Elliptic Laboratories ASA

OSE:ELABS

Earnings Call Transcript 2024-Q1

[Laila Danielsen, executive]

Hi, and welcome to Elliptic Lab's Q1 2024 Presentation. My name is Laila Danielsen, the CEO; and with me today is our CFO, Lars Holmoy. Let's start with the 3 main key takeaways. First, we achieved a good revenue growth here in Q1. We reached NOK 22 million in total revenue, which is a fivefold increase compared to Q1 2023, following on consecutive year-on-year growth built throughout 2023. This growth is especially notable given that the Q1 is historically our weakest quarter, highlighting the success of strategic, technical and commercial efforts made in the previous year.

Secondly, the growing market traction and innovation of our products. This quarter, we announced 25 model launches. By far, the highest number of launches in a single quarter to date, which with a promising pipeline for the rest of the year. The introduction of the AI Virtual Seamless Sensor, which offers innovative use cases has generated high interest in the market. We will, of course, share more details throughout the presentation about our AI Virtual Smart Sensor. Third, the revenue journey towards our NOK 500 million target. And to be clear, we are still confident about the NOK 500 million goal, but it's a question of "when", not "if". We are, of course, committed to monetizing our existing contracts and expanding our reach with both current and new customers by introducing more models and adding innovative products to each device.

Our impressive first quarter results are a testament to our progress, although we recognize that true growth takes time. That being said, our customer still face challenges in forecasting volumes for the upcoming years, which naturally introduces some uncertainty for us as well. It is crucial to be transparent about the factors that influence our time line as much as we can share under strict nondisclosure agreements that we have with all our customers.

All right. So let's just share a little bit about our platform. So our focus is to redefine the user experience with AI. So today, we are deployed in over 500 million devices, and we are 100% software. And our vision is to build a leading AI software platform for all user experience, making every device smarter, more interoperable and even more human and environmentally friendly. So a little bit more about our AI Virtual Smart Sensor platform. So what we are doing is that we are leveraging existing single-purpose sensors that are on all the devices today. So our core focus is, for sure, leveraging microphone and speakers.

And what we are doing is that we take -- we use AI, then we use ultrasound and sensor fusion to deliver new user experience. And we have a set of many, many products, so many virtual smart sensors that some are already out in the market at large scale today. And other ones are either being into different proof of concept or we have signed agreements for that will be deployed in the future. And we'll talk specifically about yet again the seamless sensor and what we're expecting here in the upcoming near time.

So a little bit about our competition. Today, our 100% software sensor are competing against single purpose hardware sensor. And so we have a clear advantage. And obviously, the market that we're going after is a large market. So the key is that our Virtual Smart Sensor can replace hardware sensors such as like infrared and time-of-flight and to deliver the same type of use cases that they are delivering. But the beauty here is that we can also deliver more features. And that's what we're going to talk a little bit more about throughout the presentation. But the core value is that when you replace a hardware sensor with software only, you can reduce the license cost -- you can also -- for the -- our customers, we also can reduce power consumption. And as I mentioned, we can, of course, add additional feature, which really makes us an excellent partner for our customer.

So we are seeing great traction for our AI Virtual Seamless Sensor. Both our PC and smartphone customers are interested in building a tighter ecosystem for all their products. They're looking for a seamless experience across their entire portfolio. We do not have the ability to deliver it. So unlike Apple, which has a complete ecosystem from iPhone to MacBook, et cetera, allowing them to create memorable and seamless user experience, our customer lack this capability. However, with our AR Virtual Seamless Sensor, we can provide true interoperability, covering many user experience and enabling an ecosystem where new use cases can easily be added to their devices.

So let's look at the specific example in this video. Here, we see 2 buyers walking into -- working in our office at Elliptic Labs on a conference call on his phone. He walks through his desk, he sits down, log into his PC and our AI Virtual Seamless Sensor detect that his device is [indiscernible] laptop and an instant visual feedback on the screen appear so he can easily transfer his conversation to the laptop. Note, this is just one of countless use cases that our AI Virtual Seamless Sensor can offer.

All right. So we continue -- talk a little bit about the smartphone market. Here launched -- so far, we have launched an over 120 models to date. And so far, in 2024, we have been launching 23 smartphones, which is good. We also continue adding on more new customers that we are launching when -- that we just announced here [ and design ]. And we're expecting that we continue to grow the smartphone market as well.

When it comes to the laptop market, we are, for sure, solidifying our position in this market. We have 13 launches with Lenovo to date in 2024, which is excellent. 4 out of the 6 OEMs are customers of Elliptic Labs. And I would like to reiterate, we see a really high interest in our AI Virtual Seamless Sensor, and this delivered truly innovative new use cases. And also, while we are very excited about this seamless sensor is because it gives a very visual, as you saw from the video, it's a very visual use case experience. These other that we have over in the market with a Human Presence Sensor and the Proximity Sensor is not as visible. So what we are expecting and what we're seeing is that the Seamless Sensor is something or it's a capability that our customers wish to also truly use in their marketing efforts. So we are very, very exciting about this new Seamless Sensor that we have already signed agreement with.

Furthermore, for the laptop segment, we are also -- we are part of the MIPI alliance. And in this alliance, we work with key global ecosystem players like Microsoft, Intel and Qualcomm, et cetera, to define industry standards and architecture. This is also important, which is going to help us with scaling, but is also a testament that the laptop market is asking for our features and capabilities. because, obviously, these players that we're working with here are huge multibillion-dollar company.

All right. So now I will leave the word to our CFO, Lars Holmoy, that will talk a little bit about our finances.

[Lars Holmoy, executive]

Thank you, Laila. We have had a strong start to 2024. Revenue from contracts with customers increased over fivefold compared to Q1 2023. The first quarter has historically been the weakest due to seasonality, but the growth highlights the strategic technical and commercial efforts made in the previous years. And we continue to focus on fully monetizing existing contracts. Revenue from contracts with customers is up to NOK 22.2 million. That's a 449% year-on-year growth. Growth is driven by revenue from contracts with fixed minimum license fees. We do see increased contribution from license fees on ship units, a trend that is expected to continue in future periods.

The organization is rightsized to meet demand. Employee benefit expenses is well managed. We increased our FTE or full-time employees to 87 in Q1, an increase of 15 year-on-year. We do not anticipate to continue to hire in the same pace as last year for the forthcoming quarters. Our operating cost is very stable. The reason of the low operating cost this quarter is that we had a NOK 2.2 million recovery from previously written off receivables.

The operating cash flow is minus NOK 8.3 million. That's an improvement from NOK 16.6 million in Q1 2023. We also had an NOK 8.7 million increase in account receivables. We continue to invest in R&D for our AI Virtual Smart Sensor platform and financing activities is repayment of borrowings and lease liabilities. Elliptic is well funded for our continued growth journey. We have a strong cash position at NOK 100 million. Increased current asset is, as I said, due to receivables from recent orders, reduced long-term liability through borrowings repayment, equity remains very strong at 88%.

With that, I'll leave it to Laila for her closing remarks.

[Laila Danielsen, executive]

Thank you, Lars. As we have shown you, we increased our revenue in the first quarter by more than 5x compared to the first quarter of last year. This reflects our efforts over the past year to strengthen the strategic and technical and commercial positions we have built since our first product launch in 2016. As a review that I've stated already, over the years, our products have been deployed in 120 different smartphone models and 31 different laptop models. This year alone, we have seen launches of 24 new smartphone models and 13 laptops, making it the busiest period ever in terms of launches.

We're the only ones having deployed AI Virtual Smart Sensor at scale, and we have increasingly been recognized as the market leaders in our segment. As I've told you before, our performance last year earned us a place as a key contributor in the MIPI alliance. This is a global business alliance, which has been given the mandate to define technical specification for the mobile ecosystem. And we are now working to define industry standards and architecture in collaboration with other global ecosystem players like Microsoft, Intel, Qualcomm, AMD and Cirrus Logic and more. This is very, very cool, but also a challenging task for a company of our size.

And although we still -- we're still early in our commercialization, we are gradually beginning to see meaningful revenue traction. This graph shows the revenue over the last 12 months. We are now at NOK 86 million, and we see multiple growth and value drivers as we now move forward. We continue to expand our smartphone offerings and are just beginning to scale our laptop revenues. Additionally, we are pushing the boundaries of technology with innovative AI products that will provide tremendous value for our customers and for us. However, things take time. We have shown you this graph before. This graph before, illustrating a time line from customer evaluation of our product and contract negotiation through the contract announcement, product launches, product shipping and sales; and finally, revenue recognition for us.

This sales cycle has typically taken longer than expected. Our customers have been through somewhat of a market rollercoaster over the past 4, 5 years. First, with booming demand under COVID and then through a deep cyclical electronics downturn that started in the fall of 2022 and lasted through 2023. Given this market back backdrop, many of our customers have found it very hard to forecast volumes with any certainty. As a result, some OEMs have been less willing to commit to minimum volumes. Some have cut back on investments in innovation and some have postponed new launches.

Let me give an illustration of this sales cycle with a laptop customer that we have signed an enterprise license agreement for. Okay. So this illustrates the contract for the first laptop model, which was announced back in Q2 2021. At that point, we also booked a minimum revenue commitment. The model was launched approximately half a year later in the fourth quarter of 2021. And then took another couple of quarters on to accumulate sales of the model exceeded the minimum commitment, as you can see here, Q3 2022. The model has since generated revenue on a quarterly basis, but as you can see, sales are now tapering off for this one model, typical as this is being replaced by a new generation of the laptop model, which are also -- which we are also in repeating this cycle.

Okay. So what you see here is the total contract portfolio with the same customer. The contract we just talked about is at the bottom here. And as you can see, we have since signed contracts for 61 other laptop models, of which 31 have been launched in the market. My point here is that we so far have only recognized the milestone revenues for the minimum commitments for these models. And we believe this portfolio offers a high revenue potential going forward. So we believe we have a significant potential to monetize on our existing contract portfolio and an improving end-user market for the laptop OEMs will obviously help in that respect.

Secondly, we have a strong focus to include significant volume commitments in new contracts and less volatile markets and better demand visibility will also help here. Thirdly, we are on path to launch more models with more laptop customers, which will both cement our market position and generate revenue. Finally, we aim to add more products per device, and we remain committed to develop new high-value AI Virtual Smart Sensor, such as this AI Virtual Seamless Sensor we have shown you earlier in the presentation.

All right. So in summary, reaching our ambitions remains a question of "when", not "if" for us. So how do we reach our NOK 500 million. Well, of course, we are going to monetize on our contract base. We are going to continue to expand our position with both existing and new customers. We're going to work to add more models and more product per device. We believe that our first quarter figures are another proof point that we are moving in the right direction. But as I said, things take time. Based on our work with customers, as they plan for 2024, 2025 and 2026 launches, we see that they still find a bit hard to forecast the volumes, which increases the uncertainty for us as well. And I understand this might take the shine off what we otherwise think is a positive report, but we believe it is prudent to highlight the estimated risk and the factors that need to be in place to loosen up the timing aspect.

We are therefore now redefining our NOK 500 million revenue target to midterm ambition rather than a point estimate for 2025, even though we remain confident in our growth potential. So could we still possibly hit the target next year? Absolutely. But that would depend on a significant minimum volume commitments, solid end-user sales and continued successful sell-ins for more products or more models to more customers.

So now we will take a short break as we are reviewing our questions, and then we will get right back to you. Thank you.

[break]

Welcome back. And firstly, I just want to thank you for the private individual investor that sent in many questions. And also, we'll start addressing them now. We also see that we have many other questions that have been taken in during the presentation, and we'll -- we'll be aggregating and then address each section of questions. So why don't you start, please.

[Lars Holmoy, executive]

All right. We have redefined the 2025 target to reach NOK 500 million to a midterm target. What does this mean? And when can we expect you to reach the target?

[Laila Danielsen, executive]

Okay. So as we stated, sales cycles have taken longer than we initially expected. That said, and as we have demonstrated through the presentation, we are making strong commercial progress with key OEMs across laptops and smartphones. And then with all the new models that we have now launched, we see a significant revenue potential from existing contract base, seeing this in conjunction with a unique position that we have built in ecosystem and traction with all the globally leading laptop OEMs. We continue to see healthy growth. It still matters of "when" and not "if" and we will reach the NOK 500 million milestone.

So and as we're redefining the 2025 goal to midterm, this is an acknowledgment of the market uncertainty that the OEMs are facing and the difficulty in forecasting future volumes. Therefore, it's better not to sort of provide a specific point for the NOK 500 million target but more having in the midterm. So please recognize that when we are working with the OEMs, we are now -- I'll just mention, we just saw numbers, of course, coming out here from Lenovo that they had good growth which, of course, we are pleased about as well. But when we are working with our customer now, we're looking at '24, '25, '26 and some way even looking at '27 for forecast and trying to plan out what we are expecting to get in revenue. So, even though we see like a recovery in the market or our customers see slight recovery, there's also many changes that are occurring in their product line.

We see like they're consolidating different models.

[Lars Holmoy, executive]

They have less SKUs.

[Laila Danielsen, executive]

So they have less SKUs, exactly. And this makes them harder to sort of do the exact forecasting and the minimum commit. So we -- to reach our target that we have mentioned before, we need to have, of course, a minimum commit. That's how we structure our contract as we displayed throughout this presentation. But then also we -- they have to sell also their PC because once we reach a minimum commit, we are charging a price per unit. So we have phenomenal traction with our technology but it is -- let's face it, it's a hard market to sort of navigate at this point. And hopefully, over the next few quarters, we will get even better visibility with our customer -- from our customers as we're working with them.

So that's -- then actually sort of lead into the next question here. So do we believe that it's still possible to reach the NOK 500 million in 2025.

[Lars Holmoy, executive]

Yes, absolutely.

[Laila Danielsen, executive]

Okay.

[Lars Holmoy, executive]

Given the current visibility, I think it's more prudent for us to say that we -- this is a midterm target and that we will reach it within the next 1, 2 or 3 years. I think that's the more prudent approach at this point.

All right. I will take the next question here. The 2024 market conditions move away from lumpiness as you already touched upon this. Given this, why can't Elliptic guide more short term, expected positive or negative result for example?

[Laila Danielsen, executive]

Yes. Well, first of all, all the contract negotiations that we're doing is highly confidential until they are finalized and then communicate out to the market. It's not just confidential. And from that point of view, it's also confidential from the customer point of view, all the way from launches and so forth in volume. During this -- throughout this presentation, we have tried to share as much as possible, particularly for one laptop customer, Lenovo, without breaking any confidential agreements, but we have to be very careful.

Secondly, so therefore, it's hard to sort of bring -- we can't really guide the expectation related to these type of contracts. Secondly, all our contracts, they're very binary, either you win it or you don't. So therefore, the timing of these is very difficult also to predict. And then into a point about the market condition, this is not something we can control. Yes, it looks like it's recovering now. It's a lot of hype around AI. Our customers are leveraging our technology, particularly on the Seamless Sensor to deliver AI capability and so forth. But unfortunately, the OEMs are still finding it difficult to forecast volume because they've been -- if you look at the past 4, 5 years, they've been through a major rollercoaster. So just because the market goes a little bit up, it's not that they are -- they've been burned. So we -- so we have to sort of stay closely to the customer and then carefully navigating the market and be careful what we are communicating out in the market and be transparent about that.

[Lars Holmoy, executive]

Yes. All right. So next question here. Can you comment on whether any of our PC laptop customers have adopted more than one product?

[Laila Danielsen, executive]

Yes. So I can say that -- and this is obviously public information that we have announced already is that they have signed contracts for our AI Virtual Seamless Sensor, but they have not launched it yet. I can say that it does happen that customer launch -- we'll make a launch for a.

[Lars Holmoy, executive]

Yes, there were some questions.

[Laila Danielsen, executive]

Yes. I'll just pull that in. Sometimes the customer will launch our product with our technology in it, and we do not have the permission to announce it. However, for this one, we definitely have -- we definitely have permission. And we are working closely with the customer here to do a big marketing splash. So we have a strong interest in more of our products, which is really good. And I have to -- I am going to highlight the Seamless Sensor because that is quite unique. We will talk more about that.

So yes, so we have -- of course, we have Proximity already for smartphone. We have the human presence detection for laptop, and then we have signed agreement for the Seamless Sensor. But we do also have an interest in some of our other products. But those 3 are the main interest now. And I just want to add a little tad on the Seamless Sensor. The Seamless Sensor is a quite -- it's a very advanced sensor -- virtual sensor with lots of capability that can track a distance, angles, position. So this is quite a great breakthrough in regards to our product, I would say. So...

[Lars Holmoy, executive]

And there's next one here.

[Laila Danielsen, executive]

Okay. Here we go. Okay. Yes, you probably can't answer, but I'll ask it anyway. How much of your revenue is from laptop customers? And how many PC models are part of this revenue?

[Lars Holmoy, executive]

All right. We provide full granularity on the revenue mix by year-end, not specific quarters. And the reason is that the numbers are still quite low, and we do want to give away the mix in consideration to our customers. This is partly what we sell to them. We do see fluctuations from quarter-to-quarter. And we are still not at that level that we have a steady-state rolling licenses. That was one question. yet. So -- and then in terms of the milestone and so forth. So meaning that the granularity between those, we can't give it quarter-to-quarter because it's a part of the negotiations that we do.

[Laila Danielsen, executive]

And the next question about cash. Do we expect to have a positive cash flow for 2024?

[Lars Holmoy, executive]

As we said, we do not give guidance for '24 individual and no short-term revenue target as it's I think you remember it is quite good on that one.

Yes, pricing on the Seamless Sensor. We have covered this before, but I think it's good to reiterate.

[Laila Danielsen, executive]

Yes, I can do that. So please recognize we have only signed one contract to date, about the Virtual Seamless Sensor. And we -- we see that -- for the Seamless Sensor, at this instance, this is not a pattern yet, but that we priced slightly more than our Virtual Human Presence Sensor. And if you look at the Virtual Human Presence Sensor, that is slightly lower than the single-purpose hardware sensor like a time-of-flight sensor or a radar sensor that can serve the same purpose. So obviously, over time, we are talking to several other OEMs about the Seamless Sensor and looking at -- I just have to mention the beauty of the Seamless Sensor is that we can create unique use cases for each -- even for each PC provider on top of just creating interoperability, but we can also do something unique use cases that they can use for advertising. So super -- very, very positive.

Let me see. I'll go to the next one here. Do you see any need to increase the cash position through capital raise given your current cash burn rate?

[Lars Holmoy, executive]

Yes, okay. I will also add in there is an ask for a minimum cash position as well. So I cover that as well.

[Laila Danielsen, executive]

Yes, okay.

[Lars Holmoy, executive]

Okay. So we are a growth company, investing quite heavily to realize the attractive long-term potential of Elliptic. And the simple answer is that we see no need for a capital raise to finance the current business plan. However, we are, of course, monitoring our cash position. Salary remains the main cash burn. We are a people business. We don't have any huge cost as we covered in the finance section related to server parts or cost of hardware or anything. It's people and we are continually like working to rightsize the organization to meet the demand. So we don't hire upfront. We hire when we see the projects coming in. And so we are -- we always try to have that balance in.

There is no -- as we are a software-only company, there is no need for a minimum cash position in terms of what we need a strong balance sheet. We do have a strong balance sheet and financially sound at this point.

[Laila Danielsen, executive]

Yes. So we have one taken in here.

[Lars Holmoy, executive]

Yes. And it's -- do we see any M&A interests? Cannot comment.

[Laila Danielsen, executive]

Obviously, I cannot comment on that. But obviously, we're working with very large player in a huge market. So -- but we can't comment specifically about that.

[Lars Holmoy, executive]

There's more questions about the Seamless Sensors, you take one more?

[Laila Danielsen, executive]

Sure, understand.

[Lars Holmoy, executive]

What is the competitive advantage? I will do -- it's a twofold question here. So what is the competitive advantage of the Seamless Sensor and the functionality? You have covered some of it, but...

[Laila Danielsen, executive]

Yes, individually on everything. So the competitive advantage is that our Virtual Seamless Sensor is 100% software. Okay. So why is that important? So let's -- I can't stand up here and not talk about Apple and interoperability and tight ecosystem. So if you look at Apple that owns -- they have their own chipsets. They have their own OS. They have their own application. They have a huge volume of phones. They have lots of products, and they have put together this nice ecosystem where everything works nicely together. However, not with Android phones.

[Lars Holmoy, executive]

Yes, that doesn't [ work ] very great with Android phones.

[Laila Danielsen, executive]

But in general, it works well within the ecosystem. However, if you are Lenovo, HP and Dell, you don't have #1 enlarged -- you don't have smartphones. I mean, Lenovo has smartphone, Motorola, but small volume. So for them to create this interoperability and sort of one position against Apple, but also for the user to make sure that the user goes to their product and stick within their ecosystem. They also have to create these use cases. So it's easy to move between devices. All the way from setup, all the way from connection, all the way from like moving your pictures, your PDFs and everything from your smartphone or like when you play on Spotify, you're going to go over to and play that on your laptop or if you're going to play it on the device -- a Teams call, the right speakers, et cetera.

So the beauty here, that's what our technology, the Seamless enabled and is 100% software, meaning it also works with the iPhone and Android. So for example, let's say, look at the U.S. market. The U.S. market, 80% of people are youngsters around 21, have a iPhone. So it has to work with this as well. So this is quite interesting. And what was the second aspect of the question?

[Lars Holmoy, executive]

Functionality, I think...

[Laila Danielsen, executive]

Okay. Yes. So it's basically create interoperability, making sure that you can move from one device to another, track distance and so track that. Are you -- angles, how close are you to the device? Should you now initiate and connect and then provide this instant visual feedback. So you can just work so -- if I go back to the video, you saw 2 buyers walking on the Teams call, walking up to the laptop. We detect that you are near, you log in, and then you get this instant visual feedback, "Hey, would you like to move your conversation over to your laptop. And this goes for any type of accessories that you can do. So we see lots of use cases as we are working. And I just want to say this too, like with the discussion we have now, we even have discussions now within different departments because now we are -- we become even more strategic because now we're working with the marketing department and the UX department. So now suddenly, we bring a solution that is meant to be part of their advertising campaign or even potentially even the branding. So yes, so it's good stuff.

[Lars Holmoy, executive]

Yes. I think we have covered all of it actually.

[Laila Danielsen, executive]

Okay. Very good.

[Lars Holmoy, executive]

Yes. Some of the questions that you have asked have been compressed into one answer.

[Laila Danielsen, executive]

Yes, we compressed into one. Yes.

[Lars Holmoy, executive]

There's a lot of questions placed differently, but...

[Laila Danielsen, executive]

Yes. Okay. Very good. All right. Thank you very much, and have a good day.

[Lars Holmoy, executive]

Thank you.