Napatech

Good morning, I'm Heiner Torsgaard, CFO of Navatech. I'm pleased to welcome you all to Navatech's Q4 presentation. Our Q4 interim management statement was released earlier this morning on the OSE and is available on the Navatech website. For your information, a recording of this webcast will be available later today. As usual, we will answer questions at the end of this presentation. You may submit your questions via text on the webcast page, or we can take your questions on the phone. If you'd like to ask a question, please follow the instructions on this slide. Please note that this presentation contains forward-looking statements that are subject to risks and uncertainties. Our actual results may differ from those discussed in forward-looking statements. Our agenda today will cover our results for 2022, updates on our strategic efforts with key partnerships, a view of our market and opportunities, and finally, a review of our financials and our outlook for 2023. Now, I will hand over the presentation to our chairman, Lars Bøylesen.

Thank you, Heine. My name is Lars Bøylesen, chairman of NABATECH. I have also in the last year been working as an executive chairman in NABATECH. 2022 was a disappointing year as we didn't meet our financial goals. Heine will, in his financial sector later in the presentation, go into details on why we missed revenue and EBIT and other targets in 2022. However, 2022 was also a transformational year. After a very dedicated, approximately 18 months of R&D product development, we late in 2022 signed contracts with market makers like Intel, F5 and others. And 2022 ended up being a breakthrough year on our new products and probably the best year in the history of Navitek, creating the foundation for mega growth and a very strong future. for the company. I have to give credit to Jared, who has led all our efforts to these new accounts, and also to Flemming, head of IND and his engineering team, who has delivered and developed these new products. This has simply been world-class performance by Flemming and Jared. In 2022, we also took cost measures. This was done in order to increase IND investments to meet the strong pipeline backlog future business of requirement from our new partners. This trend of further investing into R&D will continue into 2003, giving the high backlog and demand we see from the market. The strategic review was concluded. We engaged a banker back in October. We received interest from many partners. The board decided to go for a strategic investment from a Tier 1 partner. This partnership will include joint product development, and Napotex technology will be included in many of this Tier 1 partner's products. Again, meaning a new building block for further growth for Navitek in the coming years. Combined with contracts with Intel and others, this strategic investment creates more value for shareholders than a sale of the company today. Just as a simple example, a single order from one of these tier one new clients can potentially double Navitek's annual production, just a single order. Jared will, in his presentation, talk more about the potential of these new deals and new partnership. The key person in convincing this new strategic partner to invest into NapperTech was our new CEO, Henrik. Henrik did a fantastic job in working together with this partner and finally also convinced them to invest into NapperTech. Therefore, I'm also very pleased that Henrik has accepted to take over as our new CEO. And I will now give the word to Henrik.

Thank you very much, Lars, for giving me this opportunity. I've been with Navitek for quite some years and I always felt privileged to work at Navitek with all our incredible colleagues. I'm very passionate about the company, employees and our relationships with customers and partners that all together form Navitek. As we're going to focus on today, Navitek has an immense range of opportunities ahead. And although there have been both ups and downs since Navitek was founded back in 2003, I'm really excited about the position we are in today. We have now not only established a very strong technology and product position, but very importantly, some great partnerships that we are going to talk more about today. Having said that, we also recognize that 2022 financial performance was far from what we expected. When we initially set out our ambitions for 2022, we did not imagine the scale of impact that NABATEC would endure from the global economic slowdown and supply chain disruptions in the form of order reductions and delays. And that is unfortunately clear reflected in our numbers. Let me make it very clear, we are not at all satisfied with our financial performance during 22. In Q4 22, we continue to feel the impact of the worldwide recession on the tech industry for many of our customers and Navitek leading to a harsh end of 22. So as most of you have probably read, The numbers are not exciting. So let me tear off the band aid and review the key figures for 22. 22 full year revenue ended at 158.6 million Danish kroner, which is decline of 19% year over year, resulting in EBITDA margin at minus 13%. The fourth quarter revenue was 33.9 million Danish kroner. That is a 38% decline compared to fourth quarter of 21. and with gross margin at 59% affected by product mix with higher than expected hardware sale and the global supply chain situation driving higher than expected cost. The fourth quarter EBITDA was negative 4.2 million Danish kroner and the EBITDA margin was minus 12%. The fourth quarter cash and cash equivalent were 12 million Danish kroner affected by high inventory buildup due to lower than expected sales in 22. However, the inventory will be reduced significantly throughout 2023 and thereby improve the cash position. We are not satisfied with our financial performance in 2022, but we strongly believe that our investment in new technology during 2022 will ensure that Nabatech stays competitive and very well positioned for the opportunities of the coming years. Let me talk about why we continue to be so enthusiastic about Nabatech and our future. by sharing some key updates about important progress in our strategy that is setting us up for a compelling 2023 and beyond. 18 months ago, NABATECH and the board of directors began the execution of a new strategy based on two important objectives, which will secure NABATECH's future position in the market. The first part was to make significant investment in our product technology to create a strong foundation and competitive position for our business in market areas like 5G network and cloud that will deliver growth in the coming years. The second part was to ensure strong partnerships with market-making industry partners that will have exceptional knowledge of technology, products, markets, and customers, as we believe this will position Nabatech in the best possible way to leverage our leadership position in the fast-growing SmartNIC domain. And to tell you more about that, I'll now hand over the presentation to our CMO, Jarrett Siget.

As Henrik mentioned, we began these efforts in 2021, where the early steps in this process included design wins and partnerships with companies like Lenovo and Acronix. Lenovo served as the initial Lighthouse customer who helped us to solidify the product requirements for cloud, telco, and mobile customer networks. Our relationship with Lenovo continues strong today, in active customer trials and is expanding beyond Asia into North America. These early but critical steps provided the high confidence that we were making the right product investments and were prerequisite steps to achieve the most recent partnerships in design wins. The first of several important mileposts that we achieved in 2022 that are further fulfilling our strategy is the completion of our agreement with Intel. This agreement helps us to achieve both of our strategic imperatives, as it strengthens our ability to make and accelerate research and development investments. It also significantly improves our sales and marketing go-to-market reach. Intel's a global leader in semiconductors, including FPGAs, as well as FPGA-based smart NICs and infrastructure processing units, also known as IPUs. Napatech and Intel have a shared focus on bringing these solutions to customers who build cloud, enterprise and telecom networks and data centers, as well as the original equipment manufacturers who serve those markets. The two companies have joined forces in a multi-year, multifaceted agreement where Napitech will extend our SmartNIC and IPU product portfolio to include hardware and software solution based on Intel's latest Xeon CPU and AgileX FPGA technologies. This agreement includes significant co-investment as well as valuable commercial terms that help accelerate Napa Tech's entry into this large and rapidly expanding market. Our new IPU platform and software will be jointly marketed and sold by both companies to targeted customers, use cases, and geographies, and be exclusively fulfilled by Napa Tech. This exciting venture unlocks a scale of opportunities that is truly transformational to Napa Tech. While we have traditionally shipped around 8,000 units per year, These new solutions initially target more than 70 prospects who individually could consume upwards of 5,000 units per year. Our recently announced partnership with AMD is another important milepost met and executing upon our strategy. This agreement also helps Napatech to expand its go-to-market by significantly extending our reach to customers and geographies beyond our current capabilities. Here again, there's a shared focus on cloud, enterprise, telecom, and OEM customers. This partnership features complete hardware and software solutions designed by Napitech. Together, targeted sales, marketing, and business development activities are focused on multiple named accounts in several global regions. The solution features Napitech hardware and software designs that deliver stunning benchmarks in terms of performance, sustainability, and total cost of ownership. While these activities have the same design win cycles, we're extremely pleased with the early engagements that are already underway. You can see this partnership working this week in the AMD booth at Mobile World Congress in Barcelona and learn more on the AMD website using the link provided in the slide. Once again, this partnership and the opportunities we are jointly able to pursue are only possible because of the software investments that we've made in our SmartNICs to meet the requirements of these modern data center networks. We're grateful that we're working closely with the top two global semiconductor providers of CPUs and FPGAs. It validates that the need for NAPA tech to provide a critical component of the complete solution to our shared customers. Another proof point of the success of our strategy is the announcement in late Q4 of a new design win with a multi-billion dollar tier one global original equipment manufacturer, F5. F5 is a leader in network and security hardware and software solutions used in telco, cloud, and enterprise networks. Their products meet some of the most demanding requirements for performance and programmability. This design win was enabled by both our research and development investments combined with our relationship with Intel. This design win features substantial annual and lifetime unit volumes, as well as valuable commercial terms and operational terms that are beneficial to NAPA Tech. The solution includes a NAPA tech smart NIC powered by an Intel FPGA. It's purposefully designed for use in standard high volume servers while boasting market leading capabilities, including 200 gigabit ethernet and 400 gigabits of performance. We're very pleased to add F5 to our increasing list of customers and design wins. Following these exciting bottoms up specific proof points, I'd like to take a moment in a wrap-up to provide a brief introduction to the market we serve and highlight the broader potential for Napa Tech. Napa Tech solutions are quite simple in that we offer one product to the market, a network interface card, or NIC. A NIC provides connectivity between the underlying network and cloud operators, communication service providers, and Fortune 5000 enterprises, and the servers that host the applications and services that both fuel their revenue and protect the assets of their business. The NIC market has a few segments. These include basic NICs that are used in a decreasing number of cases for simple connectivity, and they are not programmable. It also includes offload NICs that features some specialized functions to improve performance, but are fixed function and also not programmable. The newest high growth and most exciting segment of the NIC market is known as the programmable NIC. This segment is comprised of vendor solutions that go by many names, including smart NICs, infrastructure processing units, and data processing units. They're also made up of many technology alternatives, including FPGAs, systems on a chip, CPU, network processing unit, and others. Napa Tech, of course, is solely focused on being the leading commercial supplier of complete solutions in that programmable NIC market with our smart NICs and IPUs. The excitement behind Napa Tech is based on two important trends within the NIC market. First is the overall growth. With more than 20 million servers forecasted to be deployed by 2026, the number of NICs and their associated revenue is expected to reach nearly $6.5 billion in that timeframe. In addition to the raw growth of the overall NIC market, what's more exciting is the churn within the market, where programmable NICs, including smart NICs and IPUs, are growing faster than the market in all other segments. It is here in this critical part of modern networks where NAPA Tech solutions reside. There are new and expanding use cases emerging every day. NAPA Tech has an incumbent position in some of them and new partnerships to help us establish foothold in others. These areas include 5G mobile networking, cybersecurity, financial services, cloud and edge computing, the internet of things, artificial intelligence, and machine learning. These new market opportunities are now reachable to us because of the investments in the product and technology and partnerships that we've made, paving the way for our future success. One example that shines a spotlight on these pieces coming together is Napotech's new solution for 5G user plane function offload and acceleration. This solution is made up of several parts including Napa Tech products from our hardware and software investments over the past two years, the technology partnerships with leading FPGA semiconductor companies, the independent software vendors who developed the 5G mobile applications, and the systems integrators who bring it all together for the end users. 5G user plane functions are a series of mobile networking applications that enable the connectivity from users and their devices in the radio network, to the underlying infrastructure that helps them to reach their favorite applications and services on the internet. Napa Tech solution has customers and partners excited because it delivers metrics that allow the operators to support a massive number of users in a much lower cost footprint than competing alternatives. In conclusion, the hardware and software investments that we've made over the past few years have unlocked immense potential within the leading use cases driving the increasing demand for SmartNICs. Just one proof point is shown in the bottom table. It's a recent survey from Heavy Reading where the analysts asked 83 service providers about their plans to use SmartNICs in their 5G networks to improve the performance of their user plane functions. As you can see, 78% had solid plans and 94% were considering. Our integrated solutions now allow us to target the broader set of customers and most importantly, the ones with larger design requirements. Our new partnerships augment having the right product by making it available in the right places at the right time. On our own, Napa Tech has historically shipped around 8,000 units per year, but as a result of these new product investments and partnerships, we've seen a drastic increase, including more than 15 times the number of prospects that we've historically been engaged with, and visibility into a pipeline that's more than 40 times our past experiences. This is rooted in more than 350,000 units of demand at a very profitable selling price. These factors combined create the confidence that Napa Tech has in its future, and I thank you for the chance to share this information with you today. I'll now hand things back over in the presentation to our CFO, Heina Thorsgarden.

Nabatech revenue in Q4 was down 38% compared to Q4 of 2021 and amounted to $33.9 million. For the full year of 2022, revenue was down 19% compared to 2021 and amounted to $158.6 million. Gross margins in Q4 ended at 59%, down 13 basis points compared to Q4 of 2021. Our margins are still impacted by the extraordinarily high costs of a few specific components. Gross margins for the full year of 2022 were 57%. Our staff costs and other external costs in Q4 amounted to 28.5 million compared to 33.1 million in Q4 of 2021. For the full year, staff costs and other external costs amounted to 133.1 million in 2022 compared to 111.7 million in 2021. Staff costs transferred to capitalized development costs in Q4 amounted to 4.5 million compared to 5.9 million in Q4 of 21 Transferred costs for the full year of 2022 amounted to 23.3 million compared to 23.6 million in 2021 EBITDA amounted to negative 4.2 million in Q4 and to negative 20.1 million for the full year of 2022 compared to 23.1 million in Q4 and 52.9 million for the full year of 2021. Net cash flows from operating activities in Q4 amounted to negative 11.5 million compared to 15.2 million in Q4 of 2021. Net cash used in investing activities in Q4 amounted to 5.5 million compared to 12.2 million in Q4 of 2021. For the full year of 2022, Net cash used in investing activities amounted to 32.7 million compared to 31 million in 2021. Free cash flows in Q1 amounted to negative 16.6 million and free cash flows for the full year 2022 amounted to negative 56.7 million. Cash and cash equivalents at the end of Q4 amounted to 11.9 million compared to 39.4 million at the end of Q4 2021. Cash flows in 2022 were impacted by several extraordinary circumstances. As mentioned before, our product margins in 2022 were significantly lower than previous years. This is primarily the result of the extraordinarily high prices on a few critical components. These high prices are caused by the global supply chain challenges the industry has faced during 2022. Had our product margins in 2022 been at the level of previous years, our 2022 cash flows would have been 20 million higher. Another significant circumstance impacting our 2022 cash flows is the development of our networking capital. Due to the long lead times on components, we sourced for our 2022 production in 2021. At that time, we were expecting much higher revenues, and as a result, our inventories were extraordinarily high at the end of 2022. Had our networking capital to sales ratio at the end of Q4 22 been at the level of 2021, our 22 cash flows would have been 28 million higher. Lastly, our lower than expected sales of both our core business and new product areas, of course, impacts cash flows directly. Had our core product business been at the same level as in 2020 and 2021, 22 cash flows would have been an additional 20 million higher. In total, the extraordinary circumstances in 2022 within these areas impacted cash flows negatively with around 68 million. We expect things to normalize during 2023 in all these three areas. And with the current cash position, our operations in 2023 and beyond are fully funded. 2022 was in many ways an unusual year, but we expect things to improve significantly and normalize during 2023. We expect gradual improvements in our markets as the year progresses and expect revenue in the range of 180 to 200 million. With performance in the middle of the range, revenue is expected to grow by 20% in 2023. We expect supply chain constraints to improve during 2023, providing a positive shift in our gross margin. As a result, we expect the overall gross margins in 2023 to be back in the range of 68 to 71%. As we discussed during the presentation, we are very focused on executing our strategy to ensure we maximize and leverage our technology and product position. With the announced new large strategic agreements, Navatech together with key partners invest significantly in unlocking new market opportunities. In 2023, we are redirecting and adding new R&D resources to these initiatives. In total, we are adding 13 new R&D resources in 2023 and are accelerating our investment in new products even more. As a result, with the product-related cost in 2023, We expect staff costs and other external costs to be in the range of 160 to 170 million. With this, I'll hand over the presentation again to our chairman, Lars Boilesen.

I hope you found our presentation exciting and in particular our new SmartNIC products and our new partnership contracts. In 2023, we will be very focused on delivering more than our new clients expect. sign more new contracts in order to be ready for takeoff and mega growth in 2024 and now we are ready to answer your questions if you would like to ask a question you can submit it now on the live webcast page or you may dial one of the phone numbers on the screen and an operator will transfer your call operator do we have any calls in the queue

If you would like to ask a question please press star followed by one on your telephone keypad. If you would like to withdraw your question please press star followed by two. When preparing to ask your question please ensure your device is unmuted locally. We will now pause to allow time for questions to be registered.

Yes, we got one question in the queue here saying, do you still expect the software-only contract to be delivered in 2023? I think that was a statement made back in 2022 around a project that actually needed software as well as the hardware we sold, and that project is still very much alive. And we do have expectations for that either in 2023 or moving into 2024, but the project is very much alive.

So operator, do we have any more questions or phone-ins for questions?

No registered questions at this time. But as a reminder, that's star 1 on your telephone keypad.

There seems to be no more questions here, so I think that concludes the session.

Today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines.