Elliptic Laboratories ASA
OSE:ELABS
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Elliptic Laboratories ASA
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Hi. Welcome. This is Laila Danielsen, the CEO of Elliptic Labs. Joining me is our CFO, Lars Holmøy.
I'm pleased to share our Q1 2023 report to you today, and I want to highlight these 3 main takeaways. First, we have achieved successful launches on 9 models of Lenovo laptops in the first quarter. Additionally, since the first quarter, we have introduced our AI software on 8 more Lenovo laptops, bringing the total number of laptop launches with Lenovo to 17 year-to-date. This demonstrates our scalability and highlights the market interest in our AI software platform.
As we stated before, our aim is to achieve widespread adoptions. When these laptops ship, we expect to generate more revenue over time. So the key is that we generate revenue when products are shipped, not just launched. We will share more about our revenue model in the slides ahead.
Secondly, we have secured new contracts with 2 of the top 5 smartphone customers, and we're following the same business model as the PC for the 2 new smartphone customers. This mean we anticipate to generate additional revenue as these contracts come into effect and smartphones begin to ship. We expect to continue to grow with new and current smartphone customers over time.
Third, looking back at the first quarter, we can confidently say that our technology is in a better position than ever before. Our technological leadership in AI, ultrasound and sensor fusion has been highly valued by our esteemed global partners and customers. This shared vision has enabled us to establish long-term relationship with key players in the market.
While we remain cautious about the long-term outlook, we focus on what we can control, executing consistently on technology delivery, landing new contracts, launching new products. Our strategy has proven successful in the PC industry, our next growth market. Currently, we have signed agreements with 3 of the top 5 PC makers. And as a reminder, the top 5 PC makers are, #1 and leading, Lenovo, HP, Dell, Apple and ASUS. These 5 top manufacturers accounted for 80% of all PC laptops sold globally in 2022.
We see that the market is in the process of replicating the approach Lenovo took, starting with our AI Virtual Human Presence Sensor and do a broad deployment quickly and plan to add more products per device. In conclusion, we plan to add more PC customer, expand broadly over time, include more products per unit and, last but not least, expand our reach into their product portfolio such as display, speakers, conference system, et cetera. We're also, of course, expecting to grow our smartphone business. While we're excited about our current success, we considered only the beginning of our entry into the PC industry and their larger and broader product portfolio, every device smarter, more human and environmentally friendly.
So the principle in what we're doing is that we leverage existing single-purpose sensors that are already on the devices, we apply our AI Virtual Smart Sensor platform, and we generate new capabilities, what we call Virtual Smart Sensors, that we can charge a per-unit, per-device for. So this is our principle in our key technology that is leading in this market.
Okay. The market that we're going after is large. We started off in the smartphone market, and we have worked our way into the large PC market. And just to be clear, fluctuation in this market does not affect our long-term opportunity.
Let's say, we use the 2022 as an example. Between Lenovo, HP, Dell, Apple and ASUS, 223 million units were sold in 2022 according to Gartner. Our competing hardware sensor, the single-purpose hardware sensors, are selling at the unit price of $2.50 to $4. And they only deliver one single capability, human presence detection.
Today, in addition to deliver -- for us, in addition to deliver human presence detection, we have 3 more AI Virtual Smart Sensor ready for deployment in the PC market. The top 5 manufacturers represent 80% of the market, and we are currently in business, early stage, with 3 of them.
So I used the word currently because we will become the de facto standard in the market. In 2023, we have been in discussions with management in world-leading OEMs beyond our current customer, who sees -- who truly sees the value of our product. And I have to repeat, our product is 100% software, meaning that we're not directly hit by any supply chain challenges or component prices directly but indirectly through our customers. And this is why we continue to expect short-term lumpiness in the quarters to come.
Okay. So of course, we have a lot of focus on the laptop vertical. And the adoption rate in the laptop vertical and what we're really pleased to see is faster on the smartphone market. So if we look at this graph to the left, you can see it took us 5 quarters to launch with 18 laptop models, and it took us 3x as long to launch with 18 smartphone models, about 17 quarters. It is also worth repeating that we started out with the world's largest PC maker, Lenovo, and their best-selling laptop, Lenovo ThinkPad T14.
So thus far, we have solid traction in the PC market and is a strong validation of the broad opportunity we have in the PC market. As in total, we have launched with 18 models. We now have 3 of the top 5 manufacturers as our customer, and this is phenomenal. And as I've said before, we are confident in our products and people, and we will not let short-term commercial gains come in the way of our long-term value-creation potential.
And note that we are in a cash position to take us to our growth targets. We will keep expanding with our PC customers, and we are on track, not only on track but confident that we will add more customer in this vertical, and we will also see interest in many of our products.
Okay. So let's really dive into a little bit more about business model, turning the world-AI software into future revenue. And here, I would try to explain as much as possible about our revenue model, but note, we are in ongoing negotiation as we speak, and we already have signed contracts that are highly confidential.
We acknowledge that it's difficult to appreciate our future opportunity when we deliver a decreased year-on-year revenue this quarter even though we get more and more contracts. But let me be clear, since we have a strong cash balance, we do not need to nor will we jeopardize the long-term opportunity for short-term gain. The advantage of being a 100% software company is that we don't have to worry about the supply chain issues and high inventory costs. It -- also, it allows us to have a flexible business and revenue model.
So let's take a look at the process of how we turn our world-leading software into the future revenue. So we start by evaluating or do PoC with our product with the customer. And when successful, we move into negotiation. From there, we craft a long-term agreement with the world-leading OEMs to secure future revenue. Upon agreement, we sign a contract, which we will then announce to the market. This is typical contract for a number of models with a minimum commitment volume.
When the respective model is launched by the OEM customer, we send out a press release to let you know that this model has been launched. Note, and this is important, that this does not mean that the product is physically shipped yet.
So what makes our revenue numbers lumpy quarter-to-quarter? Due to inventory backlogs and cooled-down end-user demand makes it harder for our customer to forecast volumes. These have impacted our up-front minimum commitment and volume shipped, consequentially, impacting our near-term revenue. This means, though, that we structure our deals with a lower up-front commitment, which means we charge an even higher price per unit, thus over time, as we ship more products out there in the market, we will grow significantly. And let me repeat again that we have the cash to take us to these growth targets. This is critical to understand.
With that being said, I would have to remind you who we are competing against or what we are competing against. Our software is head-to-head with hardware sensor, single-purpose hardware sensor. And in the PC and the laptop market, we are competing against products priced from $2.50 to $4 per unit, so per laptop.
Cost cuts is not the only benefits as our AI Virtual Smart Sensors are also enhancing user privacy, adding capabilities and eliminating sourcing risk. So basically, in conclusion, we deliver capability for less cost.
And these are the reasons why we are moving at such a high pace into the laptop market with 3 of the top 5 customers in more than 20 models. In the last 10 years, we have successfully developed a robust technological infrastructure and platform leveraging AI, ultrasound and sensor fusion. This accomplishment has made it possible through extensive collaboration with our ecosystem partners, including Intel, AMD, MediaTek, Qualcomm and et cetera. As a result, we have established a strong foundation that present numerous prospects for expansion and growth.
So now I'm going to leave the stage to our CFO, Lars Holmøy.
Thank you, Laila. Elliptic Labs is financially robust. Although, we had the decline in revenue year-over-year in the first quarter, we are confident knowing that we are launching our software technology and models to be deployed in the market. These models will, in turn, generate revenues to us. So what we can do in this market is to contract as many models as possible for future sales, de-risking our long-term revenue and inbound cash flow, meaning we have a strong cash position to take us to our target growth.
Our cost base is up 36% on employee benefit expenses, and we believe we have the right-sized team and capabilities in our organization to support our current growth opportunities. The increase in other operating expenses can be tracked back to increased travel activities in and to the U.S. and Asia, reflecting increased commercial activities, customer meetings, partner meetings on-site, of course, and trade shows.
Our EBITDA was, hence, negative NOK 20 million, which was offset by positive net financials and income tax expense, resulting in a loss for the quarter of NOK 15 million.
Looking at our cash flow. Sales results in the quarter subsequently affected our cash flow from operation, which ended a negative NOK 17 million. Investments increased 9% compared to Q1 2022, reflecting continued work to further our leading technological position. Financing reflects repayment of debt to Innovasjon Norge and other short-term liabilities. It leaves us with a strong cash balance of NOK 154 million, which will carry us through our growth target. We are well funded for our growth.
If you look at our balance sheet beyond our good cash position, there is a continued buildup of our current asset, which reflects upcoming payments from our customers. Our equity ratio remains at 93%, and our long-term debt in large reflects our loan from Innovasjon Norge.
With that, I will leave the floor to Laila. Thank you.
Thank you, Lars. Okay. So Elliptic Labs is currently experiencing strong commercial traction with several ongoing strategic discussions. And our commercial team and I are meeting with top management from global leading customer and partners. This is a testament to our technological ownership and the relevance of our 100% software-based products based on artificial intelligence, ultrasound and sensor fusion.
With that, we will take a short break and open up for Q&A. Thank you.
[Break]
Welcome back. So we will now address some of the questions. And as usual, we really appreciate the gentlemen that have sent in many questions on behalf of the retail investors. We appreciate that. And of course, there are other questions taken in. So I don't know if you want to just start asking some of the questions.
Yes, sure. There's a -- I would group some of them together.
Okay.
So there's the laptop models, typical. And any estimate on when new models will be released and money starts to flow, yes?
Yes. So obviously, during the presentation and I just want to reiterate that we acknowledge and we understand that it's difficult to really appreciate our business model and the future growth potential that we have here at Elliptic Labs. So answering this question is that we can -- unfortunately, when we sign a contract, we are not -- we can't announce the amount. We can, in most cases, announce the number of models that we have signed up with.
Furthermore, we are not permitted due to confidentiality agreements, and this is extremely strict, with huge actually financial penalties, should we not do it, to talk about launch dates. So after the customer launch specifically, like we did here with Lenovo, that has done -- launched 17 year-to-date, we can make that announcement.
When it comes to shipping, even though the customer has provided us a set of forecast estimates for the future when they're planning to ship these models, we cannot announce that either. So I can't give any more specific beyond that, unfortunately. And I know it's -- it might be very stressful, but -- yes.
There is a follow-up question in the same.
Okay.
So -- but then, of course, how many laptop/PC models with Elliptic products in does Elliptic estimate being launched in 2023, 17 so far?
I cannot...
Okay.
I can't comment that either. But it's worth reiterating that as we stated during the presentation, that our goal is to expand as broadly, is to...
Yes.
Right now, we have 3 of the top 5 laptop customer in the market. And we are confident that we would sign on more customers. We're also confident that we will spread over more models over time.
Yes.
So I'm sure there are more questions about it.
There are more questions that are coming in. This is very specific for the Lenovo PCs.
Okay.
So in 2022, ELABS announced the first contract, that was in '21. '22, with Lenovo covering Lenovo ThinkPad 14. After this, ELABS announced expansion, actually it's more and multiple expansion contracts. And there are further 3 announced expansion for the models that we came, sorry.
Sorry.
How many of these announced model expansion does Elliptic Labs estimate generating revenue for '22?
I can't, then I would tell -- I can't -- fortunately, I do not have the permission due to the contract to say anything specific in regards to when there'll be shipping the contract -- I'm sorry, shipping these launched models.
Yes. Okay. A little bit more technical question. Foldable smartphone seems to be a new trend. Do you see any advantage for your technology on these smartphones?
Yes, absolutely. It's -- we have just been...
The flagship model?
Yes. We just have been released some of the foldable phones. And we see many of the players in the market have foldable phones. And we are signing on -- we have been signing on more customers with foldable phones as well.
Yes.
And the advantage that we see here, which is a quite nice, is that in the foldable phone, the proximity sensor, so the single-purpose hardware sensor that we're competing against, the 3-in-1, the proximity sensor that they use on the standard smartphone does not fit. It's not a good solution for the foldable phone. They have to use a special sensor that is much more costly, actually between $0.20 to $0.40 per unit or more closer to $0.40 actually. So it is -- so we see that. And plus on top of that, they have to use some special software. So we see that we have a chance to get into the foldable phone with even more customers. This is very positive.
Yes.
I want to also make a little side note that the foldable market as of yet is a small-volume market.
Yes, it is small.
I just want to set the expectation right here, but yes.
Okay. So there's -- it just came in, another time line-ish questions.
Okay.
I'm going back to that...
PC.
Yes, PC, back to the PC and also a revenue question.
Okay.
So just what is a realistic time line when signing a new enterprise agreement for a PC/laptop customer for the product, okay, presence -- human presence detection, from signing to launch? And it's a multiple, sorry, so I'll just come back.
Yes.
And with respect to the 2 enterprise agreements that we also have signed and not yet announced anything on, do we expect any models on that this year on those 2 as well?
Okay. So I'll start with the last first.
Yes.
So the models that we have signed, I cannot state when they are -- if we're generating revenue because, once again, I will give the information when we make the announcement and launch. So that I cannot.
When it comes to -- if I use the example as T14, I think over time, of course, we expect, we hope that this will go faster. But always when you go out with the first one, it takes a little bit longer.
So we signed with the agreement with Lenovo in summer of 2021. We launched it in Q1...
Mobile.
Mobile World Congress in February of 2022. And we started shipping, so we can go back to say that because it's already shipped, in that summer of that year. So they started June, July and shipping it. And we expect...
Q3 was the first time we had license revenue for that.
Yes. So we expect -- and then you get the follow-on when we receive the information on how much to ship, to send invoice. So we expect to flow the same trend. But of course, over time, when you have more models out into the market, the revenue is going to start to, of course, even out and become more predictable.
Yes.
I think some more about competition.
Yes, more competition questions. So what is the laptop OEM customers' feedback on our product compared to infrared camera solution, for example, or, yes, time-of-flight sensors in general.
Yes. So it's not a coincidence that 3 of the 5 top PC customers are coming to us starting on -- with the presence detection. When you're using a camera, so there's a few different solutions. You also have a separate chip. We have the -- so I don't like to criticize other, but we just receive feedback and just look at the market feedback that they have had some issues, but more so also is the cost difference. So it's a few things. It's the cost difference.
It's also like a privacy issue, particularly with all the new regulation in Europe. So you see some of these companies that have actually a camera, that they have a shutter on top of the laptop to close off the camera.
A physical shutter.
A physical shutter. So what we are expecting and what we're seeing is that they're looking to replace that. Just want to mention also, this is interesting because if you look at Intel, which is our -- one of the biggest or actually the biggest partner we have in the laptop market, a few years ago, they started focusing on camera for HPD, and they have closed that project. We worked with the company -- or with people in the -- specifically on Intel that worked on our project. And they have closed that down. And obviously, they're working very closely with us. So overall, we expect that we will see a replacement.
I do still expect that some high-end laptop would have that going forward. For the -- in the broader market, we do not expect that. But I can just sort of jump almost into the next question here because we're talking about solutions, yes.
Yes.
So it's important also to note, when we have our AI Virtual Smart Sensor platform that can deliver so much more than these single-purpose sensors. So we can -- so you also have to understand that when you work with a company like Lenovo, you can go on a website, they have conference system, they have speakers, they have smartphones.
Tablets.
Tablets. They have lots of other accessories and products. So they are looking -- all of these companies are looking at more like a holistic solution to how to deliver new capability. And some capability that -- even some features we haven't shared yet, that we'll be working specifically with the customers on.
So when they come to us, we take the approach that -- and why we're meeting with the management of these companies is that because they take a strategic approach and saying like we need -- we might have distant traction, we might want to have device-device communication and so forth. So there's a lot of other capabilities.
And then they're saying, and by the way, you're also doing HPD. So yes, we say we start with that, but we are having a much broader discussion. And this is why we are very optimistic about the future. So we are not just a one-trick pony here.
Yes.
This is really capitalized on our capability of making devices easier to use and making them more seamless, making them greener. And I just want to add this as well because there's a lot of discussions around AI.
We have here in Elliptic, we have worked a decade -- over a decade building our platform using AI, using machine learning, having our own newer network. So we have core expertise in that segment combined with core expertise in ultrasound and sensors. So we have a very unique position because I think it's more I see and more hear about competition that's popping up.
Yes.
Is that they talk about if somebody else is -- see other solutions or similar solutions. So it's important to recognize that we have already proven our ability to deliver mature technology in other market, in the smartphone market. And we have to start with the smartphone market because that's where the ecosystem started supporting us because smartphone was -- it was more aggressive to adopting new technology.
But now when this ecosystem is supporting -- the ecosystem Intel, AMD, Qualcomm is providing the appropriate support -- well, obviously, we're embedding our software onto the chipset. With us for the PC market, we can take that market.
So when these laptop -- and this is not only aspired, it's very important. When you go into commercial laptops, the best-selling commercial laptops like Lenovo, they go and sell these to big companies. And a company may order like 10,000, 20,000, 30,000 laptops. And if you do a mistake on these laptops, you can reset, they turn all these laptops back. So they are -- it's not just about another newbie coming in with like something similar like us, they can walk into the -- to these products. It's very different than the smartphone market. They are more conservative in the laptop market.
And even if they're conservative, yet we are in the best selling. We started with the biggest customer and the biggest company in the market, the highest-volume-selling laptop for them. And we're adding more. So we are in a very different -- it's a very different position or very different sort of path than we have with the smartphone. And of course, we have more matured as a company and as a technology.
Yes. I think it's also fair to say, last year, we had one model in the market.
And now we are launched for 17, yes.
Yes, so building it.
And I'm going to reiterate this, too. I'm going to be hammering this in is that it took us 17 quarters to reach the same amount of -- number of models in the smartphone market. And here, it took us only 5 quarters in the laptop market. So it's definitely a sign of maturity.
Okay.
Do you have more?
There's lots of questions. So let's do this -- okay. This is a 2-sided question because it's also one question that comes in here. And it...
Okay. Just read it.
Yes. Okay. So how far is ELABS in the long-term or mid-term strategy to becoming de facto standard in the laptop vertical and, of course, how to reach our mid-term target of revenue, which is related, I will say?
Yes. No. So -- okay. I've already explained about the process of when companies are launching and spreading out. So we have signed with 3 of the top 5 companies. And let me be clear, we are planning to add more, and we are planning to spread broadly. And I think that if I look 2 years ago, back when we went public, we said that we were going to go out in a market. We expected to be the de facto standard. We expected to deploy broadly. We expected to do many laptop customers, and this we have. So I would say we -- I'm not going to put a percentage, but I think we are in a fairly good track on hitting that.
And of course, I can -- I wouldn't mind to just sort of -- we spend a lot of time explaining our business model. Of course, what it is disappointing, admittedly, of course, is that when we looked at summer of last year and looking at even as close as towards the latter half of last year. We saw that customer initiative where we wanted to do a much more higher up-front commitment and had a much more control of the forecast ability.
But of course, that has changed over the past quarter. So we saw in this last Q1 here for our end customers that they have the -- the whole market would sum between 25% to 40%. So that sort of is impacting our net revenue. And admittedly, that does, but as we are spreading out and we are now pricing -- you're not going to get a discount if you don't do a high commit. That's just end of discussion. So we expect that that's going to...
Yes. I mean, also it's fair to say that the lumpiness that we announced in the market last year, we do still see that. It's -- yes, the market is what it is at this moment.
Should I ask you a question maybe?
Yes, I'm just going ask one more specific note.
Okay. One more. Okay.
And it's about the failed payment that we're pursuing to ICC or Arbitration Court. We don't have any more updates on that. We will update and disclose that during our quarterly report, of course. It is timely -- it takes some time, basically, but we are very confident. We have a contract. It should all be good.
Yes. So I'll ask a question.
Yes, please ask.
So what are Elliptic Labs' expectation for revenue and EBITDA for 2023?
Yes, we do not give any guidance on that. Our mid-term targets, our '24, '25 target on NOK 500 million. So we do not give specific on 2023.
And we explained that very thoroughly the last quarters. And of course, it's difficult to forecast under these circumstances that we are in now with the lumpiness that we see in the market. So yes.
So I guess we had a few more, please.
Yes. Yes. Any -- what is the risks? Yes.
Okay. Well, 2 -- top 2 risks towards reaching the...
Yes, to reaching our target in '24, '25, I think that was a nicely follow-up, Laila.
Yes. Okay. So what is important that we focus on? It's clear that we have a demand for our product in the market.
Yes.
And not just for human presence detection, it is clear that the market, as what we see today, that they want a broader use of our technology. So what we have to focus on is that we have to deliver on our technology. We have to deliver on the capabilities. We have to continue to build a solid road map and alignment with the customer and with our partners.
And I would just mention here, which is also very important, we have the cash. And one of the reasons that we initially went public was that when we saw we should capture this large market, that you needed to have a strong balance sheet to go after this market because you don't know exactly how long the sales cycle will be. And then, of course, we had war and other geopolitical concerns that had been throwing...
COVID.
COVID throwing at us. So -- but, the -- what we have to focus on -- I won't even look at and think about it as risk, but what we have to really, really focus on is to deliver on our technology.
Yes.
And then, obviously, we're early in the large market.
Yes. And just to reiterate, we do have the cash to pursue our mid-term targets.
Yes.
So our growth expectation and targets, so yes.
Yes. And I just have one here at the end, I guess.
Yes. So ELABS' knowledge in signal analysis with other applications you're working on in addition to presence detection, other sectors than consumer electronics?
Yes. So obviously, as I mentioned, we have lots of other products that we have already announced and working to implement. But what we're doing also, that's worth mentioning is that we're doing an EU project with our partner, Infineon. And that's for future potential commercial applications that we are working on.
Yes.
And I believe this might even be public information on the website.
It is.
That they can read more about, but that's -- there's several other use cases that we're looking at. And those can be very relevant in conjunction with our partner for commercial applications. So...
Yes. But we're not -- will not be tomorrow. It will be in the future.
No, no, that's longer term. Yes. Yes, absolutely. Okay. Is that it?
Okay. I think we've covered most of, if not all.
Okay. All right. Thank you very much.
Thank you.
And have a good day.