Elliptic Laboratories ASA

OSE:ELABS

Earnings Call Transcript 2022-Q3

[Laila Danielsen, executive]

Hi, and welcome to Elliptic Labs' Q3 2022 Presentation. My name is Laila Danielsen, and I am the CEO of Elliptic Labs. And today, I have our CFO, Lars Holmoy joining as well.

The 3 main takeaway from today's presentations are as follows. First, we here at Elliptic had a strong Q3 quarter with solid revenue in both the smartphone and the laptop market. Secondly, in the short term, we see some volatility, which consequently may result in a lumpy Q4. However, the midterm market, we see a solid demand from the PC vertical. Therefore, we are and will continue hiring to meet this solid and strong demand from the PC market. This is important.

Okay. Let's jump into a little bit about Elliptic Labs. Our vision is to build the leading software platform for all sensor, making every device smarter, more human and environmentally friendly. So what we do is that we leverage existing single-purpose sensor to create new user experience. So existing single purpose sensors that are already in all the devices today. So let me give an example. And I'll sort of focus on the PC markets since that's our next really strong and big market for us. So one thing that we're seeing are coming, and this is what Lenovo is mass deploying in the market on their laptop is the ability to detect if a human is sitting in front of the laptop or not. What we're doing is that we reuse microphone speakers and sensor fusion to send out ultra signal to detect if you're sitting in front of the laptop. As soon as you leave the laptop, we can detect it, then the screen would lock for security and also screen will shutdown for power savings. So this is just one of the capabilities that we are delivering to the market.

We can also deliver many other capability, some that we have recently launched like the Virtual Positioning Sensor. We can also do Gesture, we can do device to device connection, et cetera. So lots of different products that we can deliver to a big market. Today, billions of the devices use hardware sensor components that we can leverage to create this new user experience. The market that we're going after are large. We started out in the smartphone market, which is high in volume, but the sensor one is using, and we'll talk a little bit more about that later in the presentation, is at lower cost compared to, for example, the PC market, which also is high in volume, but the sensors, the physical sensor that we start replacing to create a set of features has a higher cost.

And also, there are more room to charge a higher price in the PC, laptop market. And there's a lot more greater value we can even bring to this market.

We're also looking -- exploring into the IoT market as well. And we also sort of carefully exploring a little bit also in the automotive market.

Okay. So back to Q3. In Q3, we saw 75% of revenue growth from contracts with customer year-over-year. Laptop revenue represents a significant part of the Q3 2022 revenue, including a stand-alone milestone revenue and license revenue. The laptop license revenue is expected to continue to ramp up here in the fourth quarter and into 2023. However, as I mentioned initially, we see a temporary slowdown in the end customer demand in the smartphone vertical here in Q3 that we may expect to have some lumpy impact on us -- for us in Q4 of 2022.

Okay. That doesn't mean that we are not signing new contracts in this market. Thus far, we have announced 28 smartphone launches year-to-date, which is really good. And we will continue launching in this market, and we will continue signing more contracts. But we see here very near term that is the weaker consumer sentiment in the smartphone vertical. But we will continue signing contract to be clear, and we will continue launching. So still good need for a product in this market.

Okay. Let's talk about our next growth vertical which is the PC market. We see short-term drop in a laptop demand under -- this is due to a challenging market condition. However, what we are seeing and experience that this actually gives us an opportunity because leading players in the market. So the Lenovo and HP and Dell of the world, Acer, Asus, are increasingly focusing on innovative and software-centric solution. So let me try to illustrate this with an example.

Okay. For example, let's say, hypothetically, if you are Lenovo and you bought a Lenovo laptop and then you were working in a hybrid environment, which majority of us are doing these days.

Then you will buy, let's say, Lenovo keyboard, a mouse, maybe even a dock station, external display, and you set that up. Then you want to duplicate that environment in your office. To ensure that's easy to set up all these devices and they work nicely together these leading players are looking to us to provide this frictionless user experience. It's easy to set up, easier to use. It's not just the components I'm talking about, but I'm also talking about the broader set of products that each of these customers have.

So -- this is really positive. So when we work with the customers, obviously, in this market, we're starting from a -- not zero, but we're starting very early in a very large market that we can grow into. And the customer [indiscernible] they're taking a holistic approach, like, okay, how do we fit in to not just the laptop market, but the broader set of products that these customers have.

Then we start with a really strong value proposition with delivering a sort of near-term need that they have, and that's for the human presence detection, but we have a phenomenal product software-only that competes directly on single-purpose sensor, for example, like a time-of-flight sensor that has a higher cost. And so we have a solid foundation that we start.

Furthermore, when we work with these companies, we're looking -- or the way they're approaching it is also like these are long-term relationship. Where we are creating a contract, the methodology of the contract is back to the example of Lenovo. We started out with a few models, then they added on an additional 18 and then they have kept renewing one contract after another, keep expanding their footprint of our software into the market. And note, this is just with one single product. But we have more, and we have more that we are talking to with all these players in the market.

So we are in a pole position to enable software-centric and scalable and cost production solutions in this market. So we are in a unique position, and this is important. And another takeaway from this particular message is also that these customers were looking at long-term relationship. This is not the one side project, but contracts that we can truly expand organization wide for our customers. So that's important to note.

All right. Talking about the high pace of technology adoption with Lenovo. We started initially with the functionality of delivering presence detection. And this methodology and this approach is the same approach that we expect to see with more customer here over time. But also note, even with Lenovo, this was the first time we went out with one customer. And yet, they have expanded, I would say, fairly rapidly. This also demonstrates our ability to deliver our software scale. So even though we have great ability, we would still have to hire to meet the solid PC demand from the market. This is important.

Of course, as Lenovo has adopted our technology, we see and we continue to see a strong interest from the other PC vendor. So very positive, very optimistic and very confident that the PC market will be a solid and excellent opportunity for Elliptic Labs. So who do we general compete against as a starting point? Well, we mostly see single-purpose hardware sensor.

And note and I'll give an example here for a time-of-flight sensor or even a radar sensor that has a single purpose capability. What is our value proposition to the customer? Well, one, we eliminate sourcing risk because we're 100% software; two, we reduce cost because at scale, we can have a more aggressive price point or more elasticity in our pricing model compared to a physical hardware sensor. We also increased the battery life, we can increase privacy. And at least but not -- at last but not least, we can also add more features. And this is what is very, very interesting for us when we are talking to the laptop OEMs.

All right. Multiple opportunity for expansion, sort of following the methodology that we did in the smartphone, more customer, more models. What we see a stronger traction for sure in the laptop vertical is that it's not just the presence detection that the laptop market is looking at, but they also look at other type of our sensors or products. So nicely positioned in this market for growth and a very exciting time ahead of us.

All right. Thank you. And now I leave the presentation over to our CFO, Lars Holmoy. Thank you.

[Lars Holmoy, executive]

Thank you, Laila. Elliptic Labs is well funded for continued expansion across multiple verticals. We have a very strong balance. We have cash on hand, and we will continue to hire to meet customer demands and especially in the PC vertical.

We have had a strong growth trajectory supported by revenue from laptop vertical this quarter. Last 12 months, we have grown 75% in revenue from contracts with our customers. And this quarter was the first quarter we had license revenue from the PC market. We also had a stand-alone milestone revenue that was a significant part of our Q3 revenue.

Looking at the total revenue. We had a 38% year-on-year growth. Marketing. This is also the first 12 months or the last 12 months we did not have any other operating income, government grants and so forth.

First, laptop revenue recognized in the third quarter, although we are in the midst of an uncertain near-term outlook. We doubled our revenue from contracts with customer year-over-year, and as I said, it includes now also a significant portion of laptop revenue, whereas a significant portion of that, again, was from a stand-alone milestone revenue. We do see slow though in the end user smartphone market. And this uncertainty in volumes in the coming quarters may impact our Q4 revenue. However, laptop license revenue is expected to represent the majority of revenue in [indiscernible]

This quarter, looking quarter-on-quarter, we had 102% growth in revenue from our customers. And of course, as said, this is supported by our laptop vertical. As you also can see, we are profitable this quarter. And one of the key reasons is our -- we are highly scalable and zero COGS on current revenues. This is one of the key benefits on our selling our software. We also increased our employee benefit expenses year-over-year, and we have added on 14 more people year-on-year, and we are now 79 full-time employees at Elliptic and we will continue expanding our HR and our people. We need more people to meet customer demands.

And EBITDA positive at NOK 6.2 million is prove that our model and the way we work is very -- it's a workable solution.

As I started this presentation win, we had a strong liquidity position. We have NOK 200 million cash on hand. Negative cash flow from operations, reflecting our increased net working capital. Our investing activities reflecting capitalized development costs and is quite conservative. Cash flow from our finance activities, as always, is -- includes repayment of our lease liabilities, repayment of short-term liabilities, paid interest and proceeds from issuing shares. We have an equity ratio of 94.5% and as again, strong cash position. And our long-term liabilities mainly reflects our loan from innovation in Norway. Thank you.

[Laila Danielsen, executive]

Thank you, Lars. So Elliptic Labs will continue to increase its number of customers, models and products and will continue to enter into new verticals. Based on our growing number of projects in the PC market, we still maintain our business revenue target of NOK 500 million in 2023, but acknowledge that the general global uncertainties may impact our target.

All right. So now we will take a short break to review the question, and we'll be right back. Thank you.

[Laila Danielsen, executive]

Welcome back. So first, I just want to thank you the gentleman that has gathered lots of questions from the retail market and submitted to us so we appreciate that. And -- so let's start addressing. We've got quite a few questions here thus far.

[Lars Holmoy, executive]

Yes. Can you please elaborate more on the feedback on the laptop on the human presence? And how does it compare to hardware sensors competitors?

[Laila Danielsen, executive]

Okay. So first, let me just start by -- this is very important to understand. Our value proposition is stronger than a single-purpose hardware sensor. So first, I actually addressed the last question first. If I look at -- if you look at, for example, a time-of-flight sensors that you use for just basic presence detection. The only thing the single -- this single purpose time-of-flight sensor is doing and providing as a service is only turning off the screen for presence detection. But our technology is so much more.

And this is exactly why the market and particularly the PC market is coming to us for that. But when it comes to the presence detection itself, we have -- from the broader market, we have great interest. We have great feedback from the market. We haven't received issues around the deployment, which is very nice, even though we have already started deploying this in mass scale. And obviously, with this positive feedback from the market, it also has allowed and motivated for Lenovo in particular, to deploy very broadly as we see for all the contracts that we have kept signing.

Furthermore, we expect and see the rest of the market to follow the same using our technology for human presence detection. But the fact is there are several solutions out there for human presence detection. And the alternative, they are all single purpose hardware sensor that we replace with software only, better pricing, and we add more features. So overall very positive response from the market.

I'll take the next one for you.

[Lars Holmoy, executive]

Yes. Okay.

[Laila Danielsen, executive]

Have you had any problems with scaling within laptops so far? I guess we have sort of answered that already. Do you have sufficient resources to also scale with other OEMs within the coming 12 months? And yes, we do, but you can elaborate?

[Lars Holmoy, executive]

Yes. Our software has been greater in design from the very beginning from ground up with scalability in mind. I think this quarter is a proof of that. And we have proven that over the years in the smartphone industry, we're already in hundreds and millions of smartphones. And then, of course, with our very great engineers, which we're looking for more, we can deliver. And it's -- there's basically no problem in scaling. We are having customer demand, and we are looking for more people, but it does not hinder or stop our scalability.

[Laila Danielsen, executive]

No. But as we, of course, are building new products as well as continue to scale on more and more customers...

[Lars Holmoy, executive]

We continue our R&D.

[Laila Danielsen, executive]

We have to also hire more people. So we are not slowing down in hiring at this point. And then I guess I'll summarize it, we have -- as usual, we have received many questions about products like when is it coming out? When is the next laptop contract coming, lots of details specifically et cetera, lots of details in regards to pricing, scaling, who is doing when what? And I -- I mean, frankly, you deserve to have more information. I understand that. Unfortunately, as we have repeatedly stated and which is very common in this industry, is that we have strong or very strict nondisclosure agreements, meaning we cannot share publicly information out about our agreements.

And also, frankly, from a competitive point of view, we would -- we do not want to either even if we could because as we are moving into this market, I'll just make another comment here. It's a bold statement, but it is the fact, is that we see now that the way we are deploying into this PC market is that we start also in the mid-end. If you look at today's market, most models in the PC market in the high end already have the time-of-flight sensor. We started in the mid end and talked to mass volume. But what we are seeing is that now, not just now, but even Lenovo started, they are replacing time-of-flight sensor, another, for example, Radar sensor with software only.

So these -- you will see some old models that has time-of-flight sensor. You have some that already had signed in before we even start working with these customers that would still be in the market, but we expect to see more and more replacement as well as the broader deployment. And they can do the broader deployment because of our pricing elasticity.

Okay. So I'll do the next one here. So how does the slowdown in the consumer segment impact Elliptic Labs?

[Lars Holmoy, executive]

I think yes, we see, however, we have shipped on [ 22 ] phones this year, but we're coming -- we are aggressively expanding, as you can see, in the PC market. And we're starting from zero. So even though the top line comes down, we are moving up. So -- and we started pre-COVID levels, maybe it will end up at again. Maybe we don't know yet, but it's where we're at. And I think our -- as you said, price elasticity, I think our value proposition in total, as we do more than single-purpose things, we can have a broader scope. We focus on security, power savings and something. And we can help them. And we see that they're shifting their focus on a more software-centric approach.

[Laila Danielsen, executive]

Then I have another question, I can just address that quickly. It's basically specific details. Can you comment if your contracts to date with Lenovo accounts for more than more or less than 50% of the lab terms in terms of volume. We cannot answer that. We are able to answer it, but we're not allowed to answer due to nondisclosure agreements.

We'll continue here are some more questions down there. Okay, well, you sort of addressed this, but maybe you want to talk a little bit more about recruiting. Is there a bottleneck -- is it a bottleneck? Or is there a bottleneck, sorry, is the bottleneck for succeeding your expansion? Is that due to -- that we have issues around recruitment?

[Lars Holmoy, executive]

No, it's now as the -- I think on a broader scale, there is easier for us now as we are expanding in the engineering side, it's easier for us to recruit. Short answer and we do.

[Laila Danielsen, executive]

Okay. Can you explain how you're working with both laptop customers, chip producers and other software integrators when you're trying to make an entrance into more market players. In other words, are you selling the product directly to laptop companies? Or are you working mostly with, for example, Intel, Qualcomm, MediaTek to position your product and invest the most efficient way.

So our model is that today in the PC market, we sell directly into Lenovo. And here, we have some pricing elasticity due to software only. But today, how we are charging, we're charging a price per unit, so a license price per unit. When we deliver our software to do the integration, we work closely with the biggest PC chip manufacturer in the world, Intel, AMD and Qualcomm. And we work jointly together with Intel, Lenovo and us in this integration project to ensure support. So we require support from Intel, which they are giving us goes 2 ways. One, they want to create more differentiated solutions on their chipset. And then two, they get pressures from the OEMs. So we partner with Intel to sell and actually not to sell but to deliver our product into the laptop manufacturers. But the product is sold directly in it.

There are other malls that we are exploring and that we could potentially do is we could sell our software in to Intel, and they would bundle it into the chipset and sell it to the OEMs. What we see thus far is -- and that is a sort of business discussion, what type of price point do you give and to get to that level? And is that the best foundation for us to grow with the customer. Because the way we work with our laptop manufacturers, I'll talk a little bit because I'm getting a bunch of questions about how we are selling and working on how they're buying is that the customer taken a holistic approach when they work with us. They don't look at this as a short-term one-off deal but something that a solution that -- at least for the presence detection as a start to do a broad deployment.

But then furthermore, as you may know, is that these large PC manufacturers that had lots of other products like accessory. So they're trying to do a closer integration between all their product lines, so give the consumers a better user experience, more frictionless user experience. So for example, if you friction as user experience so they can also ensure stronger customer stickiness. So let's say, if you buy a Lenovo laptop that it's easier to buy a keyboard and a mouse and display and a dock station, for example, and other products, maybe a conference system, et cetera. So this is here where our software also can help.

So we start with sort of a holistic approach then we make sure that the agreement, which is our complex and takes a little bit time to negotiate, cover the whole enterprise. And then we start first with the sort of the minimum viable products to get in, which is a presence detection, get the core platform in and then we start adding on functionalities as we go along. So this is how the customer views and they are looking at us as a long-term partner.

Okay. I think we have [indiscernible] number, maybe?

[Lars Holmoy, executive]

Yes. So in general, there are quite a lot. You can pick and choose, but -- how are we going to reach.

[Laila Danielsen, executive]

There are many questions about that. So I hope that -- we once again, I do understand that it's hard to calculate how we get to the number for everybody that is listening to this presentation. So if you look at just some numbers, if you look at the big 3 that have over 50% of the market and if you look at the price point, they have, for example, for time-for-flight sensor. At $2 or $2.50, and let's say, you look at Lenovo. They have about 70 million times 2, that's $140 million. I'm not saying that we are charging $2. But what I'm saying is that since we started from the ground, even though the market is going down, it seems like it's going down pre-COVID so it's still a large market for us. We see that we can start scaling very efficiently. And this is what we are relying on.

But of course, we have to continue expanding with our customer either expand even further with Lenovo to reach this target, which we see that have a strong interest in. And also is either I talked about even for 100% of Lenovo, we are there. Or if we add on a few more of these larger or smaller OEMs. So this is how we expect to reach the number. And then, of course, we will get some revenue even though we see here short term, we addressed for Q4 that it's a little lumpy due to the smartphone market. This, we expect to be very near term. And that in 2023, we see that our smartphone customers kind of continue in deploying with us.

But what we really are relying on is the continued expansion with the PC market. And that's a fact. And that's how we expect to reach it. We know it is a ambitious target. And we know there are some uncertainties and global uncertainties that even looking at the past 2 weeks, there are lots of [indiscernible] comments, but we see such a solid demand in the PC market that we concluded and to still stick with this ambitious target.

[Lars Holmoy, executive]

Yes. I also received quite few technical questions about revenue recognition. But yes, IFRS 15. But as we said, a majority -- a significant portion of our Q3 revenue is from the laptop and a significant portion of that, again, is from our [indiscernible]. How and when we do get milestones is, of course, we can't comment. So that's basically it. And I think we covered most of it.

[Laila Danielsen, executive]

Okay. Thank you very much, and have a good day.

[Lars Holmoy, executive]

Thank you.

[Laila Danielsen, executive]

Thank you.