the best during the pandemic. Our ambition, of course, is to increase our diversification and thereby customer concentration over time. And it's really difficult to judge how successful we are in that area because we are tending, which is good. We are tending to get on board really strong and really hardcore branded customers right now. So they are, of course, doing really well. Next slide. The next slide is just an example of what we have just launched with one of our really good customers, Asus. Here in Q2, we introduced the second generation of the Ryujin CPU coolers. On top of that, we launched with them what you can see on the picture here is the NVIDIA Ampere cooler with a really nice design and liquid cooling of the GPU as well as the memory modules, etc. If you are lucky enough to actually be able to get one, this is a really nice product, but also a really good example of component shortage because they are almost impossible to get. Next slide. So from a helicopter perspective on the G&E business, there's not so much new here. The idea, of course, and the goal is to further develop and build on our leadership. We are doing a lot of R&D product development. We are growing and expanding our existing customers. That's going really well. ASUS is a good example of that. I'm not going to reveal here any numbers, of course, but I can tell you that from they came on board recently to where they are today, we and they have been very successful in growing our relationship. And that's a typical picture we see. We are, of course, also looking at widening our customer base or taking in new customers. Again, I cannot say anything at this point, but that's also going really well. And as of recently, when I say recently, the last two and a half years, we've also put a lot of effort into branding and marketing and really communicating and engaging with the gaming community. So looking a little bit on the development and the outlook, we, of course, focus on deliver our core liquid cooling solution and people could say that's a dull point yes but keep in mind for those of you who've been around for a while what it actually means is we de-emphasized the focus on doing led lighting and printed boxes etc we focus much more on our core technology now and then we let our customers do the customization We focus on what we are best at, which is the performance, quality and reliability. And that's what we are known for. We have co-branding agreements in place with many OEMs. And yeah, it's all about positioning and monetizing our own brand. Next slide. Just a small note here for those of you who are wondering why I'm talking about changing slides. We changed our system, but for next time we will be able to change the slides ourselves so you don't have to listen to it. But for now, please change the slide. So in the simsport market, for those of you that are coming in more recently, we have taken on board a new challenge, and that is to enter the simsports market. It's an opportunity we have, let's say, identified over years. It came from our Esports Academy and our racing engagement. And it's very complementary to what we do already in terms of mechatronics, hardware, software and mechanics. That's what we're good at at Acetek. So we have seen a hole in the market. We bought one company last year and we bought some assets last year. And we are now a small team of somewhere between 15 and 20 people who's working full time and then some on getting products out. And as I mentioned earlier, the R&D portion of the investment was 0.7 million in Q2. Next slide, please. If anyone should wonder how it will fit in into our, let's say, more strategic fit, it fits right into the gaming and enthusiast business. It is exactly what it is. It's for gamers and enthusiasts of all sorts, both hardware enthusiasts, car enthusiasts, racing enthusiasts and so forth. Next slide, please. So how is it going in Simsport is of course the big question and it's actually going really well despite the challenges we talked about before. As an example, we are already buying components in anticipation of our launch and actually much further out than our launch to make sure we can actually, when the products are developed, also have something to sell. We expect to launch the pedals in Q4, as we've communicated earlier. needless to say it will of course be limited volumes here in in 21 simply because of yeah everything we talked about so far but they will our first pedal set they will be available in volume in 22. we have done a huge amount of external testing already with different esports team and sim racers and I don't want to sit here and brag too much. You can read it yourself. But one of the leading esports team in Denmark, at least, they have tested our pedals and come with some very nice statements about it. So we are really excited about that. We are, of course, going to increase our marketing activities when we get a little closer to the official product launch. But as of right now, we are building a a bigger number of prototypes that will be made available for testers press and, you know, influencers, we are already engaging with the sim racing community. And we also engaging with certain, let's call it automotive partners. And that's something we will come much more back to at a later stage. But But the short takeaway is that it's going really well, we have gotten in some very sharp and very bright people. And so it's it's a nice team. And it's working really well. If we look at this portion of the business from the helicopter perspective, the goal here is a little bit different because the goal here, of course, is to be established. Sorry, would you change the slide, please? So the goal here, of course, is to become, let's say, a name and to become a brand and to get a foothold. And that's what we're working on. The more strategic aspect is we really want to leverage our core capabilities here at AC Tech and There are a lot of simsport products out there, but there's also a lot of products out there that, you know, let's say there's a good hole in the market from what we can see. And we think it's a big opportunity, like 20 years ago when we entered the liquid cooling market. Back then we were the pioneers. Right now we cannot claim we are the pioneers, but we are early enough that we are right after the pioneers and we can learn from what they have done. and especially what they have not done right, in our opinion. And needless to say, the initial focus is, of course, to make some innovation and new products. We need to finalize our market and channel strategies, including direct sales, online resellers, e-tailers, motorsport shops, etc. The pedals alone will of course not cut it. I expect the volumes in this business to come when we have, let's say, a full set of sim racing products. So what does that involve? So that's a steering wheel, a wheel base, a seat, pedals and so forth. And we start out with the pedals and then we will keep launching new products during 22 and 23. We will be supported and we tend to be supported by our reputation from the G&E industry. Although we are not well known for sim racing products for obvious reason, almost all sim racers know us anyway, because inside their hardcore gaming PC, they have AC tech liquid cooling typically. So we are known for performance and quality and reliability. So of course we want to leverage that. You can skip the next slide and go to the next again. So number 23. Yep. As I alluded to already, the data center business is really volatile and I don't want to go into a lot of detail about it. Other than that, it's how it's been for a while and I also think it will continue for a while. Next slide. So in Q2, we signed close to $2 million of data center orders and I think it was only one of them that we have announced. We have not announced the rest because there's been a number of them, but they have been smaller. So we have not seen the reason to disclose it. But for sure, there are orders coming in. We are taking steps to lower our lead times and to be more speedy in the process of meeting our customer demand. But the big and main, let's call it long term trigger, is, as I have mentioned for many quarters now, is really we need legislation. We need support about this to make it fly. And that leads me to the next slide. As some of you know, I have spent quite some time in the EU and in Brussels, mainly in 19 and also a little bit in 20. It's, of course, been handicapped a little bit because of the pandemic situation. But we have been having a lot of virtual meetings and I have a small team of combined less than one headcount spread on two people who have been doing a lot of work in the EU as well. I'm not sure lobbying is the right word in this context, because what we have been doing is really to educate people, to make people understand, of course, the right people, understand what it is we are capable of and what it is our technology can do. And therefore, of course, it's really nice to see that the EU now has made legislation proposals as a part of the Green Deal, where they specifically say that there needs to be interaction and connections between power plants and consumers and the data centers are specifically carved out. It stated that we really need to reuse the world's resources. And it's also said, and I think that's that's perhaps not so direct for non-experts, but what they say is that when you reuse the waste heat from a data center, it needs to happen with minimal ancillary energy input. So what does that mean? That means if you get 30 degrees lukewarm water out of a data center and you need heat pumps to warm up that water, that's not minimal, that's maximal. Then you are basically heating up the the water by electrical power. Whereas in our case, the waste heat that comes out of the servers can be used directly into the power plant and directly out to the consumers. So this is, I think from my perspective, really positive. The reason I'm not running around with my arms above my head yet is of course that it needs to actually end out in real legislation. I'm hopeful that it will. and we all know that when we are talking about politicians and legislation it can take time but i also think we are probably all of us convinced that this is a high focus area yesterday i wrote an open letter to the minister of climate in denmark so far he has not bothered answering But I think the net is tightening because he can ignore me, of course, but I don't think he can keep ignoring what's going on in the EU. So from a business perspective, I would say that the data center business is disappointing, but the outlook is approaching what we've been hoping and praying for years, I would say. So a good step forward, in my opinion. Next slide. That's pretty much everything I just said. So let's go to the financials and go to Peter and then then I'll be back for the for the Q&A session.

Yes, sir. Thank you. One more slide forward, please. Yeah. So, Andre, a lot of your slides have been centered about financials and stuff like that. So we have gone through a lot of these things. So this is going to be more like a recap session. Revenues in the second quarter was $23 million versus the $14 million of the same quarter last year, 64% up. For the half year, $48 million versus $23 million. That's 107% up. Gross profits 9.8 for the quarter here versus 7.3 the year before. And so it goes. I'll come back a little bit to the gross margins on the next slide. We have sold 435,000 sealed loop units in the second quarter. That's 100% up. Try and go backwards later. There you go. Thanks. That's 100% up in number of quantities. And yes, mathematically, as Andre also alluded to, That's a decline on the ASP. But keep in mind that that's important for us to state here that this is the result of a product mix change rather than price solution. We don't see price solution per se, and we are not in the business of reducing our sales prices. Yeah, and overheads are up 50% to $7.9 million in the quarter and $15.2 million for the year's half. So what we have here basically for the year as such, for the first half year as such, is revenue up 100% and overheads up 50%. And this is in a business in mind that is getting even tougher. And it's in a scenario where we're investing heavily in both SIM sports and GNE and also in the legal cases that we have ongoing. Further down, the income for the period was $1.3 million, pretty much on par with the year before. And for the half year, it's $4.5 million versus only $615,000 on the bottom line for the first half of last year. That's $0.05 per share, both for quarter this year and the quarter last year, and $0.17 per share for the first half of this year in total versus omega $0.02 for the first half year of last year. And the $0.17 pretty much corresponds to half of what we did. in the full year of last year, where we made 36 cents in total. Operating income, I should just add that that's 8.2% for the quarter. Not very impressive in itself, especially not when you compare with a very high quarter of last year, where it was 14. For the first half year as such, however, it's 11%. So it's absolutely not something we are shy about. with that then go to the next slide and then we discuss gross margins and uh typically we just show five five quarters back i think but i i thought it was necessary here to look at a little bit bigger picture we have been talking for a number of quarters about how we foresee our gross margins to reduce and now we are smack in the middle of it we have really seen the impact of these uh yeah these different factors by now last year same quarter we were at 51 which was an all-time high I would call an extraordinarily high it was based on very very favorable foreign exchange rates and it was based on a very very positive, strong data center growth margin. If you reduce for the data center growth margin by a couple of points just from that quarter alone, and if you then add in an 8% increase of the Chinese renminbi, which causes like a 4% or something like that, increase to our cost of goods. And if you then factor in the product mix that we've been talking about for a while, then we have to end down at the 42% level where we have seen us coming out here in Q in the second quarter. For the full year 2021, we have been talking about a 45% level which, of course, is a combination of all our business segments. And I remember the last quarter I was saying that, yeah, 43, which was what we looked at there, was also close to 45. And I believe it was. But at this point, I think amidst the climate we're in right now, we have to look at a gross margin expectation of between 40 and 45 for the full year. And as Andre also said, our long time target is still to be above 40%. So no change on that one. Next slide. Quick comment on the balance sheet. I just want to point out that we had a positive cash flow from operation of $3.6 million in the quarter. We are then, as you will know, if you're following us, we have a share repurchase program where we spend a million and a half, I believe, on that. And we are also starting to invest in equipment and the building. And that ends us out at a net positive cash flow in this quarter of $700,000. All in all, a very strong balance sheet, still very flexible and absolutely able to support our business going forward. Next slide. With that, we have a financial strategy. I'll leave that as is. Nothing has changed. It's the typical choice of a CFO. And with that, the next slide and the summary and outlook to you, Andre.

Yeah, thank you. So I can see the questions are ticking, which is good. So let's get to that as soon as possible. But record revenue, once again, driven by strong demand for G&E products. Data center, same story, but with the added kicker that now finally EU has adopted, let's say, legislation proposals around what we would like to see and what we like to hear. We are progressing on the sim sports and in the really big picture, I set a goal earlier in the year that In 2025, we would like to reach $150 million in revenue. And at least as far as I can see, we are on track to hit that as well. So with that in mind, let's go to the questions.

Yeah, and operator, maybe you can start up with questions by phone if there are any.

Sure. If you wish to ask a question, please dial 01 on your telephone keypads now to enter the queue. Once your name is announced, you can ask your question. If you find it's answered before it's your turn to speak, you can dial 02 to cancel. So once again, that's 01 to ask a question, or 02 if you need to cancel. OK, currently no questions coming through from the phones at this time. Very good. As I say, that one has literally just come through, if that's all right. That comes from the line of Ewasa of SCB. Please go ahead. Your line is open.

Hi, gentlemen. Thank you for taking my question. I have two for now. Firstly, just on the data center, given the potential legislation change on the data center industry, you said you are preparing potentially increasing demand. uh could you put a little more color on this i mean uh how what is your preparation and what would be your sort of top priority to explore this uh this opportunity yeah it may not be with this one that we

Let's take one question at a time. Then it's you who has to remember, not me. So it may not be the most intelligent formulation, but what it really means is I think the best way to leverage this right now is we need to make sure that our OEMs and our customers are aware of what's going on. because we are not waiting aggressively by the fax machine and then building up a lot of inventory. The key message for us is that we have to make sure our customers are aware of what's going on. And I'm not necessarily sure that they are. They are big companies, yes, but they are located mainly outside the EU and, you know, Some of our direct customers or potential customers on the data center side, for example, Dell, they have been shut down now for more than a year. There's nobody in the main offices. So I think the communication task of that is the highest on our priority list. It will take quite some boost in order intake to impress us. We are doing 200,000 pumps a month right now. So, you know, yeah. We have plenty of time to ramp the capacity. On the capacity side, it's much more about the strategic planning. Where do we do what and who is doing what. In the short term, it's all about the customers. But of course, we also have to realize and be cognizant to the fact that it is not legislation today. We cannot go to our customers and say there is legislation. We can go to our customers and educate them and tell them how we see it's going, how we think it's going in the EU. And that's what we're going to do.

Okay, great. And I understand this is still sort of a long-term potential. But could you maybe indicate what is your expectation on the timeline?

You know, it's a political question. What you're really asking me is how long time does it take to get a proposal from the EU into legislation? I just have to be honest with you. I say I don't know. On one side, this is just, you know, my own logic talking here. There's no science going into it. On one side, this, of course, have ultra high priority in the EU because it's a part of the whole climate plan. But there's also 5,000 other initiatives that has the same priority, but it has high priority. On the flip side of that coin, it does move slowly. So at best guess, and it is nothing but a guess, I would say if we have something that indicates legislation in a year and we have legislation in two years, I think it's gone fast. But again, it's just me guessing.

Okay, fair enough. Thanks. And then my second question is on the G&E business. So the first half can be very strong demand from the gaming market. So what is your expectation for the second half? I understand you talk about your customer getting nervous, etc., and a component shortage. But do you see some of the demand or orders has been postponed to maybe later part of this year or next year, given the current shortage?

I think I was pretty clear already that people are moving and pushing orders around now, but the second half actually looks stronger than our forecast. But we stick to our guns because it is fluctuating a lot.

Okay. Thank you. I'll jump back to the two.

Okay. And currently there are no further questions on the phone, so I'll hand back to our speakers for the questions online.

Very well. Thank you. André, you can read the questions as well as I can here. Maybe you can start with this one, which is a data center question.

Yeah. So can you add a few more comments to the data center opportunity in use of excess heating reuse if heat when it's starting first movers and potential challenges in this market segment? I think there's many questions in here, but I think the potential challenges we see in the market is obvious. That's why it's taken so far 10 years to kickstart it. That for a data center, it's much easier not to reuse the waste heat. Because it means they don't have to change anything. And that's, of course, why we are depending on the legislation so that we get, you know, politicians to say, let me start another place. Yesterday in my open letter to the Minister of Energy, I asked him a question and say, can you imagine you talk to your grandchild in 30 years and telling them, that back in 2021, it was legal to waste enough heat that could actually heat up entire cities. It's almost unbelievable that we are talking so much about the climate and climate changes but yet some of the biggest sinners, we are not even looking in that direction. So that is, of course, the opportunity we have here that if in fact data centers, and they have actually, I have not read all 1600 pages in the Green Deal, I have to admit that, but from what I have read, it's actually data centers all the way down to one megawatt. That's not a very big data center. All the way down there, they are talking about reusing the waste heat. And then... I really believe that there's no way around it. You have to do it one way or the other. And of course, we have a few competitors. Yes. But the way we do it, for example, at Facebook in Denmark, they use heat pumps. If the legislation goes through as written, you are no longer allowed to do that. So I think there is a really strong opportunity if this comes through. And I think the way we will see it, of course, is know the server vendors but also the hyperscale data centers that we all know they cannot get around it and and it's no option to use a data or to move a data center to poland or ukraine or sweden i mean it will be eu rules and you have to comply to them um and then i can see there is another question about the same topic And that says, when do you expect it first impacts your business? I think the way it will happen in reality, and that's also what we have proposed in the EU. If there's a hard law tomorrow saying that now from now on, you have to reuse the wastage of a data center. Of course, we are not just going to or people are not just going to rip out the servers of their data centers and start from scratch. It will be an implementation phase that now I'm making something up. But let's say the law turned into effect today, then it would probably be something like from January 1st, 23, all servers going into a new data center would need to be able to reuse the waste heat or something like that. So I would say for that to happen, the OEMs, of course, would need to have this designed in earlier. So I expect as soon as this turns into legislation or as soon as, let's say, there is evidence that it actually will, then I think the OEMs will start to speed up. That's how I see it happen. And then one more data center question. Is it right that you face more competition in this space? I'm not really sure. You know, We all know our revenues are very modest right now, and I don't know really anyone who's actually selling the same stuff as we do is selling a whole lot more. So I'm not sure I would agree that we see a lot more competition. But I can put it on the flip side and say I would much rather see more competition at a much larger market opportunity. So to me, I welcome this and I really hope that this legislation goes through, obviously.

Cool. Then there are some questions about sim sports. But before we address that, maybe we can talk about moving manufacturing. You want to comment on that?

Yes. It's, of course, always a possibility to move manufacturing outside China. The difficult part is really that you want to do it. But you want to save money because elsewise there's no point in doing it. And we have looked at Vietnam. We have looked at Malaysia. We looked at different places. But, you know, one of them, it was everything ended up 18 percent more expensive and the tariff is 25. If you then compare that to the risk involved, if you compare that to the adding shipping times, if you add it to the complexity of moving your factory and manufacturing at the same time as you are growing 30% a year and volume wise even bigger, it's not really that appealing. So we are also looking at, there are a lot of rules for these tariffs. So for example, it's not everything that comes from China that has a 25% hit. But if you build more than a certain value of the product in China, you have the hit. So we are also looking into could we source potential high cost components outside China and then keep manufacturing in China. So we have a lot of things going, trying to figure out what's the smartest thing. It's also not a very good idea to move manufacturing to a place that's just, say, 10% more expensive when half your volume is outside the U.S. So that just means you apply the 10% penalty to all products. So everything is possible in theory, but it's not a simple solution. But for sure, after we can see that the tariffs have come to stay, we are putting more effort into it.

Very good. Then there are some questions centering around sim sports, and I think it makes sense to start with this one. Expectations to market potential compared to earlier in the year. Have we seen competitors struggle?

Let me see this. Where are you? No, that's the short answer. And let me be a little bit more nuanced than that. We have decided to enter this market. We are moving full force ahead with product development. And whether one or the other competitor is struggling or the market is growing or decreasing a little bit, it's not really something we focus on at this stage.

But to be super specific, we have a $150 million ambition, not a goal per se, but an ambition for 2025, I believe it is. Yes. How much of that is Simsport?

I actually don't think SimSport was invented when I stated that goal. So I would say that without making it really difficult for myself here, I would say that we should be able to reach the $150 million no matter what. Then you can see the glass half full or half empty. You could say, well, that's much easier to reach if you're successful in the SimSport business. That's true. On the flip side, we are still four and a half years out. So if it turns out that simsport is really successful, then of course we will increase the goal. So yeah.

There is a question about a specific competitor here in the simsports. Do you want to address that or is that going to?

No, no. It says Fanatec has lowered guidance due to delivery issues and seems like there's a chance to win market share from them as they are not able to deliver. Did that impact your decision to accelerate the development? No, it didn't. First of all, I think their report came out yesterday or within the last week. So it didn't really have anything to do with that. The reason is, let me figure out something everybody can relate. Yes. So, for example, we started with the pedals. then the next thing we will come up with is the the wheel base the steering wheel base but a steering wheel base is kind of worthless without steering wheels and because we have a limited organization we are developing a lot of things in serial we have to do one thing and then when we've done the next thing we move on and so forth so the decision to accelerate was really we have gotten a really good um feedback and reception from the companies and the esports people we have talked to. So it seems to make sense that the sooner we can develop products, of course, within reason, it's not like we are hiring 100 people, but it seems as there is a good reception to this. And then, as I also said earlier, One thing is to be a component vendor, and another thing is to be a systems vendor. And as you already know, the competitor that you are mentioning here, they are for sure a systems vendor. You can buy a lot of components from them to form an entire simulator. And we want to reach that goal as quick as possible as well.

Very well. I think we've been kind of sort of around. There's a... Yeah. this is i'll just read the specific question here how does the how does it impact asiatica that dell alienware pcs has been banned in many u.s states and while andre was talking i was just checking with one of our people who lives in the u.s he's not actually aware of dell alienware pcs having been banned in many u.s states so we'll just dive a little bit into that and then we'll read and write an email to the general master question all right i think are there any more questions

uh have you i there was actually on the sims sports i think there was one line i missed in the in the lower question here just scroll down so it's whether we have seen competitors struggle um at As I said, generally, we are not really monitoring the market that closely because it is a very fragmented market that consists of many, many small players. And it's actually quite hard to figure out how they are faring. But basically, like everywhere else in the world right now, It's very common. I can see that when you place an order for a product, then you'll actually go several months before you get it. And I can see in my world, in my view, a very bad habit in the sim sport market. And that is that people can pre-order stuff and then it will actually, you put down some money. I know there's a certain electrical vehicle factory that's doing the same. And I don't want to go there. You know, we could easily, if we wanted to, make a big marketing splash about our great Simsport products and then start to take pre-orders. But I think it's hot air and I don't want to go there. We want to, and I can say that here as well, we want to build, let's say, a solid amount of inventory. Then we launch our products and then we can actually ship it when people want it. And myself, I'm a big hardware geek, whether it's electronics or something with an engine. And I know for myself, if there's some gadget that I want, I want it now. I don't want to send an email and then get it 12 months later. So we are not going there. But I can see a lot of the competition is doing that. And I don't know why they are doing it other than they would like to have something in their bank account. I don't know. But that's our plan. We are doing it old school. We are building an inventory and then we are selling.

The last question at our CMU and early in the year, we talked about sim sports and how we addressed how we would stick our feet into the water this year and see how it pans out development wise and product wise. But we did not address the market opportunity per se. And the question is whether we are ready to talk about market

No, not really. What I did share at the CMU was more some anecdotal stuff. And as we know, we have one competitor in Germany who is selling 100 million euros worth of pedals and steering wheels. And then we know there are a lot of other competitors. And, you know, the advantage of going into a market early is that you can extract high margins. You can establish a market leadership. There's a lot of things you can do. But one of the things that's really difficult in a non-established market is to assess how big it is. So what we convinced ourselves about is that it's big enough that it's worth going after. It's big enough that we believe we can get meaningful market share and a meaningful business. And although it's not very scientific, I also said earlier that I believe down the line it could be as big as the remaining part of our G&E business. And that's pretty much what I still believe.

Very good. The audience is probably getting tired of us reading from a monitor. Anyway, we have spent our full allotted hour. We've been around a lot of questions here. And with that, we'll stop the webcast and say thank you for your interest in AC Tech.

Thank you.