Asetek A/S

thank you i'd now like to hand the call over to peter madison cfo you may now begin thank you ellie and thank you everybody for attending our q4 and annual 2024 earnings call and the board met yesterday and discussed the business and of course the reporting that we are about to give you now and then we affirmed the approval of the reporting this morning so we are good to go I'm Peter Madsen. I'm the CFO. I have here with me a somewhat impacted by influenza flu, André Slot-Eriksen, our founder and CEO. Good morning.

Good morning.

And we will be doing the presentation. And as the operator said, then there will be a verbal Q&A that you can participate in or you can type in your questions on your monitor in the app and then we'll see them right here. It's certainly up to you to decide how to do that. We'll proceed. There's a legal disclaimer. We will not go through it now, but you should read it. It is important. Andre, over to you.

Yes, thank you. So diving right into Q4 of 24, our sim sports revenue grew 86% to a record 4.2 million on the back of the launch of our Invictus steering wheel and a few new distribution agreements that we published. Q4 liquid cooling revenue of 11.1. which was the highest quarter of the year. Q4 group level gross margin at just shy of 42% and the full year group revenue of 52.5 million and EBITDA breakeven in line with what we guided. We completed the rights issue in January 25 to strengthen our financial position and enable our continued investments in the SIM sports segments. For the full year of 24, we pretty much landed on our adjusted guidance or expectations with a full year group revenue in line of the adjusted guidance with an EBITDA margin of one in the lower end of the range, but nevertheless, a liquid cooling revenue of 42.8 million versus the guidance of 42 to 44 and a gross margin of 45%. And the sim sports growth was on track as well with a $9.6 million revenue and a gross margin of 25%. Diving into the liquid cooling segment, still a good and profitable business that it's been for quite a while, but also it's evident that The volatility is still there and will probably continue as well, but you can see the quarters here. We had nine new liquid cooling products start shipping in the last quarter in Q4. We have seven new products estimated to start shipping here in the first quarter of 2025. We are currently shipping to more than 20 different OEMs. We just announced an agreement with a tier one PC manufacturer for multiple products with more than 100,000 units expected this year. So as of right now, we are supplying three of the top five PC manufacturers globally. In the short term, and as we communicated during the fundraising, The focus, of course, is to stabilize the revenue in the short term. And we did end 24 with the highest quarter. We have seen declining volumes from two major customers because of dual sourcing and as previously communicated. However, I think it's important to note that all of our other 18 customers were actually growing in the same period of time. So that's at least partially offset it. And this is also reflected in the 25 segment revenue expectation. We think there are several factors that are supporting a profitable and long-term growth. And I can just as well say it now, I'll also come back to it, that As communicated during the fundraising, we do expect 25 to be pretty flat because that's just the inertia in the system when selling to these big OEMs that even though we do get new customers right now, we don't recognize any revenue until 26. But this is what we're in right now is the first major post-COVID upgrade cycle where actually more or less all the vendors, they release new CPUs and new GPUs simultaneously. We have launched our mid-market offering and thereby expanded the addressable market and of course also the potential customer base. With the restructuring of the team, we have also, I would say, increased the focus. So all in all, I believe we are positioned for renewed growth from 26 and beyond. Diving into the sim sports segments, we had a strong end to the year with a revenue of 4.2 million versus 2.2 in the same quarter last year or the year before. We launched our highest end steering wheel to date, as well as two new distribution agreements. Our gross margin was 29%. And needless to say, in the fourth quarter of the year, you have Christmas, you have Black Friday, you have Cyber Monday. So, of course, that's affected in terms of discounts and thereby on the gross margins. But of course, it's also still a scale up business and the world out there has not exactly become easier right now. So that's also reflected in the numbers. But at least I think it's good to see that the margins were crawling up again from Q3, despite it's a holiday season. and we are planning and it's going according to plan to the to launch the mass market product line and and the console support for for xbox in the second half of the year we have seen a moderate demand in the in the start of 25 which we believe reflects the high year end the year-end activity and the fact that we have had no major product releases in q1 and And we can see it's kind of an industry wide thing right now that Q1 has been somewhat to the slow side. And as I just alluded to, we are set to launch and start selling also in the second half of the year, a competitive mass market product line. And that does not mean what we're selling today is not competitive. What it means is that it's targeting a completely different market where what we sell today is targeting enthusiasts and really high-end. Just to give you an idea, the steering wheel on the picture has a cost of $1,500, so very high-end stuff, where what we are releasing later in the year is completely different price level. We are, as planned, investing heavily in our brand building, the development of new sales channel and retail access, of course. um you need to have a mass market product to have a mass market channel but no product sells themselves so of course as as soon and simultaneously and in parallel we are of course looking at establishing a retail outlet new sales channels like amazon and in general increasing our brand uh we are expecting a gradual revenue increase towards year end and of course into 26 and beyond as well. And other than the product line itself, it's of course also supported by the expanded distribution. Just give you a feel for the console market. So according to our data, NUSU, as you can see, There are roughly 60 million racing game players, what's called lifetime players, meaning that they are at some point doing sim racing. And as of right now, PC gamers represent 16%. So that's what we are targeting today. So the reminder is actually people playing on consoles. And as you can see, Xbox here is actually the largest with 47% of the market. So that's, of course, something we have high expectations and hopes for. So I'm sorry if I sound a little bit off. That's because I am a little bit off and caught the flu. But over to you, Peter, for the financial guidance.

Actually, if you can do the financial guidance.

Yeah, I can, of course. So for the year, the revenue expected in the range of 52 to 58 million. And that's, of course, a pretty wide spread, you can say. But that does reflect the business we are in. And of course, that on the same side, it's not irrelevant whether we are ready to sell the new products in August, for example, or whether it's in October. That's time will tell. We expect an adjusted EBITDA margin of 3% to 5%. And on the liquid cooling side, between 40% and 43%, with gross margins expected between 40% and 45%. And on the SIM side, revenue expected in the range of 12% to 15%, and the gross margin in the range of 30% to 35%.

And with that, over to you, Peter. Yes, thank you. Financials, starting out by looking at the revenue distribution over the last few years since 2020 and then up until now by quarters. So you can see volatility and change in revenue is not new to us. It's been in our history for a long time, starting out on the left hand side, coming out on the tail end of COVID, which was a strong period. And then one, two, three years after that, 2023 was also a strong year. So that means that when we are comparing 24 numbers, 23 numbers then of course it is a difficult comparison by nature looking at the three quarters the first three quarters of 2024 they were all in the level of 12 13 million dollars and then as andre also said q4 was actually a relatively strong quarter at least in comparison with the with the first three quarters of twenty four. And we made fifteen point four million dollars in total of revenue in twenty four, which was the increase driven primarily by by the sports segment. And looking at the income statement as a whole, starting from the top, working my way down revenues, Q4 fifteen point four million dollars. And as I said before, Q4 was a strong, stronger uh quarter meaning it we can see that by it was seven percent lower than the same quarter in 2003 whereas on the year uh full year basis the at the revenue for the full year was 37 million percent down at 52 million dollars versus 30 76 million dollars the year before i'll come back to the gross margins a little bit more detail after later uh However, on the aggregate level, gross margins in the quarter was 42%, which compares to the full year 2024 gross margin of also 42%, but it is lower than the 47% and 45% we saw a year before. The ASPs on the liquid cooling side are relatively stable. That's not where the decline of gross margin comes from. It's more a matter of us selling more in the sim sports business segment. Operating expenses. It was a relatively expensive quarter, $7.5 million versus $6.8 million in the same quarter last year, driven by a few different factors. We relocated the company in Q4 and set up this new business. We have a location we have here primarily in Q4. We've raised money and we also, as we told you about before, we laid off people during 2024 and we had some servants payments that needed to be paid out in Q4. So all of that drives up the OPEX in the quarter. Looking at the total annual And of course, it's the $13.8 million that draws the attention. And that is the non-cash, I would call it a one-off charge in Q3, which was related to an impairment write-off that we had to take in that quarter. I know I'm not showing EBITDA here, but let me just mention it anyway. We had a positive EBITDA of $560,000 in Q4 versus $2.2 million of positive EBITDA in the same quarter last year. But however, it is a positive EBITDA in the quarter. And for the year, we had a round zero, $271,000 of positive EBITDA for 2024. And this is adjusted EBITDA and what we adjust for here is the share compensation amount and the special items, for example, the $14 million of special items for the full year 2024. And that takes us to the operating income, which is a loss in Q4 of a million dollars versus an income, positive income in the same quarter last year. and a loss of $19.2 million for the full year versus an income of $9.4 million for the full year 2023. What other is there to mention here? Foreign exchange is a very large income in Q4. And if you have followed us over time, then you will know that depending on the dollar dash slash Danish kroner exchange rate, then that goes up and down. And at that point, at the end of the year, the dollar was very high compared to the Danish krona mean. And that gave us an income. And that is because our mortgage loans or our building financing is denominated in Danish krona, whereas we are reporting and making our books in the US dollars. And thereby there is a fluctuation. On January 1st, we changed the functional currency of the parent company to Danish Krone, which corresponds to the denomination of the loans, meaning we should not see these very large fluctuations in the future. All in all, income before tax for the quarter, $526,000 versus a small loss actually of the same quarter last year. And for the year, $18.2 million in the negative versus $8.5 million in the positive for the year before. The only other thing I would mention here is the tax cost expense. For the full year, you can see there's a $5.7 million charge for the full year. And that is because just like we had to do an impairment loss right off in Q3, which was driven by if you took a look at our future incomes, future cash flows, then we had a problem. sustaining our assets. And that's, of course, when the business contracts and the future contracts, then we have to re-evaluate all these matters. And that also took us down to the deferred tax line item on the balance sheet. We had difficulties defending that we had a three point something million dollars tax assets on the books. So we wrote that off in Q3. And that is the major impact of the tax charge here. Changing to the gross margins, I promised a comment on that. You will see that the overall level is 42% for the quarter, which is a little lower than we have normally seen over time, but it is, however, much better than the 35.9 that we saw in Q3. The dip to 35.9 in Q3 was driven by a quality issue that has been fixed afterwards. And then you would ask, why is the Q4, why is that not back up on that, so to speak, normal levels. And that is because the segment change we have simply by percentage, we have sold more in the same sports than we normally typically do. And that means that that we sold 27 percent of our revenue in the simsports business in q4 versus 73 percent going to liquid cooling and as the gross margin in simsports is just inherently lower at this point than it is in in liquid cooling business then of course it drives down the the overall overall average changing focus to the balance sheet and the numbers here obviously are from december 31st 2024 meaning that is before we received the $10.5 million net proceeds from the rights issue that came in and the transaction was closed very, very early January 2025. But at year end, we had $3.3 million in the bank. That's stable compared to what we had at Q3. Pretty much we had a free cash flow positive of $1 million in Q4. Of course, that is coming from from the positive EBITDA that I just told you about, that's about half of it. And then we had positive development in our working capital, especially our inventories were lower in Q4 than they were in Q3. So those things together add up to a positive free cash flow. On the right-hand side of the balance sheet, equity, 52%, it's quite solid. The other thing that draws the attention here is our building our building loans with 20 million dollars which is a bank loan it is on long terms it matures in after the q1 of 2028 it has a long-term repayment profile you could say it's paying down as if it was a mortgage until 2028 when it burns out um it's on danish kyber three rates plus two and a half percent i think we had five five point two percent in total interest rate at this point It is on our agenda to pursue and to change this bank loan to a real mortgage. But it's not an easy task, though, because, of course, the banks, they're looking at our activity last year and this year also. And it is just easier to come through with a real mortgage loan if we have a more solid, more positive P&L to show. I think that was the end of this. And then over to you, André, for a summary and outlook.

Yes, as communicated previously in last year, we do expect somewhat flat to 10% growth this year. We, of course, intend to build on the commercial progress and execute on the growth plan that's supported by the strength and financial position we came in. And then, of course, position the liquid cooling business for further growth from 26 and beyond, targeting a wider market and more customers.

very good that was the presentation and then we change the focus shift the focus to the q a and we will hand over the microphone to to the operator i don't know if there's anyone participating via phone but let's let's see thank you we are now opening the floor for question and answer session if you'd like to ask a question please press star followed by one on your telephone keypad we will pause for a brief moment to wait for the questions to come

Seeing that there is no raised hands or any questions, I'd now like to hand back over to the management for the written Q&A session.

Yes. And we can read the questions here. Andre, will you start simply from the top?

So it's about our collaboration with Lenovo back in 2017 and whether that's still going on. So we are not entitled to talk about our customers. But what I can say in general is that we are talking to everyone. There's nobody that we are not engaged in dialogues with. Then it says approximately what percentage of our liquid cooling products are sold in the US market and how does AC Tech anticipate being impacted by potential tariffs? It's a super complex question to answer, of course, because as we all know, the tariff situation is changing by the hour. We are not selling anything in the US, but we have customers who are Well, we have a little bit of revenue from SI system integrators, but in general, our big OEMs are taking deliveries different places. For example, we have a big customer who's taking delivery in Mexico. And as we all know, one day there's a tariff and the next day there's not. So it's, of course, very difficult to navigate. Some of the mitigations that we do do is that we have manufacturing of liquid cooling in Malaysia. Also, I think right now we do 35% of our manufacturing in Malaysia, and it's something that we are determining in close contact with our customers, of course. For sure, the situation is far from ideal, and it's not as easy just to swap production to Malaysia as you would think. Partly because most of the components are actually coming in from China anyway. So there's added shipment cost. The union and the labor flexibility in Malaysia is far from as friendly as in China. So it's not that easy to navigate. But of course, we try to do our best while this is going on. It seems as most of the press somehow do not understand or has forgotten that it's not 10% plus 10% tariffs in China because there was already 25% that we are dealing with. So the effective tariff out of China is actually 45%. So it's significant. Then we have a question about the prospectus under the paragraph of public takeovers. In the conjunction with the equity race in December, AC Tech writes that the company is in a preliminary dialogue with a third party concerning a potential cooperation regarding the liquid cooling business. And it's not really something I can elaborate further on other than saying that if and when anything should ever materialize, it is, of course, something that we are bound by law to communicate to you guys.

Then there's a question which goes to me. I would imagine no two-segment information. I think we are looking at the annual report here. What kind of costs are included in the non-allocated costs of operating expenses? And that is exactly the expenses that cannot reasonably be allocated to the two segments. It's insurances, management salaries, running of the building, et cetera, things that cannot be allocated reasonably to. And a further question also from the same gentleman here. Capitalized development costs, which of the two segments does that mainly pertain to or relate to? That goes up and down a little bit. Capitalized development cost, as the word alludes to, relates to the development cost. Sorry to point that out. Of course, it does. And depending on where we are in product stage and in each segment, then this may shift from between the two segments. During 2024, early, we had some large liquid cooling projects that we finalized, and there was significant capitalization of that. Towards the end of 2024, it was more in the sim sports department that we capitalized. Overall, For the year 2024, it's almost an even balance between the two segments. However, in the latter part, it's probably two thirds to same spot and one third to liquid cooling. Further question. Investments after finalizing the HEU will go down. Can you elaborate on cash conversion on free cash flow in 2025? Free cash flow 2025 will be around zero, I believe. Yes, we have seized the investments in the building and we are seeing a positive, however, minor positive EBITDA in 2025. Further questions. What are the covenants related to the bank loans? There are three components. I think we actually state those in the annual report also. One is related to solidity on the balance sheet equity versus the balance sum. One is related to our reporting to the bank that has to be done on a segment basis. And the last one is related to a minimum cash holdings throughout the period. And then over to you, Andre, on number eight here.

Yes. How much of an impact would you estimate to make with the new sim racing series line? That's a difficult question to answer because I don't know how we measure. But for sure, you could say that what we're doing today is only high end. Even our lowest cost products today are high end, all by design. Where now what we are coming with is a mainstream and much lower priced gaming equipment. So, of course, we expect it to make a significant difference. That's why we're doing it. But it's not something that's going to happen overnight because we, as I said before, no products are selling themselves. It's a brand new task to establish new sales channels and distribution channels. And that's, of course, what we are working on and working with. But for sure, it's something that we have high hopes for. Yeah. Dennis, how is the mass market liquid cooling you talked about a year ago coming? That's going well. We have several customers who adopted it and we have more to come. So we are happy about that. Is data center dead in an AC tech context? Yes, it is for now at least. Defense situation. Yeah, I don't see the defense situation as something that impacts us in any way.

very good i'm just refreshing and there seems to be going once going twice there are no further questions so that means that this concludes the the webcast keep in mind that you can always submit your questions to us to the investor.relations at acetech.com with that thank you for your interest in acetech thank you