Asetek A/S

Hello, and thank you for standing by. My name is Mark, and I will be your conference operator today. At this time, I would like to welcome everyone to the ACE Attack Q3 2025 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. You can ask a question using the Ask a Question box on the webcast page. Thank you. Now, I would like to turn the call over to Peter Madsen, CFO of ACE Attack. Please go ahead.

Thanks, Mark, and thank you and welcome everybody to this Q3 2024 Asia Tech Earnings Call. My name is Peter Madsen. I'm the CFO. I have here next to me our CEO and founder, Andre Ericsson. Hello.

Hello. Good afternoon.

Good afternoon. So our board met last night and discussed and transacted the earnings release, which we then sent out last night. We will go through a series of slides here. When I slide through here, we can see that on slide two, there's a disclaimer for forward looking statements, etc. We urge you to read those at your leisure. With that, I'll hand over the microphone to Andre.

Yeah. So let's dive into the quarter that we just passed, some gives and takes. Year-to-date revenue of just shy of $31 million and adjusted EBITDA of minus 0.7 versus 37.1 and 0.3 the same quarter last year. As most of you have realized by now, we signed a major agreement with a global customer for high-end liquid cooling with a minimum committed revenue of $35 million over the first two-year term of the contract. We saw a sim sports revenue of $1.3 million stable versus Q2 and in line with expectations as the tariff situation continued to impact us and impair us, of course. We adjusted our group revenue for the year to roughly $41 million with an adjusted EBITDA margin of a negative 3% to 5%. One thing worth noting here is that the dollar actually decreased 10% over the year. And since we have our OPEX in Danish kroner, I would say the most part of this negative EBITDA margin is actually related to the dollar value. In return, we did increase our midterm liquid cooling segment revenue ambitions quite significantly. And talking a little bit about the new agreement, the reason why it's actually a little bit elasticity in the number is because it's actually a committed volume. And then with an ASP, of course, it turns into a revenue. But that's why it says estimates. But it's a it's a long term agreement for our high end solutions based on the Ingrid platform. And we are in this case supplying both the liquid cooler itself, the plastic cap, the heat exchangers, fans, retail packaging and all of that. That means in return that we get a higher ASP. But of course, also a reduced gross margins is simply due to the fact that we can, of course, not. a charge, for example, 45% gross margin on a paper box. That's a commodity. And although we make a little margin on it, it of course drags down the overall margin. We expect to begin shipping end Q2, start Q3 next year and Q4 for the next products. We have two products. The customer is a globally leading provider of high quality components and accessories. It's one of our earlier customers. So it's a welcome back. And we do expect this customer to reclaim their top tier position within our portfolio. So as I just alluded to in the beginning, the minimum volume commitment is estimated to a $35 million during the first two year term. Of course, since the customer has committed to this, then my expectation is that they are actually being conservative. At least I would if I were to commit to volumes with one of our suppliers. So revenue may very well be higher. Our guidance, of course, reflects the near-term challenges that we are facing. We have, and it's just the nature of OEM business, we have a couple of customers who reduce their short-term forecasts. And yeah, there's nothing major in that. Of course, it's always irritating when it's in this direction, but that's how it is to be an OEM supplier. So because of that, we have revised our guidance. I don't want to repeat it once more. I just read it up. But we do expect, as we've said for a long time now, that growth will remain and come back in 26. And therefore, we have raised our midterm ambitions to $65 million, where we previously had $50 million. And we aim to consistently achieve an adjusted EBITDA margin of more than 25%, which is consistent with what we've said before. I would actually like to go to slide eight. So the current status on the business, the liquid cooling business, that is that we are right now supplying three of the top five PC manufacturers globally. We had three new coolers started shipping in the third quarter and we have seven new products that's estimated to start shipping in the quarter that we're just entering. We focus still on the high end and the mid market, and we also have a value version of the Ingrid technology platform, more for the mainstream market that will be ready in Q4, also with revenue impact from 26. We always knew that going into 25, it would be a hard year, and I would like to Take your attention to the right side of this slide. So what I mean by that is that we had a couple of customers who went to dual sourcing and the impact of that, as you can see on the left side of the graph, is that we lost perhaps two, two hundred fifty, three hundred thousand units to these customers. But we actually have been able to grow new customers and existing customers almost the same. So at this point in time, we have shipped shy of 20,000 units. We have actually been able to fully compensate for the loss. It has been too much to also grow on top of that, but I'm actually quite happy that we've been able to offset that. And the ASPs, if and when they are lower, it doesn't really say much about the actual price of the product. Of course, it says something about the price. But what I mean by this is not price erosion. It's simply due to what the customer wants in terms of extra utilities, etc. shipped with the product. I believe we have a strong support behind our 26 growth expectation. Of course, we have a committed customer contract. We have focused really hard this year on growing existing customers. And we have a full launch of the mid market and also low end products later this quarter. And I have to say that the main reason we have now seen just this year two customers come back is that There is an increased recognition of our quality. It's not just a price game. It is really also down to the quality and the services we provide. Moving into the simulator side of the business. Of course, the big headline here is still the tariff situation that is actually handicapping us quite a bit. And as I said on earlier calls this year, it has meant at least 50 percent of our revenue has gone because of that directly. And of course, our U.S. resellers, they remain cautious because of the situation. Like us, they are also awaiting clarity for the tariffs. um the focus on mid in products right now from the consumer is still above that of high-end products i would say um on the amazon.com sales we actually still see a very nice growth we are not really investing in that channel of our business so it's actually nice to see that it's growing anyway and and i would say our direct sales in our own web shop is actually progressing quite nicely, and it's actually a little bit ahead of our internal forecasts. We are seeing a gross margin in the quarter of 27 percent. I will not read too much into that because obviously to service the US market, We had built inventory ahead of 2025. And instead of sitting on that inventory, we are, of course, doing some sales. We just did. And of course, we will do that on Black Friday, et cetera, to get rid of that inventory and convert it into cash. And of course, doing these types of sale will impact the market. We launched our initial. back at Gamescom in August and presented it to the, let's say, sim racing world here in October in Cologne and Dortmund, respectively. And I would say it has been a very nice welcome both by the media and end users that do recognize it as a new leading offering from a perceived strong brand with great products. And we are seeing strong interest from our potential new channel partners and the channel partners we also did land And of course, our focus now is to convert it into real business. And to begin with, we had built modest volumes, of course, because we needed to see that production would run as expected. But also because of the relatively high inventories, we were not that keen on going flat out. But the initial volume actually sold out immediately. We, of course, started up production again immediately, too. But we do have almost three months of time shipping from China and around the world. So we will see products landing in our docks late this year, early next year. And on the Xbox console support, there is also progress. We are actually playing on the Xbox internally now, so we are almost there. And then the next thing there is in the process is we need the official stamp of approval from Microsoft or Xbox. And when we have that, we are able to start selling. With that, I will leave the bat to Peter to talk more about the numbers.

Yes, thank you. And if we look at this quarter, with revenues of $9.8 million, then you will see that it's a relatively low quarter revenue-wise. It is on par with Q1 of this year, and it's a little bit lower than the comparison quarter last year, Q3 2024. If we look at the profit and loss statement starting from above, and then I'll try and work my way through, you will see that revenues at $9.8 million versus 12.2 last year, that's down by approximately 19%. And for the year as a whole, we are at $31 million versus $37 million roughly. Last year, that's 17% down roughly. And that has to do with partly a reduction in the numbers of products sold, especially on the liquid cooling side. Liquid cooling is almost 90% of the business. So, of course, that makes up the lion part of the profit and loss. We were 4% down in the numbers of quantities sold. uh that means that something else must have shifted and that is the asp the average sales price which has been down from 54.4 last year to to 50 this year so on the surface that's that's eight points percentage points keep in mind though that as andre also alluded to that a change in asp in our case does not necessarily equate into lower gross margins It is more likely, and that's also the case here, a shift in product mix. Gross profits $4.1 million for the quarter versus 4.4 last year. That's 42 points this year and 36 last year. So that's up quite significantly. We'll come back to that. And for the year as a total, we are 44% points for this year and 42% last year. I'll come back to that a little bit. OPEX total operating expenses at $6.1 million versus a whopping $20 million last year. I can touch a little bit on the special items from last year, but if I take the liberty of excluding them just for analysis right now, then it's $6.1 million this quarter versus $6.2 million same quarter last year. 18.5 for the full year so far this year versus 19.9 the same period last year. And that is a reduction. And we're happy to report a reduction. We have also promised a reduction. For the quarter, it's 3% down. And for year to date, it's 7% down. And that is primarily, at least on the surface, driven by personnel cost. Personnel cost is a very large part of our OPEX, and that has also come down by the same 3% and 7%, as I just mentioned. However, we are in a quarter or in a time here where the dollar slash Danish krona exchange rate has changed quite significantly. The dollar has come down, meaning that the the corner has been more expensive. And we are talking about 10, 11 percent in FX currency delta this point in time versus the same point in time last year. So in addition to the actual savings in personnel cost, et cetera, you should also add I don't have a specific number, but you should add a significant factor in for the changed exchange rate price here. Operating income for the quarter, $2 million in the negative versus 15.6 last year and $5 million for the year so far versus $18 million last year. Foreign exchange rates, they, as I just mentioned, the dollar versus Danish kroner has changed quite significantly. We are at what, 6.4 or 6.45 at this point versus above seven last year or earlier in the year. But it has been relatively stable for a period of time, meaning that there is almost no foreign exchange loss or gain for the quarter and a relatively modest amount for the year so far. That means that the income before tax is negative 2.2 million dollars versus negative 17 last year and for the year 6.3 in the negative versus 18.7 in the negative. Just a comment on the special item under OPEX from last year. It is an impairment write down based on, and that's a long, could be a long technical explanation, but I'll spare you for that. It was related to the relatively low stock price last year compared to our equity. And that meant that we needed to write down about $14 million on the assets plus actually $4 million of deferred tax assets. So a significant write-down last year, which of course we don't have a similar write-down this year. Brief comment on the on the gross margins. Yes, they have gone up to 42 points at this point for this quarter compared to the 36 we saw last year. But last year, in addition to the impairment loss that I just reported about, then we had a supply chain issue that we recognized and booked in Q3. So it's a relatively easy comparison this year where we compare 42 this year compared to 36 last year. However, if we look at the most recent numbers, then you can see it's gone down just over the last quarter here from 45-ish to 42-ish. And that is primarily driven by our liquid cooling business, where the gross margin is down from 45.5 to 43.2, so a couple of points. And that is driven by the product mix changes that André also alluded to. Changing focus to the balance sheet, focusing right in on the cash balance. We have just shy of $2.8 million in the bank. That is a reduction since earlier quarters, and it is impacted by an increase in working capital, significantly or specifically around inventories where we are preparing for, like, Friday and Christmas and year-end, etc. We have to scale up working capitals. The cash balance is in compliance with our loan covenants. The loan covenants are reduced when we enter into 2026. As André also talked about, 2026, the beginning of, is sort of planned to be a turnaround time for the business until we get the new larger customer up and running at some point early next year. And of course, comes with a requirement for for for working capital when we close when we move into that expansion of the business on the uh on the liability side of of things we have an interesting bearing depth of 20.5 million dollars we've related to to the hq uh it matures in 2028 and it is on mortgage like terms it's technically not not on a mortgage but it's on mortgage like terms And we are paying Danish Kyber three plus two point forty five, meaning four and a half percent roughly as an interest on that loan. With that, I'll hand over to the microphone again to Andre for a summary.

Yeah. So something I did not touch upon, but I would like to do here is that the discussions related to a potential strategic transaction is still going going on. Other than that, I got nothing to say about it. Our revenue this year remained impacted by the near-term market challenges, specifically related to the U.S. import tariffs, of course. We did launch our new product line successfully so far, and the liquid cooling business is set for growth from 26 and beyond, with new and returning customers targeting the wider market.

Perfect. Thanks, Andre. And with that, we will move into a summary as nonsense question and answer section. And we are taking questions via the Web app. You should have the opportunity to type in your questions on your on your screen somewhere and send them and we'll get them over here. And we can see that some have. already understood that, so why don't we just start from the top and work our way down here. Question number one, at which profitability requirement is your building, sorry I'm just translating from Danish to English as we go, at which profitability requirement is your building recognized and what's the status on refinancing over to mortgage? On the first part of that question, technically classification wise, the building is classified as a domicile which means that we are taking it up at booked value. And then if you're wondering how come that the building is then written down, which it was last year in Q3 by $14 million roughly, that is back to the impairment test loss that we saw or recognized last year. It had actually nothing to do with the building. uh we are not we are not recognized the building at market value we just had to write down a significant amount of dollars and the how should i say the obvious place to write down anything on our balance sheet was the uh was the building so that's why the building was written down And so far goes the refinance over to mortgage. It's an ongoing process. It's relatively slow. I have to admit, it has to do with the fact that the mortgage companies, they are looking at our profitability, which has been under pressure, yes. But as we see that changing in 2026, we also, we hope and foresee a change in the area of moving forward in the mortgage plans. Andre, can you take the next one?

Yeah. So what's driving the new Ingrid OEM interest and how different is it from competition? And is it possible to reclaim some of the lost dual sourcing volumes with time? So starting from the back, that's exactly what happened with the new order that was getting back or reclaiming revenue in terms of how different it is from competition. I think that's too simplified because one thing is the product, yes, but I think what our customers are also realizing is the quality. One thing is the cost of a product, but the total cost, if the quality is bad, it doesn't really come down to product cost. And I think we are significantly ahead on all parameters, being it quality or being it actually product performance. And I also think we are somehow competitive from a cost perspective.

Yeah, very good. Next question. Why do you not hedge US dollars versus Danish kroner? And of course, that's a very obvious question to ask since the dollar has come down and thus the Danish kroner has come up. It's a two-way street, though. If it goes the other way, then our eagerness to hedge would not have been so great. There is some natural hedging in the fact that we are selling some products in both Danish kroner and euro. But truly, we have never done hedging. That has been a business decision. Hedging also comes with a cost as a premium. And if I go here, what are your cash flow expectations for 2026 based on expected liquid cooling growth? And how are you considering financing currently with cash on hand dropping in Q3? We're not going to comment at this point on or guide for that matter on the cash flow expectations. We've never done that and I don't foresee us doing that. We are in contact with our banks. they also, as we see, a brighter future in 2026 than what we've seen in 2026. And our board, I can also assure that they are on top of this matter. Why is it so that the cash on hand, the cash and cash equivalent for being a period of three $2 million for Q3 when it was 7.2 at the end of Q2. It seems like $4 million has disappeared from the cash bill. Yes, you can say that. And that is, of course, a combination of the profit loss being a loss at this point. And then our inventory is being relatively high and other working capital being relatively high in preparation for the year end. I can tell you that we have, and André also actually said something about that, we have launched a campaign on sim sports, as we always do. And maybe we've been a little bit more busy doing this year on an inventory clean out, et cetera. So we are seeing progress there.

André?

Are the sales discussion for liquid cooling and or data centers still ongoing? I guess that refers to what I just said, that yes, the discussions are still ongoing.

Very good. You get the pleasure of answering the number seven here.

One, is management still enjoying its job? And if so, what keeps you motivated? And two, what can be done to further enhance shareholder value in the mid and long term? So I'm not enjoying my job every day, but I I guess I am most of the days and I can guarantee you if I'm no longer I am, I will no longer be here. That's for sure. What can be done to further enhance shareholder value? I think in the in the midterm, we need now to execute on the on the new contract we have gotten and get back to the growth that we always always that we used to have. And then hopefully shareholders and new investors will also recognize that. In terms of the long term, I would say that, as you all know, we invested $100 million into the data center space. Someday it would be nice to see if we could get something back from that investment. And I would say that AI, of course, is harder than ever. We just don't have the resources to go after it right now.

Very good. One more question on cash flows, which I think we have given the answers to. However, it also asks here, do we anticipate raising additional capital? And the answer to that is that there are no such plans at this point. We are looking into a 2026, and I think we share that vision with both the boards and the people around us that is looking more much more profitable than what we see today. And with a profitable bottom line, if you take a look at our balance sheet, then you will see, I think you will realize that there's actually room for working capital financing in another measure than what we're doing today. Can I ask you to take number nine, Andre?

Yeah. And all of these calls, we get all kind of brilliant idea of what to do with the property. And I would just say with all respect, of course, we have been down all avenues. It's not like we never thought about a sale and lease back or never thought about a mortgage. So thanks for the advice, but we are looking into all the possible venues.

And then there's finally, let's take a good question on a balance amount. I'll certainly look into that and update if there should be anything to update.

I have learned that I can hit a refresh button. And I have done that a couple of times.

That means that we are concluding this webcast and we thank you for your interest in ACETech.