Asetek A/S

Last year, and then EBITDA adjusted of 6 million compared with roughly 1 million in the same quarter last year. We have made more money than ever in the second quarter on the liquid cooling business. We have achieved a Simsport revenue of $2.4 million in the quarter. compared to 1 million same time last year. Our half year revenue increased just shy of 30% to 39 million and EBITDA rose to 9 million from 0.4 half year or compared to the same time last year. We completed our listing on NASDAQ in Copenhagen and we raised $16.1 million Our full year guidance was updated a few days ago with an expected increase in revenue for this year in the range of 40 to 45% compared to last year and a projected operating income between seven and $9 million. So we are obviously seeing a positive momentum compared to where we came from. And despite the market challenges that are still there, actually. So what we have seen so far is a strong interest in our products, both segments. Obviously, liquid cooling is the dominant factor here simply because of its size. And we see a continued improvement in the liquid cooling market with higher order activities, more orders, bigger orders, and of course, high focus on execution both with us and our customers of product launches. Our recent forecasts from customers indicate, let's say, a normalization of inventories and business activity for at least some of our liquid cooling OEM customers. The rhetorical question here, of course, is what is normal? If you look back from today and three, four years back, we also see an increased shipment rate on the SimSport side. And we will get back to all of this, of course. And I think we have been relatively successful in building a relevant brand and positioning in the market communities. We have a focus on product development. lots of new products, lots of more products. We are focusing on efficiencies, supply chain, both capacity and also our capabilities, obviously strengthen our balance sheet. We have started now successfully shipments from Malaysia in cooperation with our existing contract manufacturers from China. And we are in the process of actually increasing our capacity in Malaysia, both on liquid cooling as well as in sport. And I think the war in Ukraine, supply chain issues, inflation, interest rates, it's some monsters that are out there. Nothing we can do about them. It's just how it is. And in terms of visibility and high volatility in our OEM forecast, I would say that's more or less the same as it's always been and it's still there. Which leads me into the next slide that shows this perfectly. I was spending some time this morning looking at it myself and see if there is anything you can read out of it in terms of seasonality and periodic quarters, etc. But my key takeaway for myself is that the only thing that's certain is that it's uncertain. There is simply no pattern in this. That's just how our business is laid out and how it's functioning. And then I think it's also obvious that the more we sell, the more money we make also in terms of percent. Nothing to complain about today, though, I would say. In terms of business focus, where we are focusing right now is on the gaming hardware. Right now we are a gaming hardware company and our focus is on liquid cooling. for OEMs and for our channel partners. And on the Simsport side, we focus on just being the best of what we do, having the best products out there, designing the best products we possibly can and get them out in the market. I don't want to spend a lot of time on the slide we're going into. Perhaps I could and should mention that we are actually shutting down our Silicon Valley office. That was a part of the cost reduction initiative that we did last year. Don't panic because our people over there are scattered all over the map and the state anyway. So they were not really using that office a lot. So we will keep our employees, but we are just shutting down the physical office. And then perhaps I could mention also that now we have Malaysia on the map as well, since we have started manufacturing there. And to recap, for those who may be in doubt, we are having the Malaysia facility to, I don't necessarily know if the word circumvent is the right word to use, but to not have the US tariffs. So for our US customers, we manufacture in Malaysia. Don't be fooled. It is still more expensive to manufacture in Malaysia than it is in China, but it's not 25% more expensive. So as such, it's a win-win. And then we are, as we speak, outsourcing assembly of our Simsport products to Malaysia as well, because despite being more expensive than China, it's still significantly cheaper than Denmark, where we're doing it right now. If we jump a little bit into the segments and we look at liquid cooling, then I think there are three key takeaways. One is even when we were struggling a bit last year, looking from an overall perspective of the company, as you can see from this, the liquid cooling business was actually still pretty strong and profitable. The second takeaway is that Exactly from now and four years back, the liquid cooling business have actually generated $80 million in EBITDA. That's something I'm proud about. And of course, what I'm even more proud about is that Q2 this year, we made almost $9 million of EBITDA. That's a strong quarter right there. What we see is that the revenue, of course, is driven by new products. And that's not a surprise because during the corona and during last year, things were slow. So we have actually started shipping 12 new products in the second quarter. I don't really want to list them up, all of them, because you can read it yourself. We have 11 new products estimated to ship in Q3. So our investments in product development and branding for that sake has paid off and is paying off. So I'm glad that we chose to boggle down and focus on these activities and kept the faith that it would come because it is coming for sure. In terms of our liquid cooling customers, Not really much to report there. We are shipping to more than 20 different customers right now. It's still top five, more or less, buying it all. And of course, our ambition is to increase the diversification over time. And we are launching a new significant customer later this year. Something that we've not spent a lot of time on earlier that we have taken a little bit more seriously now is basically because we see it as low hanging fruit is to look a little bit more on the regional OEMs. So what is a regional OEM? That's also what's called the system integrator. So it's not Bell and HP and these guys, it's smaller ones. So for example, now that I'm in Denmark, I can say Shark Gaming in Denmark, which is a big local player. And we have now developed a range of coolers specifically for these customers where they can also do their own branding and not just take a product from one of our big OEM customers. And that seems to be paying off also. not much have changed from a strategic perspective on the liquid cooling. Our goal, of course, is to develop and further expand our leadership and getting more market share, getting more customers. And the way we do that is obviously investing in R&D to be on the forefront in terms of technology and performance and price for that matter, and growing existing existing accounts. So having more of the same customers buying more but of course also getting more customers. And then of course, making sure everybody knows who we are and what we stand for. And the development and the outlook or the status of that is, yeah, basically what I just said. I don't think there's any reason to name it again. Moving over to SIM Sports. The focus there, of course, other than revenue, that's always a focus, but it's of course to expand our product program so that we can claim we have a full program. And we are, I would not even say slowly because it's moving fast, but we are getting there. We have four new products that started shipping in Q2. And one thing that I believe is going to be a game changer over the next years is a lot of our competitors They have a very integrated ecosystem. And I guess the thinking is if we can lock all end users into our ecosystem, then they are forced to buy our products in the future. To me, that's a wrong thinking, especially because steering wheels, there are probably, I don't know, 100 steering wheels out there in the market. There is no way one vendor can accommodate all of that and satisfy all users. And so what we have done is we have designed and patented, by the way, a universal quick release where it will fit on our wheelbase. But you can take pretty much any competitor steering wheel and apply to this quick release and it will work. It will work wirelessly, actually. And to me, that's not a large sale of a steering wheel. To me, that's a one sale of a wheelbase that's, by the way, five times more expensive than the steering wheel. So we are actually launching the first reviews as we speak. I think there will be a series of reviews out on Friday, but some of the reviewers already tested it and they are very happy with it. So that's something I'm very excited about and looking forward to see how that will actually impact things. We have more products coming in the second half. We already talked about the revenue. Gross margins, nothing to brag about, but it's a very natural cost and everything is new. So just to give you an example, let's say we get products out of China or out of Malaysia. Then we can choose to put them on a boat and wait three months to have revenue, or we can fly them in and start selling immediately, which, by the way, is what we have done. But of course, air shipping versus sea shipping is a big difference. So there's just a lot of, let's say, teething issues and growing pains, but that's how it is to start up a new business. We've been there before. And the focus is really on growing a profitable business. Despite we've had a couple of good quarters now, we have not really hired more people into the sim racing operations. uh we laid off a bunch of people there as well last year as you may remember and it would be naive to think that that does not affect the the pace of our product launches and also the revenue generation obviously it does but we are cool about that and and you know i would not say we grow it organically because we're also not stupid you have to take an opportunity when it's there but Overall, we are taking a conservative approach and the rate of new product launches is a little bit slower than we would have anticipated. But we all know why. It's, of course, all about building a relevant brand on the on the same sport. And again, I don't want to go through all of this text, but we got a design win with Micro Center in the US. I believe it's 25 or 26 stores across the U.S. It's an experiment. That's the experiment I referred to at our last call. And the reason it's an experiment is that for everybody to make money is a challenge when we have competitors selling direct. But we have gotten off the ground now. They are selling a first series of Tony Kanaan branded steering wheels, wheelbases and pedals. and we made this bundle specifically for them. Then we are, of course, sponsoring and participating in all kinds of activities. For example, Racing Prodigy, which is really a sim effort, which can lead to real motor racing. And on the right side here, we have an example of a sim arena in Saudi Arabia, where there is Aramco, sponsor of a big Formula One team, they have this big sim center and it's all based on our equipment. The strategy on the on the sim sport is not really that different to the to the strategy of the liquid cooling. It's difficult or sorry, it's different customers, it's different challenge or channels and thereby also different challenges. But at the end of the day, it's about getting the best possible products out there And then, of course, use the capabilities we have in-house to get it going. And so far, so good. We are happy. There are, of course, challenges, but yeah, so far, so good. And with that, I will leave Peter to talk a little bit about the numbers.

Yep. Thank you. And then we'll come back to you after this. So numbers, income statement starting from the top. Madre, you already disclosed that we grew our quarterly revenue by 45% and our half year revenue by 28% up to a total of $39 million versus $31 million the same half year last year. and that revenue consists of three segments no surprises one is the the cooling business which we actually grew by i think it was 54 percent uh for the quarter and 34 percent for for the half years for the full half year and then the sim sports that we grew from one million dollars in the last year second quarter to 2.4 million dollars this this second quarter So that leaves something out. And that's the third segment. And that is the data center segment where we are close to not close to being inactive. I would say revenue wise close to zero this year. But we actually did $3 million of revenue for the full half year last year. So when you compare the two half years over each other, keep in mind that out of the $31 million last year. There was $3 million of data center that's not included in the $39 million this year. On cooling business, we obviously also grew the number of units sold, however, not as much as the revenue. And that means that there must be another component, and that other component is the average sales price, ASP, that has gone up somewhat between the two periods. Q2 last year, the average sales price was $56, whereas this year it's up to $60. So an increase right there. Gross profits of $11 million in the quarter and $18 million on the half year compared to seven and 12 same periods last year. I'll come back on a slide in a little bit to the gross margins. So bear with me on that one. Operating expenses. For the quarter, $7 million versus $7 million, same quarter last year, that appears to be flat. However, keep in mind that this quarter here, we spent $800,000 on what we call special items. And those special items all relate to the moving of the shares from, or the dual listing, as it's officially called, of listing in Copenhagen. So we are listed both in Norway and in Denmark. There were also expenses related to the issue, the rights issue, the capital raise that those funds are not on the profit loss. Those funds or those expenses are taken directly out of the of the equity. So with that, then allow me to take the $800,000 out when we when we compare the operating expenses. That means that the operating expenses for the quarter was $6.1 million versus $6.9 or almost $7 million last year. So a very significant decrease of operating expenses. And of course, that's all related to the complex and painful cost reduction we went through in late 2022 and early 2023, I would say. For the half year, we spent $12 million this year, including the 800,000 special items and $14 million for the half year last year. So it's very easy to see there that we have gone through a cost cutting exercise. If you dive into the numbers and start up your calculator, you will see that our overhead expenses in Q2 specifically were actually a little bit higher than they were in Q1 of this year in all in full disclosure. And the reason for that is, of course, because there's been some there's some effect of the very much higher revenue. And then there is some effect from us releasing more products, meaning we have spent more money on, for example, testing and stuff of that nature. But the big driver is actually that we have been capitalizing. That's an accounting exercise. We have been capitalizing less money in Q2 than we did in Q1 because we released remember that we released finished quite a significant amount of projects becoming to products in Q1 and Q2. And that means that then there is not so much to be capsized. And that drives up the reported operating expenses in these lines here. That means that we have an operating income EBIT at $4 million for Q2 versus $100,000 same quarter last year. And for the half year, $5.2 million versus $1.8 million in the negative same period last year. That is an improvement of $7 million year over year. And of course, we are very happy to report that. Yeah. Changing to the gross margins, I promised you a couple of comments on that. We are reporting Q2 gross margins of 45% versus 42% same quarter last year. And for the half year, it's also 45% and versus 41% last year. Good improvements, not unanticipated, not unexpected, because as you can see with the yellow line here, our forex currency impact between the US dollars and the CNY has been to our benefit for a while. The trend in that currency cross, of course, has been helpful to us. It seems to have flattened out a little bit. So going forward, we shouldn't expect the same kind of increase, but at least it's been nice to recognize so far. Other than the foreign exchange rate impact, we have seen a little bit of sales price increase. Yes, coming back to the average sales price. But more importantly, we have seen reduced input cost or cost of goods from our suppliers, which has been quite helpful in the period. So we are very happy with the gross margins. The gross margins here also include the gross margins for sim sports, which is impacted by ramp up efforts, natural ramp up efforts, I would say. Brings me to the balance sheet. We have $7.1 million in the bank at this point, comparing to 7.4 at year end and 5.3 at the end of March. So relatively flat, I would say. We had $16.1 million net coming in from the rights issue in May. We have in general terms spent that on the investment in our domicile by $15 million for the half year. And then we repaid a portion of the construction loan by $1.8 million. Other impactors to the balance sheet is working capital, which is increased, I believe, by approximately $4 million when you measure at the end of Q2 compared to the year end 2022. And that's only natural, I would say, with the increased activity comes increased accounts receivables and accounts payables. A good thing here is that our performance on the working capital, meaning the base sales outstanding and base payables outstanding, actually helping us we have a cash conversion cycle of three days not three months not three weeks but three days and of course that means that if you have a good q2 then the cash effect of that will be seen in q3 and that also means that yes the working capital has driven up a little bit at the end of q2 but nothing alarming there's also a little bit of extra inventory Our inventory returns are absolutely also respectable. But there is a change in the way we do business in the sense that we do have a web shop, we do sell to end users, etc. And that requires some level of inventory. And that's what we are seeing here. One more comment on the balance sheet. If you've been following us, then you will have recognized that we had what was classified as a short-term construction loan in this period during May that was reclassified via our banks to becoming a long-term loan that materializes at the end of 2024. At the end of June 30, we owe $17 million on that construction line. I'm coming back to the building construction in a second. Just a quick word on the NASDAQ listing. We were, as you can see on the picture to the right, celebrating on May 17. Thank you, NASDAQ Copenhagen, for celebrating us and hosting us and our board on that day. We are... Trading in Copenhagen, I think the trading goes well. There seems to be quite good recipients of us trading in Copenhagen. We at the same time seeking to delist from Oslo. That's an ongoing process. There will be an extraordinary general meeting called for at some point relatively soon, I believe. And the time frame for the delisting in Norway is probably the end of 2023. So it's a matter of months rather than years before we do a delist from Oslo. We do encourage our shareholders in Norway to move their shares to Copenhagen. We will see more and more action, more and more trades going on in in Copenhagen and presumably less and less in Norway. We have moved at this point around 80% of the shares, but there are still quite a significant amount of smaller shareholders in Norway. we will be reaching out via good old-fashioned surface mail to our shareholders, informing them to the extent they don't know already that we are delisting from Oslo and then encouraging them to move to Copenhagen. We cannot at this point force anyone, but we will see what options there are to serve the shareholders best and have them at the same time move to Copenhagen. You can find more information on the moving process and the process in general on our website. A little bit more on the construction. It's on plan. You can see a picture here. You can see it's a prime location. Should you be interested in renting, then we have available space, at least for now. It's a prime location. You can see the Pan-European Highway up on the right going from Norway to Denmark to Germany. There's a ramp 500 meters away. We have space for now, at least. And we are actively talking to both landlords and other people to see what kind of development we can do on taking in additional tenants. It's on schedule for completion mid 2024. I think we have said that it was three, four weeks delayed. That's old news at this point, and that still remains to be the case. There's no news on the inflation, meaning the cost, meaning that we're still aiming at a total construction sum for the whole thing, including land at about $51 million or thereabout. We are at 41 today, and that means that we have 10, 11 ish to go. between now and mid-year next year and that is all within the limits of the of the credit line we have with our banks we've drawn i said 17 million dollars at this point and our credit lines in total are around 28 million dollars so there's plenty of room and even with us of course having a positive cash flow from the operations it all helps on the balance sheet picture here When we have these lines or these long term lines with our bank, there are also covenants included in those or attached to those. And we are well within those covenants also at this point. Financial strategy, not so much to say. Of course, financial strategies normally are about evolution and optimizing, I would say, rather than handling larger transactions like the ones we have been going through recently. We've had two big transactions, or what should we call them? One is the very significant and complex cost cutting exercise last year. And then, of course, the rights issue and move to Copenhagen also. But we are reverting back to a modus operandi of evolution and optimizing more than these bigger transactions. I think that was my update, Andre, coming back to you for a summary.

Yeah. So just to sum things up, we see a good interest, of course, obviously in our product right now, and that concerns both our segments. We see an improved market with high customer activity. beyond 23, our visibility is very low. I would say it is as usual, it is like it's normally is at this time of the year. And we focus on scaling the simsport business, of course, both in terms of products, and of course, also where you can buy it. And we are focusing a lot on our cost base and We always are. We always have been. But of course, the last year more than ever. We expect the revenue for the year to grow between 40 and 45 percent compared to last year. And we expect to make between seven and nine million dollars in income. As you may remember, we have said for many years that we believe our business can grow on average 15% per year. And again, the key question is what is normal nowadays? But one thing I do remember I said at the last call is that it wouldn't surprise me if we take the extra sales during the Corona sale and remove and then put on top of the let's say not so positive effects of Corona. And then you have more or less a straight line. And if we keep our guidance for this year, then at least what I can see on the graph is if you draw a line from 18 to 23, I don't think I was too far off. So that's how it goes. That was the summary and outlook.

Yeah, very good. Then we will go back to the operator. He will ask if there are any verbal questions via the phone. Mr. Operator.

Thank you. Thank you so much. If any participant would like to ask a question, please press the star followed by the one on your telephone keypad. That's star one to ask a question if you're participating via the teleconference. One moment, please, whilst we register for questions.

All right.

We have our first question from Evie Zell from SE Bank. Please go ahead with your question.

Hello, it's Wei here from ACB. Thank you for taking my question. I have two. I'll do one at a time. Firstly, the new guidance range, if we are sort of applying the midpoint, I can see you still assumed a slower or lower top line also earnings in the second half than the first half. Is there any reason you have assumed a slowdown?

yes there is and as you have seen from the the slides that i showed earlier there is a big volatility in the numbers and what we have tried to do well let me rephrase that when we come out with a new guidance one thing i want to make as close to 100 sure as i can is that there will not be a negative surprise where i would have to go back and say remember that guidance we didn't really mean that so when we look at our forecast now you can apply a mathematical model on it and see within the next two quarters, the last two quarters of the year, what room does our customers have to postpone, to change, to cancel orders? And that is what's directing our guidance much more than what we think and what we believe or what we can read in the newspapers. So therefore, we believe that our guidance is conservative and If no customers move their orders, if no customer canceled their orders, then who knows? But that's all speculation at this point in time.

And add to that, I believe, mathematically, as volatile as our revenues have been in many recent quarters, it would be dangerous just to assume that one good high quarter Q2 is a new normal.

Thanks a lot, Berkeley. My second question is relating to the capex spending. Peter, would you be able to provide a guidance on the sort of those for this year also maybe a long-term capex spending exclude the cost for the new headquarter? Yeah, I mean, as a percentage of sales, it will be easy for you to get.

Not as a percentage of sales, because those things tend not to correlate as a lot. You've seen our revenues go up and down. So everything related to sale would not be a good guidance here. We have traditionally spent CapEx on two things, excluding the building. One is capitalized R&D. where we have been between two and four probably closer to four million dollars recently and i don't see that changing significantly and then of course we're spending funds on fixed assets pp e and there we are running around oh that's a good good question that's around three million dollars on on average per per year And I don't see that changing significantly either.

Okay. Okay, cool. So if you continue to grow, then I guess the capex to sales ratio should trending down even. Is it a fair assumption?

Yes. I'm not saying that capex will be flat because of course there is the correlation that when the business grows, then of course also the capex grows. But there's not a one to one. We have for many years had a rule of thumb on our operating expenses that if you grow revenue by 10%, then OPEX grows by half of that, meaning 5%. And that is because there's leverage to be counted in here or be factored in here. And that also certainly goes for CapEx. And that factor of 50% don't use that anyway. It was just a figure.

Yes, great. Thank you very much. I'll jump back to the queue. Sure.

Thank you. We have no further teleconference questions. If you'd like to take webcast questions.

Yeah, sure. We have a few questions. Andre, will you?

Yeah. So the first question is, to what extent Asia Tech is benefiting from the current AI hype and demand right now? Well, that's two interesting remarks because hype and demand does not really correlate well here. And what business opportunities we see? To me, that's that is exactly that. That's just a new trend that I'm sure investors find very appealing. But there's been so many trends, you know, two years ago, I guess it was Bitcoin mining and what business opportunities we saw there. And my answer was the same. We don't benefit from these types and we also don't benefit from AI. And I have no reason to start focusing on the AI. We are gaming hardware business right now. And if there are business opportunities, we will of course look at them, but it's not something we spend time on. Then it's whether we can comment on the timing of when the net savings of moving manufacturer to Malaysia is visible in our reported financial numbers. I think there may be a misunderstanding here. You know, we are not the ones responsible for paying the tariffs. That's our customers. What it means is we will be more competitive. And then, of course, we have helped our customers to share some of the pain. So I think the net effect of Malaysia is what you are seeing right now. And that's also a factor in why our margins are going up. Then there is a question about our target average growth over the next five years. I think I answered that earlier by coincidence that we have this stated goal of 15% average growth. Then if I can comment on how much a general market rebound in liquid cooling is driving your growth relative to market share gains, I think we can say right now that everything is a general market rebound because when we land new customers, keep in mind that's a year long process. So we have not seen the effect of that. We are launching a new customer in Q3 that we do believe, I believe, will be a top five customer right away. So that's an example of something that's not, let's say, on the back of general improvement. But for now, that is a marked rebound that we are seeing. In previous quarters, you disclosed figures on the size and development of the order backlog, whether we can provide any information how that's developed in Q2. Keep in mind, when we had a backlog, it's because people were doing pre-orders and we could not supply, etc. So there is not really a noticeable backlog to talk about. We try to get the product out of the door as soon as we can. So that's why we don't comment on that right now, because it's really not applicable. Could you talk a little bit about seasonality in your business? I think I just mentioned that when we looked at the last 16 quarters, that there is no seasonality. So I wish there was, but there's not. Any chance to do a sale and lease back of the building in the future? And if so, how would you use the cash? So first of all, I'm not a fortune teller. So what happened several years down the road or two years down the road? I have no idea about what I can say that, of course, sale and lease back is an opportunity we'll pursue. Let's just again remind ourselves it's 12 months until the building is done. The sale and lease back market in Denmark right now for this sort of building is not interesting at all. Also driven by the interest rates. That may change 12 months from now. And of course, if it does, that is something we are going to pursue, no question.

Yep. Actually, it was in my slide deck. I forgot to talk about it.

there was one more question yeah whether we're expecting to raise capital to the rest of 2023 i can say with 100 certainty that we are not because we could simply not do that in the remaining month of the year i we just learned that that's an eight month process and since we have four months left the clear answer is no and we are healthily uh cash flow profitable also at this point there's and we have the the construction lines and the construction of the domicile within the

credit lines and the covenants are in a safe place also so I don't I think another way of putting this we upgraded our guidance twice this year yeah yes that was and I'm frantically hitting refresh here those were the last questions that we have received and that means that we will we'll say thank you we are of course available via our website and our emails etc if you should have questions coming up with this thank you for your interest in acetech thank you