Napatech

Hello and welcome to NUTS Tech Q4 2020 Interim Management Statement. Today, I'm pleased to present to CEO Ray Smith and CFO Heiner Thorsgaard. Please go ahead with your meeting.

Good morning. I'm pleased to welcome you all to NAPA Tech's fourth quarter 2020 Interim Management Statement presentation. I'm Ray Smith, CEO of NAPA Tech. I'm joined today by Heiner Thorsgaard, our Chief Financial Officer. Today's Q4 2020 IMS was released earlier this morning on the OSC and is available on the investor relations page of our website at napatech.com. For your information, a recording of this webcast will also be available on the Napa Tech website as soon as possible later today. As always, we want to be available to answer your questions following the presentation today or anytime via email. We'll be conducting a Q&A session following our presentation, and we'll be taking your questions via text, which you can submit on the webcast page using the button below the presentation. Alternatively, we can take your questions on the phone. If you'd like to ask a question, follow the instructions on this slide. I would also like to invite you to our Capital Markets Day event planned for March 17th at 2 p.m. CET. This event will be virtual this year, and we're excited to have several key customers, partners, and industry analysts who have agreed to speak to you. The event will also include a presentation by me and my team to paint a more complete picture of our progress and aspirations for 2021 and beyond. Please note that this presentation contains forward-looking statements that are subject to a number of risks and uncertainties. Our actual results may differ from those discussed in forward-looking statements. So now let's jump in. I plan to present a summary of our progress over the last few years, a summary of key financial achievements for Q4 and for full year 2020, an update about our business and market, as well as a review of additional comments about recent key press announcements to give you further insight into how we are doing and potentially how we will be doing in the coming year. Heine will then provide a detailed review of our Q4 and full year 2020 financial results, and then I will close with our outlook for the full year 2020. I thought it would be a good place to start with a short retrospective of our business over the last few years, as well as give you a perspective of which direction we are going. When I joined Napa Tech in 2018, my mission was to quickly make the needed changes and demonstrate our potential to build a growing and profitable tech business. These changes that we put in place brought us new opportunities and our team has capitalized on them. We focused on our core competencies with our FPGA software expertise. We streamlined our business to create operating leverage and we recommitted ourselves to transparency and building trust. In 2019, we set realistic expectations and then we strive to reach higher by executing a three-prong product strategy that both solidified our core product revenues while investing in new product innovation. As we gained momentum that year, we achieved positive cashflow earlier than promised. But momentum kept building. Even in a year of many unexpected challenges, we kept our eye on the plan and steadfastly delivered on our goals, building new products, new partnerships, and enabling new potential revenue streams. I believe our progress in 2020 has earned us a path to the next level of growth. So as we enter 2021, we will work hard to unlock higher growth. As with any technology, it takes time to build new revenue streams. but the recent design wins and announcements that we have made provide a perspective about how we are feeling about 2021 and beyond. We will provide a perspective about 2021 when we present our guidance and we will offer our three-year aspirations when we hold our Capital Markets Day event in March. Regarding our financial results for 2020, I'm happy to report Napa Tech delivered another year of solid performance. Our annual revenues grew 16% year over year. We delivered best ever EBITDA of 21.9 million, way better than the 1.4 million DKK in 2019. And we delivered record free cashflow of 33.6 million DKK, a 174% improvement over 2019. We maintained great gross margins at more than 71%, which allowed us to turn in solid earnings of 9.6 million DKK, the best ever profit for Napa Tech as a public company. As we have been demonstrating all year long, during a year of uncertainty and challenges due to the global pandemic, Napa Tech's products have resonated well with our target markets, even when our customer lab visits were restricted due to COVID. We continue to find ways to add new business within this environment on top of the solid foundation built on both existing and new customers. In total, and in summary, our results against our guidance in 2020 were notable. We solidly achieved revenues against our increased guidance that we raised during the second quarter IMS. We overachieved on margins. We delivered efficient operating costs, which is where we get our nice operating leverage that you've seen. We knocked the ball out of the park on EBITDAQ and EBIT results against our guided goals. Overall, as we communicated in Q3, we were confident we would finish the year strong. We hope that our realistic results combined with our transparency and communications have resulted in even better trust that we are expecting as well as we can and executing. Now I'd like to walk you through Napa Tech's business highlights, quickly summarizing on what we do, how we target our market, the key customers we want in Q4, and an update on several of the key press releases we made since the last presentation. Napa Tech builds SmartNICs, which are the devices displayed in the middle of this slide. They are made to easily plug into any standard server, which are now the fundamental building blocks for all networks, clouds, and data centers. These SmartNICs are built with a super powerful microprocessor called an FPGA, which when combined with our software accelerates applications across multiple segments such as cybersecurity, monitoring, infrastructure, cloud and edge, and mobile. These application areas require more and more compute power to operate and perform faster and securely. The demand for higher performance compute for these applications creates demand for SmartNICs. But the real secret to our success is Napotex software that runs on these smart NICs that delivers the real value to our customers. Napotex sits strategically at the intersection of the server and the application markets. Our position is to play in the high end performance part of the market where the FPGA-based SmartNIC technology is needed to run mission-critical, compute-intensive applications faster, more efficiently, and more securely with unmatched performance. That is where Napa Tech has focused our expertise to catch and grow revenues. There is a growing problem in the market, and we are focused on solving that problem with our expertise. On one hand, CPU-hungry applications are demanding more and more CPU power from the servers that they run on. On the other hand, servers aren't getting any more powerful. Server CPUs are reaching their threshold of performance gains, while the economics are driving down the cost of servers over time. So the servers just can't keep up with the application demand. The solution is an FPGA-based SmartNIC to solve the application performance gap. But these FPGAs don't do their job unless you have software to make them optimize the specific applications that need to be accelerated. That is exactly what Napa Tech does. We build the FPGA software along with the SmartNIC to power the SmartNIC to deliver greater performance for our customers. The FPGA SmartNIC is in the right place at the right time to solve this problem. and Napitech's expertise to make the FPGA work to accelerate applications puts our SmartNIC technology into a very interesting market opportunity right where the action is. As we have reported before, the total NIC market is expected to approach $2.3 billion this year, growing at about 30% year over year. And this overall NIC market is divided into three major segments. The basic NIC segment in light blue is the low-cost, low-margin part of the market that offers a basic fixed-function NIC with no programmability. Napa Tech does not participate in this segment. The offload NIC segment in green is dominated by non-programmable ASIC processors, which are designed for a specific application and a specific system, offering little in the way of flexibility or application acceleration. Napa tech is not focused here per se, but we do try to convince some of this market to come our way for the right use cases. And then there is the programmable NICS segment in orange, often called the smart NICS segment, which is where the highest performing solutions reside. These smart NICS deliver ultra high speed networking functionality with the ability to be reprogrammed and enhanced with new software to meet the ever changing customer requirements for higher performing mission critical applications. Napa Tech is keenly focused on addressing this programmable market segment. As reported by Omdia, the programmable NIC market is the fastest growing segment of all of the NIC market. In the recently released report from January 2020, Napa Tech continues to rank number three amongst the vendors in this segment and is the largest vendor making commercial smart NIC technology with FPGAs listed behind Marvell and Broadcom who happen to use a system on chip solution. But FPGAs make up the vast majority of solutions in this segment alone. we will have the author of the Omdia report speaking at our upcoming Capital Markets Day. Let's move on to the top brands that we closed in Q4. Here's a summary of some, but not all, of the logos of the customers who bought Napotec products in Q4. For additional color, I've categorized their logos into the key market segments, like networking and security, telecom and cloud, government and defense, and financial technology, where we often target our SmartNIC solution sales. We had brisk sales in all of these segments with solid recurring business customers in the networking and security and telecom cloud categories, including key customers like IBM, Neox, Polystar, Mobileum, MTS in Russia, and LiveAction, just to highlight a few. In these domains, higher speeds and the need for better performance is certainly driven by 5G, is increasing security threats, the need for greater visibility and packet processing speeds, and the transition to software defined networking are all having an impact in this section. The NAPA tech solution offers advantages in all of these areas. We also had good progress in the government and defense segment with OEM and end-user customers like NASA, Rheinmetall, the U.S. Army, Harris, Accelio, and Northrop Grumman, as well as customers like Sealing Tech, new customer Sealing Tech, and the U.S. Department of Homeland Security and the European Organization of Astronomic Research Southern Observatory in Germany. In these use cases, mission critical apps need higher performance with zero packet loss, but with greater network visibility and control. Lastly, the FinTech segment for us was quite active in 2020. Let me talk a bit more about this on the next slide. We published a press release in the middle of the year to highlight our growing presence in the financial segment, servicing banks, insurance companies, and trading firms. As we completed the year we just closed, we closed a growing number of deals, making 2020 one of the best years ever selling our solutions to this part of the market. We recently published an important press release about a significant new design win in Q4 with a global financial services trading firm specializing in proprietary high-frequency and algorithmic trading with data centers and major financial hubs in the United States, Europe, and Asia. In this new design win, the customer selected Napa Tech's 40 and 100 gigabit per second SmartNICs for their trading network to perform market data analytics to improve trading behavior that maximizes revenue and de-risks transactions, all while strengthening the security of the data in flight across the trading network. We expect this new design win over the life of this project rollout to add up to about $2 or $3 million in revenue for Napa Tech. We know how speed, accuracy, and performance matters to trading firms, trying to squeeze every nanosecond of time from the trading process, which done right adds huge value to these kinds of customers. These design wins are a great example of others that we're targeting in the coming quarters. As pointed out in the press release, industry analysts see an uptick in SmartNIC demand in this segment, and we will work to capitalize on that growth. Now onto the next slide. In early February, we were very excited to formally announce a strategic partnership we have developed with Lenovo, one of the top three global server manufacturers. This is an ongoing joint product and technology development effort between our two companies. We will be developing Lenovo branded SmartNICs based on Napotex 25 and 100 gigabit per second solutions running our newest link virtualization SmartNIC software designed to accelerate virtual networking solutions, meeting the most demanding requirements of 5G mobile telecom operators and cloud service providers. Our production-grade FPGA software delivers line-rate throughput, ultra-low latency, and is packed with networking, security, and virtualization features, including Open vSwitch offload, sometimes known as OVS offload, live migration, hardware and quality service, telemetry, service chaining, and OpenStack orchestration. It dramatically improves the networking performance and CPU utilization of servers deployed in virtualized environments. Starting with the 5G telecom and cloud data center operators in the greater China market, Lenovo together with Napitech plans to extend the SmartNIC solutions globally to the world's top operators. Napitech estimates the revenue potential of this new design win using our newest link virtualization software to exceed $10 million over the life of the product with customer orders starting in the second half of 2021 and ramping into 2022. Let's finally get into the financials. I'd like to turn the call over to Heine Thorisgaard to review more details about our Q4 and full year 2020 results. Heine.

Thank you. Revenue in USD in Q4 was up 4% compared to last year. Due to the weakening dollar, revenue in DKK fell 3% in the quarter compared to Q4 2019. For the full year of 2020, revenue was up 16% in USD compared to last year. And in DKK, revenue was up 14% and amounted to 194.2 million. Gross margins in Q4 ended at 71.9% and for the full year at 71.5%, down three basis points compared to last year. Staff costs and other external costs amounted to 30.8 million in Q4 compared to 34.4 million in Q4 2019. For the full year of 2020, staff costs and other external costs amounted to 117.1 million compared to 125.8 million last year. EBITDA in Q4 amounted to 7 million compared to 5.8 million in Q4 last year. EBITDA for full year 2020 amounted to 21.9 million compared to 1.4 million in 2019. Staff costs transferred to capitalized development costs in Q4 amounted to 4.8 million compared to 4.4 million in Q4 2019. For the full year, the amount was 13.5 million compared to 13.9 million last year. EBITDA in Q4 amounted to 11.7 million and EBIT amounted to 3.7 million compared to EBITDA of 10.2 million and EBIT of 3.6 million in Q4 2019. EBITDA for the full year of 2020 amounted to 35.4 million up 10.1 million compared to 2019. And EBIT for full year amounted to 10.1 million up 20.2 million compared to last year. The result for 2020 amounted to 9.6 million compared to negative 13.6 million in 2019. Net cash flows from operating activities in Q4 amounted to 14.8 million compared to 15.1 million last year. For the full year of 2020, net cash flows from operating activities amounted to 47.6 million, up 21.2 million compared to 2019. End of 2020, net working capital was 3.4 million compared to 17.4 million end of 2019. Net cash used in investing activities in Q4 amounted to 4.9 million compared to 3.4 million Q4 2019. For the full year of 2020, net cash used in investing activities amounted to 14 million compared to 13.9 million last year. Free cash flow in Q4 amounted to 10 million compared to 11.7 million Q4 2019. For the full year, free cash flow was 33.6 million up 21 million compared to last year. With free cash flow of 33.6 million, the free cash flow to sales ratio was 17.3% compared to 7.4% in 2019. Our strong and growing free cash flow to sales ratio demonstrates the strengths of our business model and clearly illustrates the progress we've made over the last couple of years. Cash and cash equivalents end of 2020 amounted to 62.7 million compared to 64.3 million end of 2019. Back to you, Ray.