Napatech

Good morning, everyone, and welcome to the Napatech Q1 2025 IMS. My name is Carla, and I will be your moderator today. If you'd like to ask a question and you have joined us via the phone lines, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by T. For those of you who have joined us on the webcast, you can submit a written question. I would now like to hand you over to the CEO of Napatech, Lars Borleson, to begin. Lars, please go ahead when you're ready.

Good morning. I'm Lars Borglundsen, CEO of Napatech. I'm pleased to welcome you all to the Napatech presentation for the first quarter of 2025. Joining me today is our Chief Financial Officer, Heine Torsgaard. Our first quarter 2025 report was released earlier this morning on the Oslo Stock Exchange and is also available on the Napatech website. For your information, a recording of this webcast will be available later today. Slide two, please. There will be a question and answer session following the presentation. During and after these prepared remarks, you may submit your questions via text on the webcast page, or we can take your questions on the phone. If you would like to ask a question, please follow the instruction on this slide. Slide three, please. 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. Today's agenda will cover four areas. First, we will provide a business status for the first quarter of 2025 with focus on the major news items that show promising signs of progress by Napatech towards achieving our goals to transform our business. Next, we'll provide a market update that shares information about the opportunity ahead of Napatech. We will then shine a spotlight on some of our most recently announced wins and how those will positively impact our business in the future. We will then provide detailed summary of our first quarter financial results. Finally, we will conclude with a question and answer session open to the attendees of today's call. Slide five, please. We have made considerable strides in the important mileposts of our strategic plan that strengthen our position as an earlier leader in the new and evolving mass market for advanced NICs. This includes both improving our core business and making measurable progress towards our design win goals that underpins our growth aspirations. This has gone according to plan. and in some areas ahead of our expectations. As we compare our position to just one year ago and today, we find ourselves in a much stronger position with new transformational design wins. Slide six, please. To begin today's presentation, I would like to provide a summary status of our business, sharing a few notable items and highlights. We will go into each of these items in more details in the financial update later in the presentation. Our first quarter results include revenue of 3.4 million US dollars, an increase of 8% over the first quarter of 2024, with a healthy gross margin of 70.3%, as expected and within our guidance. We also have visibility into Q2, and we are pleased to see that it's trending toward an increase of 40 to 50% over Q2 2024. One year ago, we announced a design win with Intel Altera and a Tier 1 server OEM to build a next-generation solution to their specification for high-volume use cases, as well as the general market. I'm glad to report we consistently met the hardware on my post ahead of plan and exceeded their expectations. The final product has been delivered and accepted by the client. We are very involved in the next stage of their process, which includes development and integrations of key software to meet their requirements. We are excited that our efforts today have resulted in expanding our cooperation into six use cases and opportunities across the tier one manufacturer, all of which represent potentially transformational unit volumes to Napotech. We are equally excited today to share more information about our latest high-volume design win with D-Matrix, a leader in artificial intelligence inferencing for hyperscale cloud, next wave cloud, and enterprise data centers. Our Intel Altera programmable NIC provides the AI infrastructure that enables D-Matrix to deliver efficient ultra-low latency distributed inferencing to many servers. Their customers get the benefit of deploying an industry-standard Ethernet-based scale-out solution to take advantage of D-metrics, blazing fast inference speeds, all at massive scale. We have also recently disclosed other winning solutions across an array of applications and services by leading companies in their respective vertical markets, including a cybersecurity solution with Rorcom Symantec, a network and server infrastructure solution with Identicom, an artificial intelligence solution with Celera for ultra-low latency transition in financial service markets. These are all examples of Nabatech expanding its business to large or high growth segments that require our programmable NICs. And finally, we are inspired by these early success that are far ahead of the pace we could have envisioned one year ago. Additionally, new companies with application and use cases are emerging regularly, expanding our pipeline of opportunities. Our partnership with Intel Altera continues to exceed our expectations and play a critical role in our strategy and success going forward. Slide seven, please. In this next section, I would like to share an update on our market and how it is positively being impacted by artificial intelligence. Artificial intelligence is not just the boss in the present, it is the future, and it is the majority of the future. AI begins inside of one processor in one server, but it only achieves its goal while working among an array of processors together across a neural network. connecting at very high speed over secure links with ultra-low latency that are highly dynamic and able to evolve quickly. In other words, networks that think. You will come to see in the next section why we believe Napatech's advanced networking cards, co-created with market maker Intel Altera, are the leading solution to power these new networks. Slide eight, please. There is a generational change happening in the way networks are built, and it's happening now. As shown in the center of the slide, it is a data center of racks of servers. Rows upon rows of these racks makes up the massive data centers that exist, many of them the size of football pitches. Over a long 25-year evolution, these standard servers with basic network cards provided best effort access to services like websites, email, and remote storage of files. These things were measured in speeds of 1, 2, 10 gigabits and the world was relatively static. And now, what was a 25-year evolution has given way to a near daily revolution with the network required to deliver time services. New artificial intelligence applications, along with cloud services and 5G mobile access, have caused these networks to change daily to support billions of users and devices in real time at blistering speeds without delay. And Navatek sits in the eye of storm of change that is happening right now. Slide nine, please. At the center of this revolution are the servers and the network that connects them together. The basic networking costs are now obsolete. These are three core problems with the previous architecture. First, the processor used to deliver new AI, cloud, mobile, and other services have stalled. They are suffocated with networking and security tasks greatly reducing the CPU capacity that needed to provide the new services. Further, CPUs now deliver decreasing generational improvement. Each upgrade cycle deliver less improvement to help solve these problems. Second, the basic network cards are now obsolete. They were never designed to evolve and adapt on a daily basis or handle the complicated requirements of modern network designs. Third, these issues have combined to cripple the data centers. They create unavoidable escalating costs and constraints related to space, power, cooling, and overall scalability. The largest data center operators who have launched these new services have already encountered the problems we just described. Research from Google and Facebook has shown that up to 80% of the server capacity is wasted. Basic network cards cannot fulfill the AI vision, and a new solution is needed to build modern data centers focused on AI cloud and mobile services. Slide 10, please. The solution is to replace the basic server network card with an advanced network card. This innovation has many names ranging from smart NIC, intelligent NIC, accelerator card, offload card, data processing unit, infrastructure processing unit, and more. But despite many names, they have one thing in common. They are designed to replace the basic NIC and fix the processing, networking, and scalability issues. Advanced NICs being three important improvements to the data center and servers. First, they fixed the server CPU processing problem by offloading and accelerating the networking, security, storage, and other burdensome tasks from the CPU to the advanced NIC. This significantly increases the performance of the server and those tasks. while at the same time returning the cpu resources to the core function of ai cloud and mobile services second the advanced nic is fully programmable enabling the data center to reconfigure itself on a daily basis to respond to changes in technologies new application new services unforeseen problems and new cyber security threats third The increased networking performance improves CPU capacity, creates significant better service performance, and dramatically reduce power, space, and cooling requirements, and enabling the data center to expand as needed to meet the new demands. Slide 11, please. Advanced network cards are widely used today by the largest data center operators known as hyperscaler cloud operators. They were the first to deploy AI cloud and other advanced services and ran into these issues. Lacking a merchant solution, they deployed massive software and hardware engineering resources to build their own advanced NICs and deployed more than 12 million units last year. It is important to note that Intel Altera helped to make this market and is deployed in seven of the eight largest data centers globally as a semiconductor partner on the hardware side to these hyperscalers. Today, as large enterprise telco operators and tier two regional cloud providers accelerate the adaption of AI workloads and cloud native infrastructure, they are facing the same networking challenges as the top eight hyperscaler cloud operators. Unfortunately, these next wave users must solve the same problem without having hyperscalers level hardware and software engineering resources. This creates the urgent demand for immersion-based programmable high-performance advanced network cards to bridge the gap. As the primary provider of an engineering solution to hyperscaler operators via component sales, Intel Altera has partnered with Napotech to deliver a solution for the mass market. Based on Intel Altera's proven winning hardware and software design, that is widely deployed in the largest early adopters hyperscale networks. Napatech is uniquely positioned to deliver the turnkey production grade complete solution to the IT buyers in the mass market. Slide 12, please. As demand for more AI, cloud and mobile services continues to grow, an increasing number of servers are in demand, with more than 20 million a year being deployed by 2029. These servers require connectivity from network interface cards, and it's clear that advanced network cards are the future for data centers of all sizes. The hyperscale cloud networks have all moved on from basic NICs and consequently they consumed more than 12 million advanced NICs last year. They will continue to do so and their demand will grow to a nearly 11 billion dollars in the next five years. Equally important, as the next wave of data centers raises to deploy similar AI, cloud, security, mobile, and other services, this mass market opens up for immersion providers like NABATEC and Intel Altera. This greenfield growth is anticipated to approach $6 billion by 2029 and follow the same growth that fueled the hyperscale market in earlier years. Further, now with the merchant solution available for advanced NICs, some hyperscale demand will shift to a merchant solution versus custom component design. The transition window is opening now for advanced NICs for merchant suppliers to be the next wave data center that make up the mass market. They are expected to be the fast-growing segment of the network interface card market over the next five years. Slide 13, please. There is no shortage of application services within the mass market data centers driving their demand for advanced NICs. They include high volume designs for cloud and artificial intelligence. It also includes business critical applications like cybersecurity and financial service. And it also includes advanced network infrastructure like 5G mobile infrastructure. Slide 14, please. These megatrends create the opportunity for Napatech. As shown in this inside-the-box view of a server, Napatech advanced NICs plays a crucial role in modern data centers' server designs. Our product provides the access from the outside world to the CPU and GPU resources that deliver the AI cloud, mobile, security, financial, and other critical services. Our advanced NICs ensure that these servers can deliver those services at the optimal mix of price performance space and power for the data center operator. Slide 15 please. A unique aspect behind Napatech's business model is an innovative go-to-market model that lowers our operating expenses and increases the scalability of our business. Napatech and Intel Altera have partnered to deliver advanced NICs to the mass market. This partnership brings four valuable points to Napatech. The first is increased volume. While NABATECH have been building AdvancedNIC for nearly 20 years, our solution has historically targeted critical but smaller niche applications with lower growth. This resulted in a stable business that drove 5,000 cards per year. The Intel Altera hardware and software designed for hyperscalers is now also addressing the mass market. The application and services addressed by their enhanced design now enable Napatech to target a new set of customers and use cases that are transformational in scale for Napatech, oftentimes requiring 1,000, 5,000, 10,000, 25,000, or even 50,000 cards plus cards per data center per year. Next, we can scale our reach beyond what we could have done on our own, limited by size, geographic, and cost. As a part of our partnership, Intel Altera does a significant portion of the sales, marketing, market creation, and business development, bringing Napatech into many opportunities who have already embraced the solution and are looking to Napatech to fulfill their demands. Further, as a consequence of Intel Altera's desire to strategically develop the mass market based on their hyperscale success, they have granted NABATEC access to the latest CPU and FPGA technologies, creating incredible first-mover advances ahead of other companies looking to enter this rapidly emerging market. And finally, the partnership requires frequent engineering collaboration throughout the joint product developments. We gain high confidence, technical guidance from Intel Altera's proven hardware and software solution that significantly de-risk our product roadmap and engineering designs. Slide 16, please. While this unique partnership with Intel Altera has been two years in the making, the products and solutions have largely only been in development over the past year. In this next section, I would like to share with you both updates and news related to just a few examples of the success and the potential we see from our new solutions. Slide 17, please. The first is an update on the work with the global tier one server manufacturer. The design is anchored in an innovative hardware platform that includes a 400 gigabit advanced NIC. This is branded as a smart NIC with the name N3070X. It includes the ability to add an optional CPU, turning it onto an infrastructure processing unit or IPU. We offer the IPU in two configurations optimized for servers of different sizes. These hardware programs we develop at an incredible pace and met each critical milepost ahead of schedule, exceeding expectation of all parties. As the hardware projects mature towards the end of the year, the teams began the parallel work on many of the key software requirements around network storage and security offload and acceleration. This will allow development of the customer solution for the use cases to begin on the hardware throughout 2025 and beyond. During these successful stages, we were pleased to expand the opportunities from one initial project to include six total opportunities spanning use cases, including AI, cloud storage, data content reduction, cloud tenant services, 5G mobile infrastructure, and more, all across six business units within the Tier 1 server manufacturer company. Slide 18, please. This week, we were excited to disclose the details of a design win with DMetrix, the creator of Corsair, the world's most efficient artificial intelligence computing platform used for inferencing in data centers. Inferencing is the cornerstone of artificial intelligence. It transforms the knowledge from trained models to create predictions, decisions, and insights that are practical and beneficial in real-world applications. There are several things that underpin our excitement about this design. It is in a very hot space of artificial intelligence. It is a strong validation of everything we are doing in our partnership with Intel Altera. And it is an advanced NIC solution for AI infrastructure in the AI data center backend network. And as such, it is an extremely high volume deployment with the potential for 25,000 or more units per year once in peak production. The product D-MATRAC selected is the same product NABATEC built for the Tier 1 server manufacturers shown on the previous slides. This particular design included a master supply agreement with five years of product availability, volume commitment, and an NIE fee for the work related to the software to power the solution. It's fair to say that D-MATRAC has spent a long period researching the market of programmable smart NICs before they finally selected NABATEC as their preferred solution for the future smart NIC. We have included several public quotes from leading industry experts to highlight the significance of this news. Slide 19, please. We also recently announced a new solution for data loss prevention and application from Broadcom Symantec that is used for cybersecurity, regulator, and compliance. The new design elevates data loss prevention, DLP, to new levels in enterprise and cloud data center networks. This innovative solution empowers businesses with robust defenses, greater insight and faster recovery, ensuring the integrity of critical data remains uncompromised. The software application runs on a standard server. It scales to a limited range of performance when a basic NIC is used, but it's turbocharged to 5-8x performance when the basic NIC is replaced with a Napatech Advanced NIC. Slide 20, please. We also introduced a new solution for critical infrastructure with IDETICOM. The data center solution powers by Napatech are available to cloud enterprise and telecom customers in the general mass market and are being used in a joint collaboration with one of the opportunities at a tier one server manufacturer. Identicon is a pioneer in scalable and high performance software for compute intensive infrastructure workloads in a mission critical networks with specialization in cryptographic acceleration and transparent compression. Both technologies are important ingredients in modern data center designs. Slide 21, please. In one last example from recent news, we announced another design win with Celera. Their artificial intelligence solution targets the financial services industry high frequency trading environments. Financial institutions increasingly rely on AI and machine learning models to analyze vast data sets and execute traits. However, traditional server architectures often introduce latency and throughput bottlenecks that hinder real-time decision making. In high stakes trading, even nanoseconds can translate to significant financial gains or losses. By combining Celera's leading software with Napatech, financial trading desks can significantly reduce AI inferencing latency. Slide 22, please. Our recent design wins begin to show the potential transformational impact on our business in terms of unit volumes. While design win takes time to ramp and reach peak production volumes, and there is always risk, these early results exceed our expectation from a year ago and give us confidence our strategy is aimed in the right direction. With this quarter's latest design wins, we are adding 10,000 to 20,000 units, bringing the accumulated number up to 70,000 to 80,000 units in annual volume under peak production. Slide 23, please. Based on our design win pipeline and initial wins, we gain additional confidence in our financial outlook. D-Metric is expected to drive volumes already in 2026, and as a consequence of this and other wins, this will help us to double unit sales in 2026 and even further significant growth in 2027. We expect to maintain strong margins and high volume going forward. We also see that we have delivered ahead of time to Altera and their Tier 1 server manufacturer. We also expect to keep OPEX in the coming years at the same level as 2025. This is due to the fact that we already have delivered the 400 gig product to Intel Altera and the tier one server manufacturer. And in addition, we are going to deliver to DMATRIX with the existing organization. Finally, we expect to reduce our networking capital due to new models taking orders before incurring expenses. We will go more into this in the next section. And now I would like to go to the financial section. I would like to give the word to our CFO, Heiner Torsgaard.

Thank you, Lars. Slide 25, please. Revenue in Q1 in DKK was up 11% compared to Q1 2024 and amounted to 23.8 million. Q1 revenue was in line with our expectations and with the significant pickup in activities we've seen so far in Q2, we believe that we are now seeing the signs of improvement in the market we've been waiting for. The gross margin in Q1 was 70.3%, also well placed within our normal range and in line with our expectations. Our staff costs and other external costs in Q1 amounted to 48.9 million compared to 40.6 million in Q1 of 2024. Increase is the result of our strategic R&D investments and follows the plans we've communicated. EBITDA in Q1 amounted to negative 29.1 million and EBIT amounted to negative 35.5 million. Next slide, please. Net cash flows from operating activities in Q1 amounted to negative 25.7 million and net cash used in investing activities in Q1 amounted to 3.7 million. Free cash flows in Q1 amounted to negative 29.4 million compared to negative 5.4 million in Q1 last year. At the end of Q1, our cash and cash equivalents amounted to 34.6 million compared to 27.5 million at the end of Q1 2024. Next slide, please. As illustrated in the bar charts to the right of this slide, our net working capital has had an unfortunate development over the past five quarters. This has been a significant focus point of ours, and we've been actively working on strategies to address it. The development primarily occurred due to sourcing decisions we took in 2022 when our supply chain was still impacted by the effects of the COVID days, and we sourced components to meet sales that didn't materialize in 23 and 24. The result of this is very clear in our inventories, and it's the reason why our net working capital is too high at the moment. And for the same reason, we've planned and implemented several improvement and initiatives aimed at reducing our net working capital over the coming quarters. Looking ahead, most of our anticipated new growth business will be based on large volume customers where products are produced to order. In our historical based business, on the other hand, we've been building to stock based on forecast and on our own estimates. This shift from forecast-based to order-based manufacturing will help us manage our inventory more efficiently going forward and reduce our stock levels significantly. Additionally, we are working with key partners and suppliers to optimize payment terms for components and manufacturing. This, in addition with optimized payment terms from our customers will help us manage our networking capital more efficiently. We believe we'll be able to increase our unit volumes significantly and at the same time bring down our networking capital. With this, I'll turn the presentation back to you, Lars.

Thank you, Heine. This concludes today's prepared materials. We will now open up the call for any questions that may exist from our attendees.

Thank you, Lars. We will now begin the question and answer session. If you'd like to ask a question, please press star followed by one on your telephone keypad. If at any point you would like to remove yourself from the queue, please press star followed by two. When preparing to ask your question, please ensure your device is muted locally. While we wait for the questions to be registered, I will hand over to Lars.

Thank you. Yeah, before we stop the Q&A, I just want to let the audience know that We have announced a capital increase this morning of minimum 150 million NOC. And we also announced that we have pre-commitment above that amount. So I just want to make sure that everyone on the call is aware of that. That was not part of our presentation this morning.

Thank you. And our first question comes from Christopher B. Johnson with D&B.

Yes. Hi, good morning and thanks for letting me on. So just wondering on the volume outlook you had on slide 23, can you maybe help us unpack a bit like how much of that is coming from the matrix and how much is coming from other opportunities? Because our sense is that, you know, given the potential customer line of the matrix,

they could cover that 26 and 27 outlook alone right so just trying to think about the upside from those those numbers as well as some of these other big opportunities materialize i guess yes um so obviously um what's really interesting with d matrix if you start with them is that they are providing a inferencing back-end network for AI, and this is relevant for particularly players in the AI space, which have huge networks. So the volume on AI inferencing is very, very big. So it's very hard for us to estimate what it will be, but if you look at the 26, then obviously The majority of that is coming from D-Metrics since they are going live in 26. Why is the number like it is? It's very hard for us to estimate. So we have tried to be conservative on D-Metrics there. And we have, when it comes to other... The TS Server 1 manufacturer, we also try to be conservative. So we have only included development units for qualification, et cetera. So that's the reason for that number. In 27, then we are in peak production on several accounts, and that's why the number there is higher. It's very hard to estimate. We very much have a big market in front of us, and we just try to be relatively conservative on the forecast we get from our clients, and that's what we put in.

Great, thanks. And then just a quick follow-up on the working capital commentary. So you noted that you'll move tomorrow, like... manufactured to orders or what you call this. Can you just help us understand the lead times there from when you get an order to when you can deliver? That would be helpful.

Yeah, so these products, they are already there. If we get an order, we can manufacture that very quickly in... in one to two months. And so if you get longer credit days, then you can ship everything before you have to pay and the suppliers. And there's also opportunities to get consignment from some of the biggest supplier we have.

All right, thanks. That's all.

Thank you, and our next question comes from Oystein Elzel Lundgaard with ABJ.

Good morning. A few questions from me as well. So starting on the slide 22, where you talk about the design win pipeline, there you say, in the growth business, as you call it, 10 to 20K new design wins in 2025. Is that only the ones that you have won so far, or does that include additional design wins this year? Because the reason I'm asking this seems a bit low if you expect more desirability this year, given the potential with the matrix alone.

It's very related to the matrix and like the questions before from Christopher, then we just try to be relatively conservative in estimating this. There are other things in there, but we have been very conservative on, for example, the tier one.

server manufacturing in 25. i see and this is a these are these are peak production volumes remember that yeah of course of course uh and in terms of the the 27 guns of 32k units the to what degree does that include volumes from the server manufacturer given given what you yourself expect that to contribute more long term?

That includes good numbers from the tier one server manufacturer, probably not peak production, but good numbers from them and also significant numbers from D-Metrix. And then we have not included so much other clients there. What's interesting is we're still working towards a market which is just evolving. So we try to only estimate clients which we have announced. We do have a very interesting pipeline and many of them will hopefully contribute in 27 for sure, but we are not including those.

Very clear, thank you. In your presentation you stated that you expect effects to remain at the same level as in 2025, but on the slide you're guiding for it to decrease somewhat from 2025 level into 2026, 2027. Could you please just clarify around that?

Sure. So we had some very big deliverables in 2025. We have now completed and our deliverable to the tier one server manufacturer has been accepted. And this is a product that will be our flagship product for a long time. And as you can see on the slide with the tier one server manufacturer, you can see we have a SmartNIC, we have an IPU, and we also have a sandwich model. So most of our pipeline now are are basically testing that product.

D-Matrix is a very good example. They selected the SmartNIC version of the deliverable to the tier one server manufacturer.

So we see that obviously we still have very ambitious roadmap. We have people working on that, but we do not have, we have delivered on time and we see that we can deliver most of it. with the existing organization. So we do not have the same number of consultants in the company as we had two months ago.

And this is the reason for it. If we suddenly get new projects, most likely we will get paid for that, for NAE work, etc.

Then we will add on OPEX again through consultants. But right now we We estimate that we have sufficient resources to deliver things we have on our roadmap and clients we see because most of them are basically testing with our latest product launch to the tier server one manufacturer. And as you could see that D-Matrix, they selected Napatech among lots of competitors and the product we already delivered, we have in the market, has been accepted by the tier one server manufacturer that is the leading product in the market now. So we do not foresee that we have to increase OPEX. And it's also something to do with the world-class engineering organization we have in Copenhagen. We're not a startup. We have 20 years experience in hardware and software building the most advanced smart mix products in the market. And we have done that over the last 20 years with a small organization that we have today. So we are well equipped for new features, et cetera, with the existing organizations. We don't expect OPEX to dramatically increase.

Perfect. Thank you very much.

And just as a reminder, I want to ask a question. And as we have no further questions on the phone lines, I will hand back over for the webcast questions.

There is a question here for you, Heine, if you can answer that. Could you please elaborate your net cash position eventually, credit facilities going forward?

Yes, of course. Thank you. So as commented, our cash and cash equivalents at the end of Q1 was at 34.6 million. And we going forward, the way we are structured with our credit facilities, as we have some facilities with our bank in Denmark and with a bank in the US, it's variable credit facilities that some part of it has been guaranteed by a public investment fund in Denmark and due to some legal changes with reasons to that fund going forward from later this year this guarantee credit facility is terminated if they continue that would be in violation with the EU regulations so going forward some of our credit facilities will be adjusted downwards in the range of like 10-15 million DKK But the other facilities we have with the Danish bank and the US bank will remain unchanged. And we are continuously in dialogue with our bank to optimize our facility going forward. I think that would answer the question, hopefully. Otherwise, please reach out to me and I'll be happy to give additional details. Thank you, Lars.

Yeah, I think there is no further questions on the webcast.

And just as a reminder, is there one to ask a question on the phone lines? We currently have no questions in the queue, so I hand back over to you, Lars, for any final comments.

Yeah, so I think just to sum up, so finally, is that with the estimates which we discussed now on the call and the answer from Heine and with this upcoming capital increase, we hopefully, we expect this to be our last capital increase in the future of the company.

Thank you, everyone. This concludes today's call. You may now disconnect.