Napatech

Good morning, I'm Henrik Borel Jensen, CEO of Navitek, and I'm pleased to welcome all of you to the Q3 2023 presentation. Our Q3 2023 interim management statement was released earlier this morning on the Oslo Stock Exchange and also available on the investor relations section of the Navitek website. For your information, a recording of this webcast will be available later today. As usual, we'll answer questions at the end of the presentation, and you may submit your question via text on the webcast page, or we can take your questions on the phone. And 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 risk and uncertainties. Our actual results may differ from those discussed in forward-looking statements. Our agenda today for this interim management statement includes the status and outlook for our business, and it also provides an update on the overall data center market and future opportunities for NABTECH solutions. I'll also spend time on outlining the progress in our strategic plans with focus on our investments in product development and our earlier success in partner and business development for our growth initiatives. We'll conclude with a review of our Q3 financials and expectations for the rest of 2023. I'm pleased to report that we have made progress in two areas of equal importance, our near-term business operations and our medium to long-term strategic plans. To briefly summarize here, we are on track to meet our overall objectives for the fiscal year 2023 and in some areas ahead of schedule in our strategic plan that underpins our growth aspirations. To begin, I'd like to quickly restate the three primary components of our strategic plan as the remainder of today's presentations will highlight the progress made in each of these areas. First, we continue to service our variable installed base of current customers who represent the earliest adopters of programmable SmartNIC products. Because of these innovative customers, Navitek established our position as an early leader in the market for the next generation of server networking. Second, we'll continue to accelerate investment in engineering research and development of new SmartNIC and IPU products. These investments build upon our current products, where we are extending, enhancing, and expanding both our software and hardware solutions, enabling our new SmartNIC and IPU products to meet the most demanding requirements in the projected new high growth segments. Third, we are pleased the success and traction in the first two areas has strengthened our position in the broader industry ecosystem. We are pleased to announce additional solutions and fulfillment partners this quarter that are instrumental in expanding our go-to-market reach and making it easy for customers that need NABATECH SmartNIC and IPU solutions to acquire them. With those three strategic imperatives in mind, I'm happy to share today that our development efforts, which are part of the previously disclosed collaboration agreement with INSO, remains on track. Also, our broader set of R&D investments are defined by lighthouse prospects, input, and progresses. Combined, these efforts continue to expand our sales pipeline and design win prospects, and I expect it to turn into initial product sales by 2024, leading to meaningful growth in 2025 and beyond. While we are optimistic about our growth aspirations, we are equally pleased with our short-term metrics, as we are reporting a 44% quarter-over-quarter revenue increase, making Q3 2023 revenue $7.2 million and delivering strong product margins of 73%. These results, combined with our Opportunity Pipeline and Backlog give us the confidence to reaffirm our 2023 guidance. In addition to our internal execution of our strategic plan, we continue to see many positive signs from within the industry that validate our plans and business aspirations. At every turn, we continue to see megatrends developing within the IT communications industry that are having a significant impact by driving new network architectures, requiring programmable SmartNIC and IPU products, and therefore enables opportunities for Napotech. These megatrends includes a massive list of next wave cloud service providers who are creating tailored solutions for targeted enterprise customers, copying the SmartNIC and IPU architecture deployed by the hyperscale cloud operators. It includes telecom operators deploying new core and edge networks by advanced 5G services, private 5G networks. for an infinite set of emerging IoT use cases. It also includes cybersecurity demands that are always pervasive. We see new verticals continuing to emerge within the fintech and financial services, as well as storage and content delivery. And the rapid ascent of artificial intelligence applications and utilizations is unlocking a massive new demand for servers powered by SmartNIC and IPU products. In total, this is a long time since so many changes have impacted the way organizations are designing their networks. These megatrends play a direct role in the significant growth forecast in the market that NABATEC are now capable of targeting. Today, programmable NIC products are known by many names, including smart NIC and infrastructure processing units, or IPUs. But regardless of the name of the programmable NIC They all aim to solve the biggest problem facing new networks architectures that require acceleration of the most burdensome workloads running on the servers. The networking, storage, security and virtualization functions are critical components of the next generation network design. But at the same time consumes a large amount of the most valuable resources in the server, the compute resources delivered by the CPU. Navitek SmartNIC and IPU products deliver a complete solution of hardware, software and support in a production-grade solution that return those valuable compute resources to the application and services that generate the real profit for the network operators. When Navitek provides our programmable NIC, we uniquely enable IT organizations of every size to achieve the performance, business and sustainability benefits that were previously only available to a small number of the largest hyperscale operators. In support of these megatrends, NABATECH in September was pleased to share with the world the launch of our first ever IPU product. An IPU is a programmable NIC like NABATECH's other smart NIC products, but even smarter. In addition to the powerful FPGA technology, The hardware also includes a high-performance Intel Xeon CPU. This Navitek F2070XIPU was developed in collaboration with Intel and is the first and only production-grade 200 gigabit IPU based on the Intel OakSpring Canyon architecture. It is purpose-built for cloud, enterprise, and telecom customers and includes software solutions for highest growth use cases. We'll talk more about our Intel collaboration and the new IPU product later in this presentation. I'd like to provide an update on the programmable NIC market as it provides insight into both our short-term expectations and long-term aspirations. As I've mentioned several times, programmable NICs are known by many names, including Accelerator Card, Intelligent NIC, Smart NIC, data processing unit, DPU, and infrastructure processing unit, IPU. But regardless of the name used by a given vendor, analyst, or press, one thing remained consistent. An increasingly uniform forecast from experts that programmable NICs will play a critical role in networks of the future. A special note this quarter, several trusted sources increased the forecast of the future. amplified new market insight, and initiated new coverage. And I'd like to share a few with you here. Rihanna Research noted that IPU and DPU revenues tripled in first half of 2023, primarily by demand from early adopter hyperscale operators who built their own solutions. Moving ahead, they forecast significant growth with demand expanding from general IT organizations expected to be served by vendors like Napotech. The Delora Group also provided new market guidance that validated many key points behind Napotech's strategy and aspirations. Like Crehan, they noted an increased set of opportunities for off-the-shelf vendor-built solutions, and the smartNIC continued to cannibalize legacy basic NIC demand. combined the smartNIC market is forecasted to grow at a 42% target through 2027. Omdia also provided the latest quarterly market update echoing the same trend that programmable NIC make up most of the revenue growth within the NIC market and programmable NIC increasingly cannibalize all other forms of NICs previously available in the market. At the same time, Omdia also notes that there still exists a significant server market volatility driven by macroeconomic headwind and predicts that the trend scenes in first half of 2023 will continue rest of the year and even into 2024. Finally, API research initiated coverage of the IPU, DPU and SmartNIC markets. Their report analyzed top suppliers of SmartNIC solutions and included Navitek among the leaders in both innovation and implementation. What shines through these recent reports is that the programmable NIC market is proven and established within the early adopter hyperscale cloud operators. Hyperscalers have previously built their own solutions but are increasingly open to merchants' ventable solutions. Further, the market is opening for non-hyperscale buyers like in tier two cloud enterprise and telecom networks who will buy from merchant vendors like nabatech so although it's still early days nabatech has uniquely established our position and we are one of the leading players outside of hyperscale buyers this is a key point behind our strategic plan and the initiatives we undertake with intel to leverage this market-leading position combined with our history to deliver equivalent solution to the broader market as the mentioned megatrends unfolds. On this slide, I'd like to expand upon our Intel journey a bit further. In the first half of this year, we disclosed part of our strategic plan to take advantage of Intel's market-making position behind programmable FPGA-based SmartNIC and IPU products. As a very important stepping stone to this partnership, Our new SmartNIC and IPU product offerings were launched globally in September during the Intel Innovation 2023 event in Santa Clara, California. I'm also pleased to report that all our hardware and software development efforts to create Navitek's first Intel-based IPU product are on track, allowing us to begin accepting orders today and ready for first customer shipment by December of this year. The partnership combines the premier technology from Intel with the Navitek competencies in product design, development, delivery service, and support that the end customers require. During the first three quarters of the year, we have begun joint sales, marketing, and business development efforts that are yielding early progress somewhat ahead of the plans we envisioned at the start of the year. These business activities unlock new prospects for Navitek that are projected to drive demand into the coming years on a scale that could be transformational for our business. Intel's selection of Navitek is an indication of Intel's commitment to expanding their leadership in infrastructure processing in data center networks. As part of the launch, Intel noted, Navitek's IPU can help deliver the scalability and high performance products, solutions, and services customers require to make their cloud enterprise and data centers more efficient and cost-effective with high feature velocity. While we are still relatively speaking early in a long design win process, we are seeing many signs of progress and success resulting from our collaboration with Intel. Of note, beyond IPUs, we also launched our first two Intel-based smart NICs, which are several customer design wins, including our previously disclosed design win at F5 where we anticipate sales beginning in 2024. While we have launched three new products based on Intel technology during 2023, I would like to call special attention to the recent global launch of our first infrastructure processing unit or the IPU. The Navitek F2070X is the industry first and only 200 gigabit IPU powered by Intel technology. Our IPU mimics the product and technology architecture that is used today by several INSUL customers in the form of the INSUL application development platform, also called ADP. The NABATECH product commercializes the ADP solution and make it available to IT organizations of every size. So now data center operators from enterprise, telecom and tier two cloud networks can have all the price, performance, sustainability, and evolutionary benefits that were previously only available to hyperscale networks but in a simple and easy to consume solution from naptek naptek has benefited greatly from the collaboration with intel including the previously disclosed development agreement and related joint sales and business development activities supporting our design wind pipeline growth naptek was also pleased to participate in the global launch of our new ipu product during the Intel Innovation and IFTT event, held in September 2023 in Santa Clara, California. Navitek product, technology, and solutions were included in numerous presentations and sessions conducted by Intel, reaching thousands of in-person attendees. And our solutions continue to be promoted heavily by Intel and Navitek. And more information on this exciting new product can be found on both the Intel and Navitek company websites. Finally, I'd like to share that we are pleased that we continue to expand our partner ecosystem for solutions completion that includes Navitek products. These type of partnerships place an invaluable role in Navitek's achieving our growth ambitions. While the first and critical part of our strategic plan is to develop products that align with the high growth market segments, the second and equally important part of our strategy is to be able to deliver these products to customers who need them by aligning with their purchasing behavior. These partners provide many key functions like application software, servers, and the system integration to form the final solution for the end customer. They also have an important direct relationship with the end customer that Labatech may not have. The partnership activities including joint sales, marketing, and optimization of timelines around proof of concept, trials, and the overall design cycle is also important. In many cases, it also includes fulfillment in a way that is acceptable to the customer. In total, these partnerships play a crucial role in the pipeline development, fueling our growth ambitions. The partnership we announced in the first half of the year include those activities with leading server manufacturers like Advantech, Contran and Jabil. These are manufacturers who the end customers traditionally do business with, consider Navitek's part of the solution imperative. We also announced partnerships with two of the most recognizable 5G software companies, A5G and Druid, who provide the software applications that power the 5G core networks. Finally, we have announced the partnership with Databento and Orthogon, companies that have developed software that requires SmartNIC to accelerate their financial service applications. Today, I'm happy to note that we expanded this list in Q3 with Dell Technologies and Lanner. These two global suppliers of servers and systems integration services both aid in fulfillment of end users and simultaneously validate the benefit of our solutions. I'll now hand over the presentation to our CFO, Heine Torsgaard.

Thank you, Henrik. Revenue in DKK in Q3 was up 34% compared to Q3 last year. In USD, revenue was up 44%. For the first three quarters, revenue in DKK was unparalleled last year and amounted to 124.6 million. In USD, revenue for the first three quarters was up 1% compared to last year and amounted to 18.1 million compared to 17.9 million in 2022. Gross margins in Q3 ended at 78%, up 29 basis points compared to Q3 last year. The overall gross margin in Q3 is impacted by revenue from our large NOE project. The gross margins of our product revenue in Q3 was 73%. As this margin shows, the extraordinarily high component costs resulting from the supply chain constraints we faced in 22 are now behind us. and our product margins have returned to their historic levels again. The overall gross margins for the first three quarters of 2023 was 71% compared to 56% for the first three quarters of 2022. Our staff costs and other external costs in Q3 amounted to 32.1 million compared to 31 million in Q3 last year. For the first three quarters of 23, staff costs and other external costs amounted to 104.8 million compared to 104.6 million last year. As communicated at the beginning of this year, we are redirecting resources towards our new strategic development projects and are adding R&D resources to accelerate investments in our new products even more. As part of this, we implemented some cost cutting initiatives earlier this year and are now in the process of adding engineering focused resources. EBITDAQ in Q3 amounted to a positive 6.6 million compared to a negative 12.7 million in Q3 last year. EBITDAQ for the first three quarters of 2023 amounted to a negative 8.4 million compared to a negative 16 million for the first three quarters of 22. Staff costs transferred to capitalized development costs in Q3 amounted to 1.3 million compared to 5.8 million in Q3 last year and to 8.4 million in the first three quarters compared to 18.8 million in the first three quarters of 2022. The results for the period for the first three quarters of 2023 amounted to a negative 0.6 million compared to a negative 12.7 million in the first three quarters of 2022. Net cash flows from operating activities in Q3 amounted to a negative 7.8 million compared to a negative 14.7 million last year. For the first three quarters of 2023, Net cash flows from operating activities amounted to a negative 5.8 million compared to a negative 12 million last year. Net cash used in investing activities in Q3 amounted to 1.5 million compared to 7.8 million in Q3 of 2022. And for the first three quarters, net cash used in investing activities amounted to 10.2 million compared to 27.3 million last year. Free cash flow in the first three quarters of 2023 amounted to a negative 18.8 million compared to a negative 40.1 million in the first three quarters of 2022. Cash and cash equivalents at the end of Q3 this year amounted to 44.2 million compared to 27.9 million at the end of Q3 last year. Our annual guidance for 2023 remains unchanged. We expect revenues in the range of 180 to 200 million DKK corresponding to a growth rate of 20% in the middle of the guided range. And we expect gross margins for the year to be in the range of 68 to 71%. With performance in the middle of the guided ranges, EBITDA will be negative 10.5 million. Now back to you, Henrik.

And now we are ready to answer your questions. If you'd like to ask questions, you can submit it now on the live webcast page, or you may dial one of the phone numbers in the screen and an operator will transfer your call. Operator, do we have any calls in the queue?

Thank you.

It seems we don't have any calls in the queue, but I got one from the text here. It goes like, can you please elaborate a bit more on F5? How is RAM going? And have you received product forecasts for 2024? And yes, I can do that. So we are actually doing quite well with F5 integration testing and these kinds of things between our companies and also at F5 is going on, going well. And we have actually received forecasts for both 24 and beyond that meets our expectations we set out initially when we started our business journey with F5.

I hope that answered the question.

We do not have any more questions in the queue. Therefore, we conclude today's call. Thank you very much for attending today and have a great day.

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