Napatech

Hello and welcome to Napa Tech 2021 half-yearly report. Today I'm pleased to present CEO Ray Smets and CFO Heine Thorsgaard. Please go ahead.

Good morning. I'm pleased to welcome you all to Napa Tech's 2021 half-year report presentation webcast. I'm Ray Smets, CEO of Napa Tech. I'm located in Copenhagen today and joined by Heine Thorsgaard, our Chief Financial Officer. Today's half-year report for 2021 was released earlier this morning on the OSC and is available on the investor relations page on our website at napotech.com. For your information, a recording of this webcast will also be available on the Napa Tech website as soon as possible later today. Given the resurgence of the global pandemic we've seen, I hope you're all staying well. We here at Napa Tech are completely healthy. Next page, please. As always, we want to be available to answer your questions. We'll answer your questions at the end of our presentation via text, which you can submit on the webcast page using the button below the presentation. We can take your questions on the phone if you prefer, too. If you'd like to ask a question, follow the instructions on this slide. Next page, please. 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. Next page, please. So let's get started. During this presentation, I will present our first half 2021 business highlights, including a summary of key financial achievements and an update of how Napa Tech is doing within the SmartNIC market. As always, Heina will provide a detailed review of our first half and Q2 financial results, and then I will disclose what our expectations are about the 2021 outlook for our business. Next page, please. Same as in Q1 2021, Q2 and first half 2021 have been on track and as expected with both growth and profitability. We delivered first half revenue growth of 5% year over year in USD against a very strong first half last year. We've been guiding that our growth would be lower in the first half of 2021 due to the stronger compare. We forecasted this because our expectations of timing of revenue from several key large OEM accounts. If we were to remove one of our biggest clients who had a slower start as expected in first half 2021 from our results, the rest of our business grew at 23% year over year for the first half 2021. We generated solid gross margins of 71.8% in Q2 and nicely within our guided range. This is a continued validation of our value proposition in the marketplace. On the earnings front, overall earnings were significantly up and growing year over year, demonstrating the overall strength of our business from the top line to the bottom line. With these results, we have delivered 11 quarters in a row of year over year revenue growth adjusted for the 2018 sale of the underperforming Pandian product line. And we delivered a combination of year over year revenue growth and profit for the fifth quarter in a row. One of the key areas we are carefully watching is the general industry supply chain challenge for semiconductors and other vital technology components. We have strived to stay way ahead of this worldwide challenge by pre-purchasing hardware components to ensure that we have them in place to support our planned revenue goals in the second half of 2021 and into 2022. So when it comes to free cash flow, which Heiner will talk about in a few minutes, we put working capital into action to protect our supply chain, which resulted in negative free cash flow for first half 2021. Although this wasn't expected at the beginning of 2021, we have shown resilience with how we have managed this to the best of our ability. Next slide, please. To provide a little more color using several key metrics, take note of the chart on the left. First half 2021 revenue was 15.1 million USD, which is up year over year and up over the prior first half periods. Due to foreign exchange headwinds in first half 2021 from USD to DKK, we were down in revenue in DKK as a result. However, the same foreign exchange headwinds on revenue were tailwinds for expenses. On the right side, shows that with well-managed expenses, we delivered record earnings, which demonstrates our business leverage and our potential for long-term profitability. We did all of this with another unpredictable year of challenges and distractions so far. All in all, our performance in the first half shows that we delivered as promised, but we are now operating within the new normal, We still have some employees working at home virtually, and we have a global travel suspension in place for employees unless approved by me for the safety and security of our employees, customers and partners. But productivity is strong and we are hiring new engineering and sales talent to keep on pursuing the big opportunity that sits in front of us. Next slide, please. So now let's talk about the opportunities that we are pursuing. Next slide, please. Napa Tech builds SmartNICs, which are the devices displayed in the middle of the 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 reconfigurable microprocessor called an FPGA, which when combined with our software, accelerates applications across multiple application segments, such as cybersecurity, monitoring, infrastructure, cloud and edge, and mobile. These application areas require more and more compute power to operate, perform faster and securely. The demand for higher performing compute for these applications creates demands for SmartNICs. But the key strategic advantage to our success is Napatech's software that runs on these SmartNICs that delivers the real value to our customers. The software provides the features that make our customers' software solutions work better, smarter and more securely. But when it's married to our hardware, we add the benefit of FPGA hardware performance to accelerate these applications even further. Next slide, please. So how does Napa Tech grow within a fast-growing programmable SmartNIC market? In an oversimplified way, we want more SmartNICs that we build, that little card in the middle of the slide, to be deployed inside as many servers, that large box on the right-hand side, as possible. Together, they are used to solve network application acceleration challenges. We designed SmartNICs and SmartNIC software that deliver network application acceleration solutions in 5G mobile, the cloud and edge, networking, cybersecurity, and financial services. Our solutions will keep getting faster to serve the growing demand that comes from increased network speeds from 25 gig to 100 gig and now pointing towards 400 gig. Our customers benefit with improved TCO in their data center by making servers more powerful. That way, the data center needs less servers to do the same work, lower cost to power and condition them, and reducing overall cost to deploy and operate. Next slide, please. In our business, we believe growth is optimized when we engage multiple paths to the markets that we serve. This requires us to build new partnerships to get us there. That is why we've been working hard in 2021 to put the right partnerships in place and then executing them to get them to revenue. As we presented previously, our announced partnership with Lenovo is noted as an important step for Napa Tech. Lenovo is a top three server maker with a long standing deep relationship with the kinds of customers that we want to get access to. In this partnership, we have been testing our latest solution focused on virtual networking with key end user customers of theirs. We are expanding our newest link virtualization SmartNIC software designed to accelerate apps and services meeting the most demanding virtual requirements of 5G mobile telecom operators and cloud service providers to meet the needs of their target end user customer base. Napa Tech estimates that the revenue potential of this design win to exceed $10 million over the life of the product once orders begin from their end user customers. Together with Lenovo, we are fully engaged with several customer testing efforts right now, and our ambition is to achieve a design win potentially in the back end of 2021 and ramping product volumes into 2022 and beyond. Another key partnership we presented is with Silicon, a well-respected industry-leading provider of high-performance networking and data infrastructure solutions. Napa Tech Software will power the Silicon SmartNIC which is based on the Intel FPGA SmartNIC IPU reference design. This is a partnership to bring Napitech's link virtualization software combined with Silicon's leading Intel FPGA SmartNIC to the market. We continue to work with our friends at Silicon and we'll work hard to help Silicon target use cases and win new businesses together. Napitech's partnership with Acronix was kicked off a few months ago back around the Capital Markets Day presentation and continues to take shape. We jointly announced a partnership with Acronix to create solutions that combine their Speedster 7T FPGAs with Napitech software to deliver the optimal mix of price, performance, and power, and feature set for SmartNIC designs. Acronix is a leader in FPGAs and embedded FPGA IP, offering high-end FPGA-based data acceleration solutions designed to address high performance, compute intensive, and real-time processing applications. As we get this moving, we intend to create a win-win in an effort to provide a feature-rich, high-performing solution to a growing set of data center, cloud data center operators, 5G mobile telecom service providers, enterprise data centers, and government agencies. And we expect that this will give us better access to the opportunities that are growing in the hyperscale and service provider 5G markets needing higher speed from 100 gig and higher. This is a sampling of the efforts we're working on. but not to exclude our longstanding deep relationships we have with Intel and Xilinx too. These kinds of strategic partnerships take time and effort to pull them off. Then it takes time to make them win. We expect them all to be winners for Napa Tech in terms of new revenue streams in the future. And we expect to demonstrate an initial win in the coming second half of 2021. Next slide, please. As I like to show every quarter, Here's a sampling of the logos of customers from all over the world who put their trust into purchasing Napotex SmartNixon software in Q2 alone. I've categorized our logos into the key market segments like networking and security, telecom and cloud, government and defense, and financial and technology or other. We had important sales in all of these segments, with solid recurring business customers in the networking and security category, including key growing customers like IBM, Live Action, VIAVI, Neox Networks, Arteza Networks, and Polistar, just to name a few. This is where speed and security against evolving threats are paramount. On the telecom and cloud side, we, among others, continue to see business with Facebook, and we are building business momentum with key service providers like Orange, NTT, Vodafone, Cedmi, Auger, and OEM partners selling service provider solutions such as Nokia and Mobileon. In these domains, higher speeds and the need for better performance is driven by 5G, increasing security threats, and the need for greater visibility and faster packet processing. I'm also glad to see the business activity in the government and defense segment, which has been a growing focus area for us over the last couple of years, with returning OEM customers like Ryan Mittal and Accelio, and one of our newest customers, Ceiling Tech, all serving the cybersecurity defense market, but also end users and other customers like Airbus Defense, Raytheon, Rockwell, Harris, and several of our newest customers, one called Provices Corporation, providing high-performance software-defined radios, and the preeminent Pacific Northwest National Laboratory, which is part of the U.S. Department of Energy's Office of Science. In these use cases, mission-critical apps need higher performance with zero packet loss, but with the greater network visibility and control that we provide with our smart things. In the fintech or other category, we continue to earn business with key OEM customers like Pico, Velocimetrics, and Refinitiv, and end-user customers like Bank of America, Handelsbanken of Sweden, the Eurex International Exchange, and Capital Group, one of the largest investment management firms, as well as Jump Trading, which is focused on algorithmic and high-frequency trading. We are also deployed in a use case where many people enjoy their coffee at Starbucks Corporation. Overall, we're pretty pleased with the customer wins in Q2, which is seasonally our slower quarter of the year. And as we build momentum, as the year matures, we're looking forward to the second half. Next slide, please. As we reported before, we like to keep our investors updated on the latest news of the overall NIC market and specifically the smart NIC market. Our goal for showing this information is to assure our investors that we are approaching a large and growing market with plenty of headroom to thrive and grow. In the latest report showing results at the end of Q1 2021, the total overall NIC market is expected to approach $2.8 billion this year, growing at about 21% year over year. This new report reiterates forecasting for 2025 of $5.6 billion. In total, the overall market over this period will grow at a healthy 19% CAGR through 2025. In this total NIC market, Napa Tech continues to be reported as a top 10 player in the overall NIC market in Q1 2021. And we continue to be viewed as a nimble specialist that has proven world-class renowned ability to serve the highest performing needs in the network application acceleration market. Focusing on the programmable NIC market on the right-hand side of the slide, It's the orange bar at the top of the bar chart. Napa Tech holds a higher ranking among the growing and evolving mix of companies here. In this grouping, there are two kinds of companies. There are the large self-build players, namely Microsoft and Amazon, who up to this point don't buy commercially, but prefer to make their own programmable NICs for their own use. And the other kinds of companies are vendors who make smart NICs for companies to buy and deploy. That's where we sit and that's where we exist in this part of the programmable SmartNIC segment. Napa Tech ranks number six among the vendors. The SmartNIC market is growing faster than the overall NIC market at 26% CAGR due to increased spending by target customers like the ones we're doing business with already and other ones that we are targeting. And they need products that we are developing and deploying. We grow in this market by winning new designs and building pipeline, growing partnerships, and expanding channels to get access to more and more customers. As we execute our product and go-to-market strategies, we aspire to approach the long-term growth rates of 30% or more per year in this area. We are also carefully tracking the progress in the server market where analysts have been reporting strong performance in 2021 so far. That's great to hear. However, they also report that demand for data center compute would have been much stronger had it not been for the semiconductor supply shortages. These analysts are seeing a strong indication that shortages in the CPU substrate materials and other components are having an impact on the service supply in 2021. We're watching this because our NIC market could be negatively impacted if our customers cannot buy servers that they need to install our products. Next slide, please. Since when I took the role as CEO of Napa Tech a little over three years ago, I promised to keenly focus on our core competencies in building software on FPGA-based SmartNICs. Also with this, we have been executing on a three-pronged strategy to grow our business, and this strategy has served us well. Just to reiterate, our plan for growth is to focus on our product strategy where one, we expand our core product revenues with new competitive features, Two, we grow new product revenues with new inline features to access new firewall market opportunities. And three, we gain traction in the fast-growing virtual use cases with addressable market needing apps deployed as a virtual instance on a virtual machine, such as in the 5G mobile or cloud and edge domains. This multi-pronged approach assures we are building core revenues on a solid foundation and expertise while enthusiastically building new revenues in areas where we think we can win. Next slide, please. Now let's go to the financial details. I'd like to turn the call over to Heine Thorsgaard to review more details about our second half and first half 2021 results.

Heine. Thank you. Slide 15, please. Revenue in USD in Q2 was up 4% compared to Q2 last year, but due to the weakened US dollar, revenue in DKK fell 5% compared to 2020. For the half year revenue in USD was up 5% compared to last year and amounted to 15.1 million. In DKK revenue in first half amounted to 93.2 million compared to 97.4 million in 2020. Gross margins in Q2 ended at 71.8% down 3.4 basis point compared to Q2 last year. Gross margins in first half of 21 with 70.9% down 1.1 basis points compared to last year. Our staff costs and other external costs in Q2 amounted to 29.9 million compared to 27.5 million in Q2 last year. For the first half of 2021, staff costs and other external costs amounted to 60.3 million compared to 61 million last year. EBITDAQ in Q2 amounted to 3.4 million compared to 9.4 million in Q2 last year. And EBITDAQ for first half of 2021 amounted to 5.8 million compared to 9.5 million in first half of 2020. Staff costs transferred to capitalized development costs in Q2 amounted to 5.2 million compared to 2.4 million in Q2 last year. And 11.6 million for first half compared to 6.2 million in first half last year. EBITDA in the first half of 2021 amounted to 17.4 million compared to 15.7 million last year and EBIT amounted to 7.6 million compared to 4 million in first half of 2020. Results for the period in first half amounted to 11 million up 8.5 million compared to first half of 2020. Slide 16 please. NIT cash flows from operating activities in Q2 amounted to negative 0.9 million compared to positive 14.7 million last year. For the half year of 21, net cash flows from operating activities amounted to negative 13 million compared to positive 18 million last year. End of Q2, net working capital was 36.6 million compared to 13.6 million end of Q2 2020. In Q2, our working capital grew 9.7 million and compared to end of Q2 last year, our inventories are up 17 million. As we've mentioned, we have proactively been sourcing components for some time due to the uncertainty around the supply chain. And this conscious choice is reflected in the network and capital levels. Net cash used in investing activities in Q2 amounted to 3.5 million compared to 2.5 million in Q2 of 2020. And for the half year, net cash used in investing activities amounted to 10.4 million compared to 5.8 million last year. Free cash flow in first half of 21 amounted to negative 23.4 million compared to positive 12.2 million in first half of 2020. Cash and cash equivalents end of Q2 21 amounted 38.3 million compared to 69.9 million at the end of Q2 2020. Now back to you, Ray.