Elliptic Laboratories ASA

OSE:ELABS

Earnings Call Transcript 2023-Q3

[Laila Danielsen, executive]

Hi, and thank you for joining us for the Elliptic Labs Third Quarter 2023 Investor Presentation. I'm Laila Danielsen, the CEO of Elliptic Labs. And here with me today is our CFO, Lars Holmoy. Let's delve into the key highlights for today's session focusing on 3 main takeaways.

First, let's talk about revenue growth and Elliptic Labs' market position. In Q3, customer activities continue to positively impact our revenue figures. Year-to-date, our revenue is up 40% compared to the same period last year. And we're already 14% above full year 2022, a noteworthy achievement given the challenging market conditions.

Despite market challenges, we stand well positioned for long-term growth, both operationally and financially. Our proactive approach and attention to emerging trends position us to thrive in this dynamic landscape.

Secondly, let's talk a little bit about new products and milestone. Because we achieved a significant milestone by securing a proof of concept contract with a major PC OEM introducing a groundbreaking product set to revolutionize device, device and probability. Subsequently, we formalized this achievement by signing a license agreement with the same PC OEM announced in early October. This customer relationship is set to introduce seamless user experiences across different systems and devices, aligning with the vision of more interconnected and user-friendly technological world.

And let us be clear here. Our new product, the AI Virtual Seamless Sensor, is chipset and operating system agnostic. So yes, we do support iOS, meaning we support Apple iPhones in addition to Adroid-based smartphones from companies such as Samsung and Xiaomi. We will dive, of course, further into the details later in the presentation.

Okay. So our AI Virtual Smart Sensor platform, leveraging our technological leadership in AI machine learning, ultrasound and sensor fusion, is at the core of this innovative breakthrough. Also, in the last quarter, we expanded our footprint by signing agreements with existing laptop and smartphones launching our AI Virtual Smart Sensor platform on new devices, new smartphones. Okay. Third and the final takeaway. And this one is, I would say, is really interesting because it's a significant paradigm shift, is underway in the PC market with our partners like Qualcomm, NVIDIA and AMD, developing new ARM-based chipsets in addition to the x86-based [indiscernible] and AMD chips targeting the PC market. This shift is underscored by industry giants like Microsoft and Google, refocusing on the PC space. With these 6 major companies competing in the PC market, we already see a strong need for differentiation in their product offering, targeting our joint OEM customers, so our joint PC customers.

Elliptic Labs is at the forefront of this paradigm shift with these key ecosystem partners seeking our innovation around AI and device-to-device in probability. The increasing numbers of connected devices with the average household having over 20 is driving the PC to become the central hub unifying the user experience. Our AI Virtual Smart Sensor platform is pivotal in creating this seamless user experience, and this precision open up for new business model.

Of course, we will share more details later in the presentation. In conclusion, we maintain unwavering confidence in establishing ourselves as the industry standard with our AI Virtual Smart Sensor platform. Our strategic buying and market traction provide a solid advantage, positioning us to drive long-term growth and delivered significant value for our stakeholders.

All right. So let's dive in further to the presentation. Elliptic Labs works with global leading partners and customer to redefine user experience with our AI Virtual Smart Sensor platform. As the market becomes familiar with our technology, they discover new ways for consumers to engage with and to utilize their products.

The market, our customers and the ecosystem partners turn to us for innovation, leading to the creation of new and exciting applications. Our platform is entirely software-based and leverages AI, ultrasound and sensor fusion to deliver exceptional user experience to companies across various industries.

As our technology becomes mobilely known, both the market and our customers uncover novel ways to gauge consumers and optimize the products. They rely on us for innovation, leading to development of exciting new applications. So if you look on the slide on the upper right-hand corner, you will find our new AI Virtual Seamless Sensor, which is an important new product that see a significant interest for both our large partners as well as our customers.

We share more information about the importance of the seamless device-device connection and interoperability later in our presentation. All right. So it is clear that our value proposition is resonating with the market, customers and partners, demonstrating in our year-on-year growth. Our AI software-based solutions are an obvious choice when compared to expensive single-purpose hardware components.

Our smartphone business continue to remain robust as we continue to launching more models with our smartphone customers. And then you can see that we -- this year, too, we have launched a lot more smartphones already. And this will -- we expect to just continue.

In the PC, we continue to launch more models, selling new expansion contract, so this quarter -- this past quarter, excuse me, with Lenovo, as well as converting a POC license contract for our latest new product, the AI Virtual seamless sensor and turning that into a license contract and talking about the new product.

We just announced also the launch of our new AI Virtual Seamless Sensor. This virtual sensor brings multi-device interoperability that would revolutionize how users interact with technology. As a result, our platform's interoperability functionality, which truly empower our customers, our OEM customers to innovate new value-adding user experience, thereby broadening their ecosystem and strengthening customer loyalty.

We are really excited to bring this technology to the market together with our customers and partners. The AI Virtual Seamless Sensor offers significant potential, boosting a range of capabilities, such as distance tracking, positioning, initiating communication between 2 devices and determining angles. Notably, this virtual sensor is hardware and platform agnostic, compatible with all major operating systems, including markers of Googles and Apples, completely combining on all the different chipsets, Qualcomm, Intel, AMD NVIDIA, et cetera, MediaTek, for that matter as well.

This versatility ensures that when our PC customer design a seamless user experience, it will work with all Android phones as well as the iOS Apple iPhones. As stated earlier, we have already secured a customer who has entered into a software license agreement using a derivative of our AI Virtual Smart Sensor. Of course, this AR Virtual Seamless Sensor has such an enormous capability. So meaning, the customer would just use a piece of this capability. This strategic move aims to enhance customer loyalty by delivering a consistent seamless user experience. And to be clear, the contract, which is highly confidential, I may add, is signed for several PC models and would aim to support both iOS, so Apple iPhones, as well as Android smartphone.

Furthermore, for this contract, we will also collaborate with those partner together with the customer. Okay. So how do we price our new product? So I want to underscore and just make a note of this is just the first data point that we have with -- obviously, it's the first contract we're doing with the AR Virtual Smart seamless answer. But the first data point is that we were able to price -- this virtual seamless sensor a bit higher than our initial AL virtual present sensor that we currently have running in the market today with the PC or PC customer.

All right. So we can all agree that we are well positioned in a very large market. And in the PC, we have solid traction with multiple opportunity for expansion. We have signed with 4 of the top 6 OEMs. As you can see here, we have 5 products launched in the market. Launch, meaning announced in the market, not signed contract for yet. We have signed license contract for 2 of these products already. And we have lots of models in the market using our technology.

So how we're growing, more models, more customers, more AI Virtual Smart Sensor across more verticals. So due to the traction and the push from our PC customers, so we see a big push into the ecosystem from our PC customer. And of course, this is based on -- it doesn't exactly hurt that we own hundreds of millions of smartphones in the market. So the ecosystem partners have extraordinary interest in working with us because our PC customer, in particular, appreciate our technology leadership in AI ultrasound and sensor fusion, as well as our proven ability to scale on a global level. This combined with what we stated about the paradigm shift in the PC industry and the need for the ecosystem to differentiate themselves. We are well positioned in this ecosystem.

And so just to sort of be clear and just add a little bit flavor to the paradigm shift. Thus far, if you look at the past, Intel has had 80% of the PC market. AMD, 20%. Now Apple has their own chipsets. So Apple has about 13%, Intel around 70% and obviously, AMD, a little bit less. What's been announced recently, you may have seen this in the news, is that NVIDIA is also planning to enter into the PC market in 2025. And Qualcomm have already made several announcements. This is -- we did some joint press release with Qualcomm as well for their latest chip that is targeting aggressively into the PC market. So we see a big shift here going from 2 key chipset vendors to 5 PC chipset vendors, and we work with all of these partners, and we are very well positioned.

So how are we going to capitalize on this position? Well, we are leveraging our leadership to become industry standard, making it easy to expand our product through our ecosystem partners, which also opens up for other business models. For example, our partner can embed their software into their products and deliver this as a standard out to their PC customer. That can be one other business model, for example, that we can take a look at. So it's a very interesting time here now for Elliptic Labs. Okay.

So let's talk a little bit about our revenue models. And obviously, we have talked about this many times. And as always, we are in ongoing negotiation for more contracts, and we have already signed contracts that are, as usual, highly confidential. This is simply the nature of our business.

Our advantage, the advantage of being 100% software company is that it allows us to have a flexible business model and revenue model. The dynamic nature of revenue numbers quarter-to-quarter is influenced by various factors that we proactively address and we are growing year-on-year. We have taken proactive measures to adapt to the market conditions, including structuring our deals with upfront commitments. This approach enables us to offer competitive pricing per unit, which position us for substantial growth as we continue to ship more products into the market. Okay.

So of course, we're getting a lot of questions around pricing. So let's shed a bit more light on it. And I'm just going to say before you get too excited, we are not at this point for competitive and general market exposure, we will not give the exact license fee amount that we are charging our customer per unit.

However, let's take a little bit closer look at the recent contract we signed for our new product. For this one, we have 1 price for the Virtual Human Presence Sensor, and we charge a bit more for the Virtual Seamless Sensor. This means that the customer indeed is paying a double license fee per unit. So I'll just throw a high number here so we don't get speculation. But let's say we charge $5, which we are not, but let's say if we did. For the presence sensor, we will then charge at least the same amount, actually, we charge a little bit more. So the total price then would have been $10, just to clarify with an example and a price that we are not charging exactly.

So -- but please note that this is just 1 data point, and we are very early in the market. Okay. Everything we have talked to, talked up to this point, demonstrates the great position we're in. We have multiple growth and value drivers as we move forward. We're scaling our laptops revenue. We continue smartphone expansion, and we're certainly driving more AI Virtual Smart Sensor Products per customer.

When with this new AI Virtual Smart Sensor products, we are expanding, it gives also new opportunities that we are starting and exploring and working and talking to customers about into peripherals and devices and accessories and into certain segment of the IoT market. So overall, we are in a very good position. So I'm now going to leave the word to our CFO, Lars Holmoy, who would talk us through some more numbers.

[Lars Holmoy, executive]

Thank you, Laila. We have demonstrated a stronger revenue growth year-to-date 2023, growing revenue from customers 40% compared to the same period in 2022. At the same time, we are already 14% ahead of the full year 2022.

We are still in the early stages in building our laptop business, but we are well positioned as we have secured contracts with 4 out of the top 6 PC OEMs. Our smartphone business remains robust, and we expect a balanced mix of smartphone and laptop revenues throughout 2023. And we are expecting continued growth with quarterly fluctuations, as we have seen in the past quarters, we're also expecting it to continue somewhat further.

Q3 2023 revenues from contracts with customers of NOK 21.9 million compared to NOK 27.1 million in last year. This year, NOK 59.1 million versus NOK 42.2 million, a 40% uptick as already mentioned. This quarter, we had a lot of milestone revenue as a significant contributor to our Q3 revenue. We continue to prioritize long-term growth over short-term gains.

Our organization is still a light and a lean organization, which we prioritize. Employee benefit expenses of NOK 20.6 million, and that's up from NOK 19.3 million last quarter and up from NOK 16.3 million same period last year, which included an increase of 7 full-time employees in Q3 2022 -- from Q3 2022.

Our operating cash flow of minus close to NOK 12 million, NOK 11.7 million, is primarily attributed to a higher level of operational activity, travels and so forth. And we also have 11.4% increase of account receivables, which is not yet due from sales that we have had. Investments reflecting our R&D of AR Virtual Smart Sensor platform, which increased 17% compared to the last year.

Financing, mainly reflecting proceeds from our issuing shares from our option program, among others, and repayment of short-term borrowings, a positive of NOK 4 million. Our cash position is strong. We are well funded for our strategic growth target. The current operational levels and the increase in receivables from customers align with our expectations.

As I said, we maintain a robust cash position of NOK 120 million at the close of Q3 2023. The increase in current assets is due to not yet do accounts receivable from our customers, aside from the disclosed dispute of $425,000 that are -- that we are in a dispute over. There are no other outstanding receivables that are due.

Our long-term liability are in primary composed of loans from Innovasjon Norge. We bought an equity ratio of 89%, a testament to our solid financial structure. Our balance sheet reinforces our strong funding positioning, enable us to pursue growth and opportunity as we progress. And with that, I will leave the closing to Laila. Thank you.

[Laila Danielsen, executive]

Thank you, Lars. All right. Successful expansion into the PC laptop market supports Elliptic Labs' long-term growth ambitions. While customers in both smartphone and PC markets currently face uncertain near-term demand, there's a growing trend among PC customers to incorporate Elliptic Labs products into more of their models. This ongoing expansion will contribute to additional revenue.

We have signed multiple significant contracts throughout the year. Although or however, some of these main contracts we are currently negotiated with large new customers, these are taking a bit longer than initially anticipated. Based on this, Elliptic Labs expect solid revenue growth in 2024 and to be on track to meet the NOK 500 million revenue goal in 2025.

So now we will do -- we will have a short break so we can just review quickly the questions that are coming in, and then we'll be right back. Thank you.

[Laila Danielsen, executive]

Welcome back. So we have received lots of questions. So why don't we just jump right in?

[Lars Holmoy, executive]

I saw all them up front from some of you guys. I truly appreciate those questions. So Laila, seamless sensor, a lot of questions around that. Explain the functionality. We have done it already, but please do a little bit more elaboration around that.

[Laila Danielsen, executive]

Yes, even more. Yes, sure. So obviously, as we are seeing in the market is that basically, we see the whole industry is focusing on position themselves a lot around Apple true ecosystem, the interoperability between the iPhone, the Mac and the rest of their products. So what we're doing with the Virtual Seamless Sensor is that we can also deliver a true interoperability device-device connection with a software-only solution. Because it's clear that, obviously, the iPhone and the Apple product has a lot of sensors, physical sensors, which, let's say, for Melanova, HP and Dell. I don't control the whole smartphone ecosystem. I don't control what Apple is putting into the product, Samsung, Xiaomi, Oppo and Vivo, et cetera. Therefore, you have to solve many of these interoperability with software only, and that's what the seamless sensor is truly solving.

So to be clear, too, because this is essential for the PC industry non-Apple product, is that they can also support iPhone. With our technology, we can do so. And with this contract we signed, I also want to underscore that we are doing this together with a very large partner for this particular case. We have also other partners and customer approaching us as we speak. So this is about, of course, initiating this device-device communication and another beauty here with this Virtual Seamless Sensor for this particular customer is a derivative of the seamless sensor.

And when they launch, this will be visible. It will be visible functionality. So it will be clear that it's our technology. And that's, of course, a big change because with all the other products that we have, for example, present detection and proximity, if you don't really notice our technology, it's -- you notice if it breaks, but you don't notice it when it works.

But this one is -- I mean I'm super excited about this because it's such a visible technology. Furthermore, I just want to also talk a little bit about this whole because a lot of companies are coming out with seamless device-device connection. But they are missing this capability, this -- to truly create this interoperability, a product like Elliptic. So this is very, very positive. And of course, we didn't start overnight working on this. We have been working on this product behind the scene for quite some time.

[Lars Holmoy, executive]

Yes. I would just cover a few questions here, and then we can come back to the seamless sensor again, actually. Even more questions. We will give full granularity between the revenue mix at full year, not on specific quarters. And the reason why is the numbers is still quite long, and we don't want to give away the mix. And it's not to the market. It's basically to our customers and partners and so forth as we -- as it's a part of what we sell to them.

We will also not give short-term revenue targets for this year alone in terms of visibility and so forth. What we addressed in the presentation as well that we do see fluctuations from quarter-to-quarter. Still, we're not at the level that we have a steady-state rolling license revenue yet. So -- and then in terms of the milestones and so forth, as we stated, in Q3 this year, we do have a milestone revenue coming in, but we are also having a more healthy mix of running license revenue.

And last year in the market, we had 1 PC that was an upfront commitment and then license revenue. This year, we have 18 models or 17 new ones, which was not [indiscernible] and then running license revenue. It's a -- meaning, coming into a running license revenue, it will grow already. And also when we're launching more PC models, of course.

And to the dispute, it's -- we haven't been much. We are arguing about USD 425,000 that we, of course, mean that we are entitled to. There will be an arbitration court late February, 29th of February. We are very certain that we will have a positive outcome of that one.

And cash burn. Cash burn is within our expectations. We do have a very prudent approach to cost in the terms of rehiring people with the idea of having a project not before we're having the project. So we need people to deliver on some of it, but we do not expect to increase hiring without a very high rate at this point.

We do have a very prudent approach, and we are very comfortable with the funding that we do have now. We do spend quite a lot on R&D still, and we will continue to spend. And that's coming into the patent question. I think it's a nice leeway to that. And the reason why that we have to continue developing, and that's -- we have a question directly on patents. And do you want to like say something about longevity of patents and how we do this. And I think it's [indiscernible].

[Laila Danielsen, executive]

Sure. Of course, we have a whole strategy around patents, and we are close to 200 patents at this point. And we continue filing patents. Patents are valid from application date for about 20 years. So we are covered there quite well.

And yes, so -- and also, it's important to note that it's not a -- the way we're -- we call it strategy sort of picket fencing. But the way we are filing pattern is not that 1 product is just covered by 1 patent. It's multiple patents. So you create a sort of like a mind feel around all your products.

So yes. So we are well covered there. But we will continue filing, obviously, because one of the beauties is that we are first in the market with this Virtual Smart Sensor approach here. And so we discovered also a lot of things very early before any of our partners and customer covering. So we continue filing patents.

[Lars Holmoy, executive]

I think can you -- there's a question here that says, why do you need to collaborate with a large partner on the seamless sensor?

[Laila Danielsen, executive]

Don't necessarily need to. However, for this particular case, we are. And I would not share more details. Just I would -- obviously, I am super excited to find when we launched this product because it's very visible. And I would love to share more because I'm very excited about it. But we have extremely strict confidentialities, even within the partner, there's only 1 group that allowed to even understand exactly what we're doing. So I'm not comfortable to sharing more details around why we are leveraging this application together with the customer.

[Lars Holmoy, executive]

And of course, launching of models in 2024 with other vendors and so forth?

[Laila Danielsen, executive]

With other PC vendors?

[Lars Holmoy, executive]

Yes.

[Laila Danielsen, executive]

Yes. So of course, according to -- I mean we don't control when our customers are launching their -- our technology on their products. However, I can state that we are target or we have received confirmation from the customer that we will be launching in 2024 more PCs with more different customers.

However, that may not happen because it's beyond our control. But we do expect this to happen, okay? So it is planned for. They sign up for certain target models, et cetera, for this to be planned to be launched. Things may -- this thing may change.

[Lars Holmoy, executive]

All right. I just have a follow-up question on the cash. Yes. And I will address it immediately. So it is -- we are currently, as I said, very comfortable at this point, and we will continue gradually increase cost, but not as much in plan as our revenue, of course.

[Laila Danielsen, executive]

Yes.

[Lars Holmoy, executive]

I think also there's a question around the 2025 here.

[Laila Danielsen, executive]

Do you want to take that?

[Lars Holmoy, executive]

And what has changed since we now have moved taking away to '24. I don't want you want address that.

[Laila Danielsen, executive]

Yes, and I can try to...

[Lars Holmoy, executive]

I think it's fair to say we have signed multiple significant contracts. But they -- some of them, they are negotiating with very large vendors. And it takes some time, it does. And what has changed? It's nothing has changed basically. We're still very much in, I would say, safe. Not safe, but I'm struggling with the word here.

Based on our solid revenue growth in '24, we expect them to reach that in '25. It's nothing changed. It's just the timing, and we're not comfortable, that's the word I'm looking for.

[Laila Danielsen, executive]

To continue guiding for the -- to '24. So I can also say like that we talked a little bit about this in the presentation. It's a paradigm shift that is happening also in the PC industry with all these large chipset makers that I stated between AMD, Intel and now Qualcom coming into the mix and then Apple creating their own chips and NVIDIA. And so there are a lot of these -- we have discussions also with the various partners to talk about larger contracts and so forth.

So it's more -- that it's sort of we don't have good enough sort of visibility on the timing to be comfortable to state in 2024. Can it still happen? Yes, it can. But we are more comfortable just stating that we will have an excellent growth in 2024 and that we are comfortable in -- or we feel good about the '25 revenue for NOK 500 million. So I think that's a fair statement.

[Lars Holmoy, executive]

You covered quite a lot during on prices during your presentation, so -- but you could reiterate a little bit around that?

[Laila Danielsen, executive]

Yes, specifically around seamless sensor.

[Lars Holmoy, executive]

For the seamless sensor, I guess.

[Laila Danielsen, executive]

Yes. So the -- so please note that this is the first. We only have signed on contract, as you know, with the Virtual Seamless Sensor. We have a price for the Virtual Human Presence Sensor that we are charging lower than a physical harbor sensor, which I have to say also our strategy is working because we are getting into the large volume PC models. And also, we see that we already have started kicking out some of these hardware technology sensors in the PC market, and that's what exactly what we planned for and expected.

When it comes to the seamless sensor, we were able to charge the same as we did for the human presence sensor. So basically, 1 plus 1 is 2. So doubling the -- not saying it is 1 to 1. But basically, we charge actually a little bit more than a human presence sensor. And Yes. So of course, we have other negotiation in process. And over time, we'll get more data points and then -- but we do expect to, of course, as we're adding on more sensor, to be able to add more higher price per unit for each of our customers. So yes.

[Lars Holmoy, executive]

Again, seamless sensor, also usable for the smartphone vertical?

[Laila Danielsen, executive]

It is. It is possible to do so. What we're seeing now sort of in the ecosystem, it seems like it's more practical that more PC OEMs are signing for this. But it's -- certainly, you can do that, the fact that we are supporting also the -- all the smartphones as well.

[Lars Holmoy, executive]

Yes. And I got a question around disclosing laptop models. As far as we are allowed to in contract, of course, we expect 3. There is nothing at this point that seems like we're not. But we expect to disclose all models that are launched with our software as we do. I think we have covered most of this at this point.

[Laila Danielsen, executive]

Was it something about when we're launching PC timeframe?

[Lars Holmoy, executive]

Yes, timeframe around launching of PCs.

[Laila Danielsen, executive]

Okay. What is the timeframe for shipment and launch to laptops of the contract announced this as specifically 9th of October 2023. When do Elliptic Labs expect the products to be included in customer labs of products and ready for sales. So I can say in general, what we are seeing is that you can't take this to the bank. But just in general, we see 9 to 12 months from the contracts are signed. It might be a little bit shorter. It may be a little bit longer. So that's what we are seeing now.

And this will actually vary a little bit from customer to customer. There's some customer that you expect to be more like 18 months from signed contracts. So for the launch when they sign a contract from when they have forecasted to put our technology into the -- onto the product and launch in the market.

[Lars Holmoy, executive]

Yes. And I think this is also an elaboration on what you mean by interoperability with specific examples. I don't think we can go into specific examples.

[Laila Danielsen, executive]

Well, I mean, obviously, we can't give a specific example where the use case that we are doing. But it's -- I can try to give an example where, let's say, if I come with a smartphone, and I'm working towards the laptop, I use a set of combination of ultrasound, sensor fusion and AI to initiate that, hey, you are right next to your laptop, make that connection, fire of Bluetooth wireless and start transmitting there, for example.

So it could be very seamless that where the user don't really have to do anything. But we see lots of use cases, very interesting use cases from the customer base that they want to sort of launch with, and we don't want to give away the thunder.

But the basic principle is that you can think about that we are doing -- you don't need Bluetooth. You don't need -- just to initiate the connection, and you don't need wireless. You do this with other sensor and ultrasound. And then you then decide after or the system, which we power up after, like, okay, should we -- we're not going to be replacing Bluetooth and wireless, just to be clear, but it's that initiation, which is important.

And I can just mention that Apple has been using ultra wide BAM sensor, which is an expensive sensor. And I'll just reiterate that to -- like I'll just mention this as well because it makes sense. So in the smartphone, the iPhone, they're 100% ultra-wideband sensor that can do this type of initiation. We can solve this with software only because you need to understand in the Android market, only 5% of the smartphone has an ultra sensor. And they're not going to have at any time since all the PC, everything, they don't have it. There's so many devices that does not have it. So that's where we can come in and really play an important role.

[Lars Holmoy, executive]

Yes. I think we have covered all the questions.

[Laila Danielsen, executive]

Yes. Okay.

[Lars Holmoy, executive]

Yes. Thank you very much.

[Laila Danielsen, executive]

All right. Thank you very much. Have a good day. .

[Lars Holmoy, executive]

Thank you.