Elliptic Laboratories ASA

OSE:ELABS

Earnings Call Transcript 2022-Q2

[Laila Danielsen, executive]

Welcome to Elliptic Labs Q2 2022 Report. My name is Laila Danielsen, and I'm the CEO of Elliptic Labs. And today also joining me is our CFO, Lars Holmoy.In Q2, we saw that our proven software platform continued to have strong momentum across several verticals. The three takeaways from today's presentations are: one, we are receiving positive feedback from the products deployed in the laptop market, and we are delivering software successfully to the laptop contracts that we signed in Q2. Secondly, we launched on seven new smartphone models with new and current customers, and we are onboarding new smartphone customers seamlessly. We are now deployed in over 300 million devices in the market, confirming that we have a scalable and proven software platform. Last, but not least, we are experiencing additional interest from more virtual smartphone enabled by our platform. Like the PoC that we recently announced for our newest and latest Virtual Position Sensor for the laptop market.Our mission is to become the leading software laptop -- software platform for all sensor making devices smarter, more human, environmentally friendly. So let's take a look at our platform. What we're doing is that we are leveraging single-purpose sensors and deliver additional capabilities. If you look at the left-hand side, our platform use the single-purpose hardware sensor to enable new functionality and detect features such as proximity, presence, connection, positioning, etc., using nothing but software.As an example, we use existing microphones and speakers that are in all laptops today to deliver human presence detection, and this is done as a 100% software solution. We can also use multiple sensors through sensor-fusion technology to increase performance and deliver new capabilities. The underlying technologies: ultrasound, artificial and -- artificial intelligence, and sensor-fusions are the technologies behind our AI Virtual Smart Sensor Platform, which enables devices to sense you and your surroundings.And today we are standing on a strong foundations. Billion of devices in the market today already use hardware sensing components that we can apply our software platform to. We estimate that the market for our technology is approximately USD5.5 billion and growing. While the smartphone market, as you can see here to the left, is the largest in terms of number of devices, it's the smallest in dollars and cents. The PC market, which is our next growth area, on the other hand, has fewer units but a significant market size due to higher hardware sensor costs in the devices that we are replacing.So our software platform can replace hardware sensors such as infrared, time-of-flight, and radar while still enabling functionality such as presence and proximity detection. This allows for elimination of redundant hardware, reducing cost, eliminating sourcing risk, decreasing component waste, minimizing power consumption, and reducing emissions.So we are experiencing good growth. The increase in revenue for Q2 was still primarily from the smartphone market. We expect that the first laptop license revenue will be recognized in the second half of 2022. Our business is impacted on seasonality. And in general, we see that the second half is higher than the first half. So we have multiple opportunities for expansion across vertical with our software platform.But let's focus on our next really large growth area, the laptop market. As an example, we start with one customer on one model with one product, the Virtual Presence Sensor. From there, we add more model, and across those models we upsell with more products, also known as virtual sensors, and in this case, as you can see on the top of this triangle, we have added on an additional Virtual Smart Sensor which is called Virtual Position Sensor. Then we repeat this process with more laptop customers. And because our platform is proven at scale, we can apply this across multiple verticals, so truly a scalable business model.And as we are continuing our commercial scale from a strong foundation, our solid Virtual Smart Sensor Platform, supported by a strong ecosystem of partners, we continue to add more PoCs or proof-of-concepts that we are successfully converting into real business and model launch. As we have mentioned before, in some markets, for example, in the smartphone market, we don't really do any proof-of-concept. We go straight into contract sign and models launch. We expect eventually this to be the same for other vertical markets as we keep expanding in those markets as well.So even in the smartphone market, we still experience strong demand. This quarter we launched 7 new smartphone models with the new and current customers. The new customer that we added on was a company called Transsion Holdings out of China, and the brand that they launched was TECNO, and this company is also considered the Apple of Africa, so very pleased that we could seamlessly, very easy add a customer, get them up and running, and deploy them out and launch with them out in the market. And note, no proof-of-concept was needed for this contract to be signed.Okay. We today are on the path to become the standard in the laptop market, and certainly the deployment with Lenovo has been helped with all the positive feedback that we're receiving, as well as all the additional contracts that we have signed with Lenovo is definitely helping with the pull in the market. We are working with some of the leading laptop manufacturers, as you know, which you can see from this chart are Lenovo, Dell, and HP. We also work with all the chipset manufacturers in this market. This means we can address 100% of this market.So in the short term, we are working very closely with Intel and AMD and Qualcomm, of course, jointly with our customer to ensure efficient delivery of our software platform. And due to strong market demand that we're seeing in the PC space, we are closely aligning our roadmaps with our partners to deliver current, but not just current products, also new products successfully. This has led to an even deeper collaboration. For example, now we've been invited from our partners to their joint customer events to present current and new products to their broader customer base. So, overall, excellent demand, both from their customer as well as from the partner ecosystem that we work with to support mass deployment into this market. Very, very positive.And so talking about products, we are excited to announce our latest Virtual Position Sensor. In general, when we come up with new products, we take the approach that we always focus on products that can be used broadly. So for this instance, we work very much with the commercial side of the laptop market on the commercial -- the laptops that's going to be sold into the commercial side of the market. And what we are seeing in the market, together with some of our customer, is that workers in general, due to COVID, has multiple work locations and work setup. And with this technology, this product simplify this process. So definitely a product that we can -- we see that potential can be broadly deployed, so very exciting for this particular product that we recently launched and just signed the PoC with as well.All right, so the market is dominated by single purpose sensor, and we see that in general the price point from for hardware sensors are increasing. Fortunately for us that most devices in the market today have a mic and a speaker that we can leverage to deliver functionality, so there's less need for these single-purpose costly hardware sensors.All right, so then I am going to leave the word up to our CFO, Lars Holmoy. Thank you.

[Lars Holmoy, executive]

Thank you, Laila. Some highlights from this quarter. We have launched on 7 new models in this quarter, and we also launched with a new client or customer, as Laila talked about. We expanded our contract with Lenovo across 18 new future models, and we also added on 2 additional contracts on top of that. And subsequent to the Q2 close, just a few days ago, we presented our new AI Virtual Smart Sensor -- Positioning Sensor, sorry, demonstrating the continuous progress being made to our platform. We also launched our PoC with that product just days after we launched it, so it's been a very good quarter.Elliptic Labs is funded for our continued growth. We have a strong growth trajectory. Year over year our customer revenue grew 85% looking at the last 12 months. And due to our fact that our technology is mature and our significant market traction, we are allocating our resources towards customer revenue and not so much to the other revenue. And all in all, 42% year over year on total revenue is very good result for this quarter as well.This quarter, as the last, smartphone revenue is being the majority of our revenue and our quarter-by-quarter, year-or-year growth was 100% from NOK4.8 million to NOK9.6 million in Q2 2022. We have -- as you can see from the graph, we have had quite significant seasonality, and its reason is that we operate in the consumer electronic markets and the majority of revenue comes from smartphones, [ laptop ] (13:38) is the major revenue driver. Laptop licenses are expected to ramp up in the second half of this year. As we continue to grow, maintaining a robust capital discipline through our growth journey is important because it's a benefit for us to have a strong balance and good liquidity as we scale across multiple verticals with our AR software platform.We do see higher costs related to salary in all regions that we operate in, and we have increased our FTEs by 40% year over year, contributing to a growth in our personnel expenses, of course. Other operating expenses increased 53% year over year, mainly related to investments in supporting systems, sales and marketing, and professional services. All in all, we do have a very conservative approach to our costs.Our cash position is supported by our equity raise last year. We have low negative operational cash flow in Q2 2022, with minus NOK400,000. Cash flow from investing activities of minus NOK4.9 million, reflecting capitalized development costs. Cash flow from financing includes repayment of lease liabilities, repayment of short-term liabilities, paid interest, and proceeds from issuing shares. As you can also see, it's positive this year and it's due to high U.S. dollars activity in this quarter.And as we have said, maintaining a robust balance sheet is a priority for us. Working capital was slightly reduced by NOK4 million, and we keep an equity ratio of 94%. We are paying down our debt and are in a very, very strong position.And now Laila is going to do the final words for you. Thank you.

[Laila Danielsen, executive]

Thank you, Lars. So let's talk about how we are going to reach our 2023 target of revenue of NOK500 million. As you saw from the presentation, we continue to expand in the smartphone market, and we are planning to do so in the future as well. In addition, we're expecting significant growth in the laptop market. And as we have stated, the laptop market is our key growth vertical. Furthermore, we will continue exploring building a position in the IoT market, and the combination of these 3 activities, we expect that this will -- this we will reach our revenue of NOK500 million.So in conclusion, growth in the smartphone market, significant growth in the laptop market, and some growth in the IoT markets as we are expanding.Thank you. Now we will take a short break to review the questions you have sent in. So we'll be back shortly. Thank you.

[Laila Danielsen, executive]

Welcome back. And now we will address some of the questions that -- actually once again, thank you for the gentleman that has gathered lots of questions before this meeting. And we will start addressing them as well. There are also some other ones coming ticking in here as we speak. So I'll just jump straight in. The first one to you. How does the rise in interest affect the economics of Elliptic Labs or us?

[Lars Holmoy, executive]

Yes. The rise of interest does not have a direct impact on Elliptic Labs business. Our company, as such, we have very low debt. We have cash. So it hasn't -- I wouldn't say it hasn't had an effect. Of course, it'll have an effect on the broader market, in general, but not for us so directly.

[Laila Danielsen, executive]

Yes. And then the follow-up questions, which is quite natural. Do Elliptic Labs have enough cash and income for company operations?

[Lars Holmoy, executive]

Yes, we do. We are very well funded. I think we addressed that just a few minutes ago. We have for the foreseeable future and with the increase in revenue as we see now and our increased interest in our products, we have more than enough cash for our operations for the foreseeable future.

[Laila Danielsen, executive]

Okay, very good. Thank you. Any interest from potential new smartphone companies? And I'll answer.

[Lars Holmoy, executive]

Yes.

[Laila Danielsen, executive]

Yes, absolutely, we have -- we work with other smartphone manufacturers as well in addition to the ones that we have listed thus far.

[Lars Holmoy, executive]

Can I just jump in, it's a very directly a question here as well. With so many new smartphone contracts, how do you still remain unprofitable? As you all know that's not the plan for very much longer. We do see already...

[Laila Danielsen, executive]

Already in many markets.

[Lars Holmoy, executive]

Yes. But yes, so we are unprofitable. We are scaling fast, we are hiring fast, we are spending money on supporting systems, and so forth, and we are growing rapidly, and it costs money, basically. It have a high cost, but we expect revenue to increase as well, so yes, it's for not much longer.

[Laila Danielsen, executive]

Yes, absolutely. As we're attacking these other verticals and [indiscernible] [20:44]...

[Lars Holmoy, executive]

We have to invest in everything related to this.

[Laila Danielsen, executive]

Since we raised money, so that's. Okay, so can you tell us about how the PoCs for the remaining OEMs are going within the Laptop and Tablet segment. And it's going well, and we -- I can just do the follow-up questions. Do we still stand behind that we expect to add more laptop customers. And answer to that is, absolutely, we are still standing behind that strongly and have confidence that that would happen.

[Lars Holmoy, executive]

And can you comment something about the timing in the market? Why is it -- does it take much longer? That's also a question here.

[Laila Danielsen, executive]

Yes. We, in general, when it comes to timing when we will secure the contract and launch with other laptop OEMs, we cannot comment on that. Many reasons, but what we're doing is also quite sensitive, contractual with the customer. So we have NDAs. We are not allowed to share about timing, not even about pricing either because I saw another question coming in here about pricing. So we can't give a lot of details to that.I'll take the next one, if you don't mind. Has the demand and activity from customer changed because of the current market situation? So, we see a positive and increased interest in adding more software-only capabilities particularly to the laptop market. But this is not due to the market situation. This is just a general -- actually general approach that we're taking with the customer or even rather how the general approach that the customer takes with us. They look at our Virtual Smart Sensor Platform to be able to add lots of different functionalities and capabilities that they would like.So as we have delivered successfully to Lenovo in the market with positive customer feedback, we see that not just them, but others are now interested in our solution and our platform. And also look at what else holistically point of view can you do to deliver innovation, practical features that is very useful, what can you do with software only. So, I'll just sort of -- because I have a bunch of questions here about just on the product.So follow-up question to that is, the approach that we are taking, or even if I look at the historical with Lenovo, the first deal and the first integration you do in a new vertical is always a little bit more challenging because you have to work with the ecosystem, you have to establish new relationship with the customer. For example, Lenovo, we have to do feasibility study, we have to get to know their team, we have to work on the business side, we have to negotiate the enterprise license agreement, and then working with them to deliver successfully.Then in parallel we work with the ecosystem, Intel and AMD, and had to get to know their company and sign agreements. Once that heavy lifting has been done and our platform is fully supported by Intel and AMD and already been integrated once with the customer, even a customer, and proven that this we can deliver at scale, it's then also easier to add more functionality. So, the timing, because there's not a question when does the virtual next product come out, the Virtual Position Sensor. We're not going to get specific, but in theory it is easier for us and the customers to adopt because of all the groundwork and the foundation of our platform that we already have done. So I think I answered like 5 questions actually.

[Lars Holmoy, executive]

Yes. And I'm also going to do a very specific one regarding who do we work with, which we have not mentioned. And as always, we're not going to mention specific partners or specific customers that we have not launched publicly, at this point.

[Laila Danielsen, executive]

Yes. But we can, again, say, because another question here about our partners, and if we have, how is the relationship going with Intel and AMD in particular because those 2 combined is almost 100% of the market. Of course, Qualcomm, but they have negligible amount of market share. So due to the market demand, we see -- and this sort of becomes a symbiotic relationship with Intel and AMD. They want to add more functionality. They're now really aligning roadmaps, like future roadmaps, with us to ensure that we can support current features more seamlessly and new capabilities. So this is -- overall, the relationship is really positive, and we expect in the future even closer collaboration. So very, very happy with the progress in this market.So let me see. I'll take this one. I don't know how many more you have coming in here. Lenovo seems to continue the use of hardware sensor, presence sensor, in some laptops. Do you expect to take over where they are used today? Okay, so the short answer is, yes, and I can -- I'll share a little bit how the approach that the Lenovo and the other laptop manufacturers are taking when they're working with us. That is correct that some of the high-end, low-volume laptops they already have put in the time-of-flight sensor, and they've had that for a few years already. When they work with us, we go in, in the high volume where the price of the laptop itself it's lower compared to the high-end laptop. We start there and then, even with Lenovo, they start going up the chain and down the chain.So for presence detection, we see opportunity for extremely broad deployment. So that's -- at least that's our feedback from the customer, and that's the expectation that they would like a uniformity, so the same consistent presence detection capability across all their laptops. And, of course, from a price, ease of use, no design impacts, no supply chain issue, we are a very nice solution for them.

[Lars Holmoy, executive]

Should we take the last one?

[Laila Danielsen, executive]

Sure. Does your technology has any impact on animals? Okay. So no, this has been verified over a decade ago, and it has no impact on animals. So do you have any other questions?

[Lars Holmoy, executive]

No.

[Laila Danielsen, executive]

Let me see. No.

[Lars Holmoy, executive]

No.

[Laila Danielsen, executive]

All right. Well, thank you very much and have a good day.

[Lars Holmoy, executive]

Thank you.

[Laila Danielsen, executive]

Thank you.

[Lars Holmoy, executive]

Bye.

[Laila Danielsen, executive]

Bye.