Asetek A/S

Welcome to Aztec First Quarter 2025 Earnings Call. Please note that this call is being recorded. You will have the opportunity to ask questions to our speakers later during the Q&A session. If you'd like to ask a question by that time, please press star followed by one on your telephone keypad. Thank you. I'd now like to hand the call over to Peter Madsen. PFO, Peter, you may now begin.

Thank you, operator, and thank you, everybody, for joining this Q1 2025 earnings call for Asetek AS. My name is Peter Madsen. I'm the CFO, and I have in the room with me here our founder and CEO, André Slot-Eriksen. Hello, André. Hello. So our board, they met this morning, and they discussed, and then they approved the earnings release that we sent out a few hours ago, and they released the presentation that we are just about to give also. Before we get to the details, let me just add to the questions, remarks that the operator just came up with, that if you are in front of your computer, there might be, or there will be, the opportunity to type in a written question that we can then read from later in the presentation. With that, let's proceed. Disclaimer, which we, of course, encourage you to read. And then, Andre, over to you for the financial advice.

Thank you, Admiral. Let's just dive right into it. So, SimSport's revenue in the quarter reflected a soft demand after a high year ending in 24. And I'll come more back to it, but it's because of some logistical challenges and of course the macro uncertainties that we are looking into. Q1 liquid cooling revenue of 8.6 versus 10 in the same quarter last year reflects a shift towards more affordable products among our customers. I'll also get back to that. Our Q1 group gross margin ended up at 44.2, up a little bit compared to last year. As everyone knows by now, we completed the rights issue in January, raising 10.4 million in net. The full year outlook, we just adjusted the other day, due to a lower theme sport revenue expectations, We also changed the group revenue, of course, in the range to 45 to 53. No surprise, I assume, tariffs in the U.S. situation. Of course, most significant impact on products made in China broadly applies throughout the entire gaming value chain. Of course, we look into an increased uncertainties And it is impacting our simsport business for sure, where at least for now the liquid cooling business proves to be more resilient. As a consequence, we have put our sales into the US on hold for simsport only, of course. We can all guess on what's going to happen. We have chosen to focus on what we can control And we do have a lot of experience in dealing with these tariffs because for liquid cooling, they have actually been in force since 2018. The point we have right now is, of course, a trigger for dual sourcing with transfer of our production to Malaysia instead of China, at least for what goes to the U.S., And we have expanded our capacity late 24, of course, in dialogue with our customers and tried to predict what was going to happen. We see it as we are in a relative position of strength in the sense that we have increased our production in Malaysia, somehow mitigating the tariffs, as well as we have done cost reductions at group level. Just to be clear, moving production to Malaysia is not for free. It comes with a cost premium as well as longer lead times. And the main explanation for that is really that all the components used for manufacturing primarily comes from China. Just a small note on the revised guidance. Our group revenue is expected in the range from 45 sorry, 45 to 53, where it was 52 to 58 before, and an adjusted EBITDA margin of 0 to 3 compared to 3 to 5 before. We have not changed the liquid cooling segment revenue, so that's unchanged. And on the same score side, instead of 12 to 15, we are predicting 5 to 10. It all comes with a high degree of uncertainty right now, of course. Just going in to the top segments a little bit. If we look at the liquid cooling business, it's still a good and solid long-term profitable business with, in my opinion, healthy growth margins. And we are continuously expanding and building. And in the quarter, we released 11 new products. and we have 10 new products estimated to ship in the quarter we're in right now. And at this point in time, we are supplying three of the five world's largest PG manufacturers. And I can happily state that the new customer, the new OEM that we released last quarter is actually doing better than we had hoped for. At that topic, I would like you to focus on the right-hand side of the slide for a second, where you can see our Q1 last year was $10 million. You can see that the dual sourcing impact, so for any newcomers, we had two major customers who went to dual sourcing, and that impacted us actually quite a bit, as you can see. but we have actually been able to offset that, the lost revenue from that, from basically all other customers growing as well as new customers. One thing I would like to highlight here is that we have sold more or less exactly the same volumes as we did last year. So in terms of sales volume, we have actually offset what we lost, so to speak, And I would also like to highlight that the margin is the same. So then you can, of course, ask, so why is the revenue lower? Well, that's because people have bought, let's say, a different product mix. And that's completely trivial and nothing spectacular. And that goes up and down. But from my point of view, I think it's positive that even with the announcement we got last year of two major customers, we have actually been able to offset that. And that leads me into a little longer term outlook. It's, of course, a little bit ironic with the scenario situation. We don't know what's going on tomorrow, but now I'm talking about 26. But the reason is that we believe in 26 that will be the first major post-COVID upgrade where both new CPUs and new GPUs are launched. We also have reason to believe that the more mid-market products that we released late this year will come into full revenue impact from 26. And then, for sure, the increased commercial focus has helped quite a bit. And what is that? What does that mean? It means that we assembled and gathered the management team in Denmark and basically closed down our U.S. office has enabled us to focus even more in spread on only two geographies instead of three. Looking towards the SIM sports. Yeah, so compared to the same quarter last year, it has been a soft beginning. It's something we see across the board from all our resellers, all our partners, all our competitors. So we are seeing that as well. Some of it has also been that some of the orders we closed and booked in Q4 have actually been caught up in logistical, you know, harbor congestions and container congestions and things like that. So what was supposed to land at our customers in Q4, a lot of it actually only got delivered recently, which of course means there's just no demand from these customers in the period. Then of course, Looking forward a little bit beyond Q1, we have gotten message from different of our customers in the U.S. that they have simply stopped purchasing products from China because of the tariff situation. And then, of course, it's anyone's guess what's happening to the consumer confidence and increased pricing. Growth margin of 26%. still high quarterly volatility in that area, there's still a lot to be gained in the logistics. I believe at least five points can be picked up just like that as soon as we get to more stable volume. On the commercial side of the business, we are looking at new sales channels. Of course, that's no secret. And one of the, at least for now, smaller milestones, but that's of course something we intend to change, is that you can now find our products on Amazon. As we released this morning, we have entered into an agreement with, let's say, Pan Scandinavian, Pan Nordic, a leading consumer electronics chain, that will now carry our products when they come out later this year. That's of course a major milestone for us in the sense that We never had any of our own branded products out in the retail before. We are also very observant that putting them on the shelves is not going to be enough. We have to, of course, up the marketing and be present in the shops and make sure everything is as it's supposed to be. So I would say that our mass market strategy is rolling out as we have planned for. We believe we have a a competitive product line that will launch in the second half of the year. We also believe that we are on track with the console support that will also be on track for the second half of the year. Of course, when we launched all of this or when we planned all of these new retail products, of course we had planned for a launch in the U.S. That's not going to happen, at least not right now. Let me rephrase that. It is going to happen, but it's not going to happen right now. So currently we are focusing on the Nordics and on Europe. So with that, I will leave the bat to Peter to talk about the financials.

Yes, thank you, André. Let's first take a look at our revenue distribution over the quarters and over the years. And as you can see here, fluctuations up and down is not a new thing to AsiaTech. However, there is no hiding that Q1, in comparison with other quarters, is a softer quarter. When we look at the income statement, allow me to start from the top and from the left-hand side, where we are comparing Q1 this year with Q1 of last year. Our total revenues are down by 19%. As Andre alluded to, the liquid cooling part of this, which is around $9 million, or $8.5 million thereabout, actually is stable when it comes to quantities. It's the ASPs, it's the average sales prices that are down. And let's not be confused here. A lower ASP does not equate, in ACETEC's case here, to a lower gross margin. The total gross margin for ACETEC this quarter was about 44%, and the same was the case for the same quarter of last year. SIM sports is around 12% of the whole revenue this quarter, and it is $1.1 million versus the $2.2 million we did last year. And this is where we got hit in the back by the very high Q4 revenues where our customers have had certain logistical challenges getting them to the last mile, you could say, from the boat to the warehouses. Looking at total operating expenses at $6.1 million versus $6.7 million last year, that's pretty much 10% down. It's reflecting the right-sizing or the cost reduction, whatever you want to call it, that we committed to last year and that we performed, transacted also last year. And at the same time, while we have cut the cost significantly, we have actually managed to organize ourselves so we have better and more focus on simsports sales and marketing. That leaves us with an operating income of negative $1.8 million this year versus $1.4 million also in the negative last year. Financing, let's just put a quick comment on that. As you may recall, we changed the functional currency from January 1st, and that means that we should see, and we also in this quarter see, much less... changes in this line. All in all, income before tax, minus $2.2 million versus minus $700,000 the same quarter last year. Looking at the gross margins a little bit, you can see that our total gross margin this year is 44%, and if you track four quarters back, then it's also 44% the same quarter last year. What we see here, the impact of, is the change in product mix, where we, this quarter, have 88, or should we say 90% of our revenue coming from liquid cooling, and then the sim sports is 12%. And if we compare Q1 with Q4 last year, then you can see that the mix has changed, meaning that we are, also coming back to the comments made earlier, we are, in this quarter, selling less percentage-wise and dollar-wise in sim sports than we did Had the split between the two segments been the same in the two quarters, Q4 and Q1, then the gross margin had also been very, very similar. I should add that one percentage point of gross margin in Q1 of this year comes from the rental of premises that we have to attend in the, or come from attendance in the headquarters building. Of course, with a relatively low revenue number, then that percentage becomes a little bit higher in comparison. Couple of comments on the balance sheet. We had $9 million in the bank on March 31st. That's up, obviously, from Q4 of last year. Obviously, I say because we transacted the capital, the rights issue transaction in very early January. We had $3 million in the bank at the end of December, that was actually a relatively high amount because we were getting close to the capital raise. We were running out of funds, et cetera. So what we did there was that we owed more money at the end of December, that we equaled that to more money in the bank, and we have corrected that over Q1 here. Our loans, looking at the liability side, is in compliance with the various covenants that we have in place with our bank. And I should also add that our interest-bearing debt is $20 million, which is related to the HQ financing primarily. And they are, as it is today, they are with a maturity date of March 28th. We are working on, it is our desire to change this to a more traditional mortgage. but it is still a work in progress and we probably need to show a number of quarters of good solid progress before that really takes off. I think that was the comments I had, Andre, and then I'll send it over to you for the summary and outlook.

Yes, so just to sum up, our revenue this year will be impacted by the tariffs we are executing on our SIM sports. And, of course, we are pushing all the time, but we are pushing hard for getting back to the growth we'd like to see on the liquid cooling site in 2026.

Perfect. And with that, we change. Sorry about that. Operator, if you would see if there's anyone desiring to talk.

Thank you. We are now opening the floor for question and answer session. If you'd like to ask a question during this time, please press star followed by one on your telephone keypad. We will pause for a brief moment to wait for the questions to come in. As of right now, I'd now like to hand the call over to Peter Madsen for final remarks.

Yeah, thank you. And what we'll do now is that we will read out the questions that we have received via the app, and then we'll do our utmost to answer those, of course. Should I just start from the above? And the question here is, given the lower EBITDA guidance and continued investments in SIM sports, what are your updated expectations for cash flow and free cash flow in 2025? So that question comes over to me. We are not guiding, per se, on the specifics of the cash flow. What I can talk about is the components of the cash flow, and then you can do your math yourself. With an EBITDA guidance of around zero, and we know that we are investing $2.5 million, $3 million in R&D, and we know that we are paying down loans at around $1 million, $1.3 million for the year, then, of course, that has a cash flow effect. And that, of course, has not become better, you could say, with our accounts adjustments. That's the immediate answer to that question. Andre, how do you assess the tariff impact on ACETEC versus industry peers?

It's impossible to answer because I don't know our competitors from the inside. What I can say is I do believe with our manufacturing in Malaysia that we got something others don't. My biggest concern is actually our Chinese competitors and while that may sound counterintuitive. My concern is actually that they will get some sort of relief from internally for the tariffs so that they may not have to increase prices. And if that happens, of course, then we are obviously behind, and I guess then that defeats the whole purpose of the tariffs. So that's still to be seen. In terms of the logistical challenge, I was perhaps not clear of that, but the logistical challenges we faced here in the Q4 deliveries was actually not on our side. So I can't really say when containers are not delayed anymore or things like that. On our side, in terms of what I referred to on the gross margin, I would say that I can't put a date on it, but we simply need some scale for the supply chain to really work. For example, hopping fees, it's a big portion right now because you pay something for the space you consume, but you also pay something for the services. So we just need some more scale and that's what we're working on.

Yep. And thank you for leaving the last part of the question. Question here, can you elaborate a bit on your cash position working capital? Are you already now planning a new emission in 2025 or did you secure a credit line in the banks due to the downgrade and foggy situation in the US, China? So you could almost say that this is a follow-up to the first question. We are not planning a new emission in 2025. Maybe, Albert, you can add to the comments here, but we, of course, will take the measures needed to preserve our cash.

Yes. I can also say we are not planning one for early 2026. We are not planning an emission at all. Of course, we cannot predict how the world goes, but for sure we are not planning for that. No.

How can AC Tech better align a shareholder's interest with management interests? What would make management increase its skin in the game going forward?

I don't really know what this specific investor thinks about my interest compared to the companies, but what I can say is that over the last many years, I have acquired and purchased shares in the open market just as I have participated in the capital rounds that have been sold. I would pretty much say that I have the same interest like any other shareholder.

And then a question here. What scale is the negotiation about data center about? More or less than single digit million dollars overall?

We are not in a position to comment further on that.

What is your expectation to free cash flow 2025? I think I replied with the components of the cash flow. Can you tell more about the potential data center work?

Yeah, there's two or three of these questions about this data center thing. What I can say is that during the prospectus of the rice issue, we had to disclose that we had a contact with an interested party, and now this interest has and we felt that we needed to inform the market about it. But at this time, that's what we can say.

Thank you. Have you tried to sell the headquarters and make a sale and lease back and so that you get debt off your balance sheet? That's an ongoing discussion or conversation we have with our investors. A sale and lease back is obviously, I shouldn't say obviously, but it is an option. It may not be the best option, But it is certainly one of the things that are being discussed. Andre, do you want to make comments on that? It's been debated.

No, it's something that we've been asked many times and also answered many times in the sense that we are, of course, looking at all options.

And there's a follow-up question to that regarding the value of the building and the debt. So how come that you cannot do a mortgage borrowing on that debt? And the thing is, without going into too much details, that the mortgage companies, they are these days looking at the business as a whole. And as we all know, the business has been volatile for the last couple of years. We need to show stability. And when we do show that stability, then, of course, the odds of changing the lending to a mortgage scenario is just by nature better.

I could perhaps just ask that if we were the ones to make the decisions, our debt would have now been converted into mortgage.

Absolutely. That was the last question, and I have pressed refresh a couple of times. That means that we end the presentation here, and thank you for the interest in this. Thank you.

Thank you.