Elliptic Laboratories ASA

OSE:ELABS

Earnings Call Transcript 2020-Q4

[Laila Danielsen, executive]

Welcome to Elliptic Labs Q4 presentation, March 10, 2021. My name is Laila Danielsen. I'm the CEO of Elliptic Labs. [Operator Instructions]

And so let's just jump in here. Agenda introduction in Q4 2020 highlights, then the financial will be presented by our CFO, Thor Andre Talhaug, and then we will conclude with the summary and end with some questions. So let's just jump straight into it. Q4 was a very good quarter for Elliptic Labs. It was the highest quarterly revenue in the history of the company with NOK 27 million. And during this quarter, we demonstrated that we have a scalable business model where EBITDA margin exceeding 65% in Q4. Furthermore, as you know, we secured a healthy financing last year when we went public. And we spent some of that to pay down interest-bearing debt. And this quarter -- last quarter of Q4, we also obtained positive cash flow from operation of NOK 15 million.

Over Q4, we have continued to expand our customer base in the smartphone market and IoT. We have made excellent progress on the POC and the PC, laptop market. And we expect that with a positive outcome from these POCs that this will have a significant change and positive impact on the financial performance during 2021 and onwards. We continue to have a really good relationship, customer relationship with our customer, Xiaomi, and we had several launch their high-volume smartphones. Another point that we will be discussing further during the presentation is the partnership that we have -- that we keep working with this global leading chip manufacturing.

And all of our underlying and scalable technology, we continue to patent. And now we have a patent portfolio that is close to 100 patents granted and pending. So let's just take a step back and talk sort of what our core technology is. Our mission that we're doing and have our core focus is today is that we're developing smart software sensor that use AI and ultrasound to sense you and their surroundings. So what does this mean? This means that we use sound. So ultrasound. And when you have -- when you look at any device, whether it is a smartphone, smart speaker, laptop, we use standard microphones and speakers and how it works is that ultrasound operates at a higher frequency.

So when you send out sound, you send out audible sound that human beings can hear, which is under 20 kilohertz. And then you also send -- and the devices also send out ultrasound, which you cannot hear as a human being. And this is this unused frequency that -- this is what we're using. So for example, let's say, you have a smartphone that has a speaker and the speakers send out on ultrasound, and the ultrasound will balance of your body, your head, your hand. And then the ultrasound will go back and then the microphones will listen to it. And then our technology would transform this into a set of features.

So that's our mission. But our vision and as we've been working for several years is to build a leading software platform for all sensors, making every device smarter and more environment friendly. What does this mean? Okay. So our core focus that we started on was using ultrasound software-only solution. We will continue being a software-only solution, but we will start to incorporate more and more sensors. So for example, one thing we're seeing from several companies in the market that they want to have the ability to detect this is particularly around wellness features to detect heartbeat on human beings. And then we are talking to them, for example, we can use the radar sensor. And we work with several world-leading radar sensor providers in the world like Infineon and Texas Instruments, like multibillion-dollar companies. And what they have, they have the physical sensor, but they don't have the software to truly enable sophisticated type of features like heartbeat.

So this is what the customers are now coming to us as well. And what we are seeing that we can provide even additional features. There's lots of other sensors we are reviewing as well, but the next one we are seeing begin interest on is radar. And we've been working with -- also with radar sensor for several years. So -- so our vision is to really continue expanding this platform now in the smartphone, laptop, and then in other markets.

So an important note, today, we are the leader in the market for the consumer market for anything using ultrasound capability. As we are recognized as the leader, we have global presence in, of course, in Norway where have headquarters. Within Asia, we have offices in China, Shanghai, Shenzhen, we have presence in Taiwan. South Korea and Japan. And of course, we also have in Silicon Valley.

So we, over time, have built our presence where our customers are. This is an important element because we spent quite some time and resources to establish these relationships, built a solid platform that we've demonstrated now. It's -- we have now deployed over 150 million devices, and we keep growing. And as we are scaling, this is why our business becomes very scalable, we all have established this global presence where our customers are. So as we're scaling the revenue, our cost and to address that further would not scale so much. Therefore, we see that our software-only business model have an opportunity to exceed over 50% EBITDA margin. And we have still target that we will reach NOK 500 million over the next 3 years.

All right. So talk a little bit about our features. So one thing that is very important when you go after these large markets, is that you spend some time to be really, really good in one thing and demonstrate that you can scale and then build your ecosystem and get your partners with you. So what we focus on for the -- initially, was to replace a physical proximity sensor in the smartphone. And what is the purpose of a proximity sensor? Yes, it is. When the phone rings, the screen turns on. And when you put up to the air, the screen turns off, and we'll take it away again. The screen turns on. This particular capability is in every single smartphone today. The first time that was used was from Apple in 2007.

So you have 1.5 billion of these infrared sensors. These are the ones that we are now starting to replacing. The beauty is -- we have spent this time in building up this platform. The beauty is that the underlying technology now, we can use them into other markets. For example, what we are seeing now is the presence detection for laptop. Once again, we're using software only, we are reusing the microphones and speakers that is on the laptop. This is for presence detection. Means when you stand a front of the laptop, it's on when you move away from the laptop, the display or the screen dims and then locks and then shuts down. And this is important for power consumption and security. When you come back, the technology ultrasound would keep checking if somebody's come back, then turning on, then using for authentication, either camera or face recognition or fingerprint to unlock the device. So the beauty is that the underlying technology that we have now proven at scale in the smartphone market, we can now leverage into other markets with other capability.

Gesture, we also see coming in the PC market. And in the IoT and automotive, we see other features that we will discuss further when we're further along with those type of feature set in those markets. But really good, really scalable that we can take proven technology, product is in the market and then moving into new large market like the PC market.

So -- in the beginning of 2021, we also experienced, and this is good for us. It's very good for us that the hardware sensor prices increased. This improved our competitive advantage. So I want to highlight these two key markets that we have the strongest focus on that. That's smartphone. As you see in the smartphone, that's the pricing on our competitive hardware sensors. It's -- I would say it's relatively low. It's a large volume, but I would say, relatively low, it's around NOK 0.10 to NOK 0.25.

The reason for that is that, as I mentioned earlier, Apple started this back in 2007. It has now sold billions of billions of sensors. And therefore, the way it's manufactured, they're making also these residents are really small. So there are really low costs. The feature or the capability of infrared sensor is that the signal it stands out is very, very narrow. Therefore, when you go into the PC market, you have to use this different sensor. This sensor is more costly. It requires a wider field of view because if you're sitting, for example, in front of a laptop and let's say, use the infrared sensor is very near field of view, you just move a little bit, and then the display will turn off, which should be very annoying and not usable.

So for this market, it's a different type of answer, which is the higher cost. And also in the infrared sensor, you have lots of large companies that are incumbent of the infrared sensor is incumbent. However, in the PC laptop market, there is no incumbent today. And this is where we have this fantastic opportunity to be the de facto standard in this market. We're also moving into these other markets as well. We mentioned we have a smart bridge. And we expect that we will gradually keep growing this market. But our two key focus market now is the smartphone and the PC market.

So let's talk a little bit about what we -- a little bit more detail of what we did in Q4. So we launched to high volumes with Xiaomi, which is important, and we keep growing with that customer. We also launched with a new smartphone customer, ByteDance, on their model. And then furthermore, we also strengthened our partnership particular with MediaTek. And this -- the relationship we did with them makes us easier for also integration, it's easy for us to scale with our customers. And we -- this happened in Q1. But if you pay attention to the news we had here a few weeks ago, you also saw that we launched our first large order volume model on a MediaTek platform with Xiaomi.

So this relationship that we are strengthening is already paying off. So this is also a big advantage as we are scaling. So I talked about PC market. We are super excited about the PC market. And lots of good things are happening. That market has been growing a little bit due to COVID, which is phenomenal. We also continue to -- and we have -- we have announced POC, and we have mentioned that we are working with all the big players. So now you -- we can't mention the name, but I think it's pretty obvious when you see it on the display, on the screen here. Also, we have -- we start and we'll continue working very closely with the partners, all three of the partners, and I'll dive into that in a few slides here.

So the PC market, we signed two new POCs with [ LDPC ] manufactured here in Q4. But more importantly, also what we're doing, we're doing this to accelerate the relationship and the speed we're going to market is that we added on experts PC consultants in the U.S. and in Japan. This will help us to strengthen relationship to make sure that we get up to the executive leadership with these companies and as well as particular in Japan. So we don't get any language barrier because in COVID, we have a little bit limiting to traveling. So it's good to get these specialists. And these are so connected that this makes it also easier for us to add more people exactly where we need it as we are scaling to engage with more PC engagement.

So really positive around everything that's happening around the PC and Q4 has been incredibly positive for us. So the partnership that we have with its chipset partner, all of this would help us streamline deployment for as we're targeting this joint customers. We have several joint POCs. We mentioned already, we did a launch with MediaTek that I touched upon. But what we're seeing for laptop is really, really exciting for Intel, AMD and Qualcomm. Not only are they looking for how they're going to work with us and align with on the short term. But now, they also started looking longer term out, making sure that we have appropriate and good strong relationship, not just in 2021, but they're looking 3 years out. So this -- we see -- we are very excited about. And the reason is very straightforward, is because they get a lot of pressure from the customer. So good progress in alignment of road map makes us easier to support our customer, and this will also help us on the road to become the de facto standard for this market.

We continue working also with other partners. I mentioned a little bit about Infineon, AAC and Knowles these are companies that are selling very leading astounding microphone and speakers. Frankly, we can support any type of microphones and speaker. But it's good to have this go-to-market partnerships and joint marketing and promotion, just to get our name in front of more people. So we continue to also strengthen that just pure sort of marketing purpose as well.

So now I want to leave the word to Thor Andre. Thank you.

[Thor Andre Talhaug, executive]

Thank you, Laila. Yes, like for the third quarter, we would like to first go through some of our main nonfinancial KPIs. We believe these KPIs are very important in order to understand the company where we stand and make predictions going forward. Even though we have had a big success with a few customers in the smartphone space, we are still in an early commercialization phase overall, and we are entering into new huge verticals that will transform the company if we succeed to another dimension, I would say, to a much huger company in the years going forward.

So what we have built are our bases has been to have much focus on patents and to grow the number of patents for each year and each quarter, we can show now that we have in total 93 patents granted and filed after 2020. This has also made us a very attractive partner for ecosystem partners. And we have now 15 partner agreements after 2020. When we are entering into new verticals, we have been successful with the POCs in the first phase. As you can see, we started with POCs in the smartphone space early in 2016, and we are now, as you see in the last -- in the lower part of the slide to the right, the cumulative number of models launched, which has reached now 27 in the smartphone space. In the latter period, we have introduced a lot of or several POCs in the -- and also in the laptop space, the last being announced earlier this week actually. And we believe this will also lead to models launched in the laptop area going forward.

Looking at our numbers for Q4, we can emphasize that we have had the highest quarterly revenue in the history of the company. It was also expected to be a good quarter, but we also saw that the profitability maybe also was stronger than what we have earlier made expectations of. So with EBITDA margin of 65% in Q4, it is almost above our expectations. But for the second half in total, 35%, maybe more in line with what we could expect. And as you know, we have our target with 50% EBITDA margin. Have to keep in mind that the first half of 2020 was a very special year for us with almost 0 in revenue due to the COVID-19 effects, especially in the Chinese market that we were very hardly hit by in the first half.

Looking a little bit ahead, we also want to give some guidance for 2021. We expect it to be a significantly stronger top line than what we have achieved in Q4 for 2020. And we also expect EBITDA for the year as a whole to be positive. EBITDA for 2020, as you can see, was a little bit less than minus 5. So it is -- we believe that this is a realistic target for the year. We still expect seasonal effects for 2021. You must keep in mind that we have a few customers, and we have also been having customers -- paying customers in the smartphone market so far. We have experienced that this is -- this has been very seasonal. Most contracts have been entered into in the second half of the year. This will also be the case for 2021.

In addition, you know that we are working with several POCs in the laptop space. We don't expect these to be hugely recognizing revenue in the first half, but rather in the second half of 2021. So both these factors are leading us to the conclusion that the second half of 2021 will be likely very good. First half will be less so, but better than 2020.

If you look at the balance sheet, after the share issue we made in October 2020 and the listing on the Euronext growth, we have a strong balance sheet. We have equity book value of NOK 191 million at the end of the year. We have a strong cash position of NOK 101 million even after paying down NOK 25 million in debt in the fourth quarter. If you look at the cash flow, we are very pleased to see that the cash flow from operations is following the profitability. So cash flow from operations in the fourth quarter ended at NOK 15 million in plus, whereas it for the second half in total ended at NOK 12 million. For the whole year 2020, we ended at minus NOK 5 million, which we believe is good, taking into account that first half of 2020 was, as I already mentioned, severly hit by COVID-19 effects, and we had very little revenue.

With our software-only business model, and the minimal working capital requirements that we see, we believe that cash flow will be very strong when top line is growing. We reiterate our target for NOK 500 million in revenue and EBITDA margin of more than 50% within the next 3 years. Regarding the EBITDA margin, we believe that our second half of 2020 is a good signal that the EBITDA margin is reachable. When it comes to the revenue target of NOK 500 million, it can seem as a big step from today's NOK 45 million in 2020. But you must remember that we are at present only in one vertical and mainly with one product in this vertical at present. And also much of the revenue in the smartphone space stems from one big customer.

As you have seen, we announced in this quarter, Q1 2021, that we have signed a contract with another big smartphone customer. This contributes to the target -- to the long-term target of NOK 500 million. In addition to this, for sure, all the POCs that we have entered agreements with different OEMs in the PC market, it's very important to understand. We are feeling that we are approaching a crossing point where we go from POC to contract also in the laptop market. And when we are successful with one or a few laptop PC customers, we believe that the target is within reach.

As you know, the alternative cost for the -- in the PC laptop market is 10 to 30x higher than the alternative cost in the smartphone market for our solution. Therefore, we don't need so much success in order to reach the NOK 500 million target in the laptop space to get there.

Looking at the shareholder structure. There has been a few changes since last time, but the main shareholders have been pretty stable, I would say. And we have a huge portion of our shares owned by the Board of Directors and the management in total, 22%. We have also increased the number of shareholders during -- after the flotation of the shares on the Euronext growth, and we are now around 900 shareholders in the company.

With that, I will leave the word and the closing remarks to Laila.

[Laila Danielsen, executive]

Thank you. So just to sort of reiterate or summarize. So we are very nicely positioned to capitalize in multiple verticals, specifically at the smartphone and the laptop. We have already demonstrated that we have a proven business model with software only. And we have -- we are also in the market today. And we have proven that we can scale our technology to over 150 million devices. And this underlying platform are we now deploying into new markets.

Over time, over close to a decade, we have spent effort to sort of build our company global and be close to the -- our customers as well as we've been working hard with all these various global partners that enables us easier support for both new and current verticals. We will -- we have launched several smartphone models. We have added more customers, and we will continue to do so. But I would say what is truly, truly exciting is the visibility that we have in the PC market. Of course, by strengthening in our organization has also given us even further visibility to enter this market and positions nicely is also to be able to meet these demands in the PC market.

So sort of just reiterating what to address that with the few smartphone -- a few large smartphone customers as well as either have -- do really well with one laptop manufacturer or just okay with a few, this allows us to be in a good position to become a NOK 500 million company within 3 years.

So with that, we have finished our presentation. What we will take is a small break so we can have a chance to address the questions that are being submitted. Thank you.

[Laila Danielsen, executive]

Okay. So we see some questions there taken in. So we'll just jump straight into it. So let me see here. The first question, do you see -- do you see if we are on track with our medium-term financial targets?

[Thor Andre Talhaug, executive]

Yes, I believe -- we addressed also during the presentation. We are on track. We see that the new contract in -- with a new big customer in the smartphone space is positive for us in the smartphone area in addition to some new smaller clients that we have added on during the last 6 months that we also have announced. And we are also working very good with our biggest customer in the smartphone space, Xiaomi. As you have seen, we have also announced several POCs in the laptop space. These are moving forward. and also will contribute to revenue in the medium term -- medium term, I would say.

[Laila Danielsen, executive]

Yes. And then we've got some more questions around our business model. As we're talking about customer review want to elaborate a little bit about our business model and how we generate revenue from our customers?

[Thor Andre Talhaug, executive]

Yes. We are entering into different kind of deals with our customers. Sometimes there can be annual contracts of license, there can be lump sum upfront payments, et cetera. But whatever we do, all is derived from a per unit cost of our software which, again, is derived on -- from the alternative cost the customer has from hardware sensors. This you can see from the slide, we presented the alternative solutions in the different verticals smartphone, laptop, PC, Smart TV, IoT, et cetera.

[Laila Danielsen, executive]

Okay. So there a lot of questions opening here, so let me see. So I'll take the next one. Shortage of hardware sensors. We experienced more interest due to the increased cost on the competitive hardware sensors that we're competing against. And in general, we have seen great interest about our technology, in particular now it's increasing in the laptop market -- laptop PC market. We see this sort of shortage around hardware sensor or rather the increase of pricing also in the hardware sensors, not only is increasing the interest around our technology, I think it's overall. And then also, we don't get as much pressure on price because the alternative price that they -- if they would go with a hardware sensor, it has increased significantly.

So okay, so we're getting several questions around the POC. So I'll elaborate a little bit more on the POC. So just to be clear, in the smartphone market, in general, we don't do POC. We've been selling out in the market, the customers, we have very good reference customers. So in the smartphone market, it goes straight to production. However, in the laptop market, we do a POC. And in general, when we engaged initially with in the laptop PC market, we started the first feasibility study and the POC is where we go in with a very dedicated focus project where we're targeting specific models that the customer would like to deploy upon completion of the POC.

In general, we expect that this deployment into production is about 12 to 18 months from [ initiate ] and POC. However, what we are seeing due to the fact that we are software-only, we have a potential to actually get deployment earlier.

Okay. So then let me see where are some more. Yes. I'll -- since we are talking about competitive landscape. For software-only solution, what we're seeing in the market is that, in particular, when we look at the commercial laptops and the PC market, it's very important for the customer that they see mature, scalable technologies. And for today, we are the leading in the market using ultrasound. We are the only one in the world today that has deployed a virtual smart sensor based on ultrasound in hundreds -- over 150 million devices. This is critical. Also not an aspect that is critical when you're engaging with these large customers is that you've been around that you have proven local scale that you have a strong IP portfolio and also that you are close to the customer that you have established presence around the world to support these customers.

So per today, we don't see any other companies, large or small, that is working on any short-term to even from the next 1 to 2 years. And even if somebody is going to start now, we know that's going to take other software companies. quite some time, plus that we have a strong IP portfolio to be a significant threat for us.

It looks like we have addressed. Okay. I'll take this one too. Sorry, this is for you. How is the dividend yield planned for the future?

[Thor Andre Talhaug, executive]

Yes. It is -- the Board has not resolved any specific dividend yield going forward yet. This will be done as soon as we reach a good profitability, I would say. So not -- yes, next year, maybe there will come some news about this. We'll see.

[Laila Danielsen, executive]

I see. Yes. It looks -- I mean, we can give it maybe another minute to see if there's other questions taken in, but it seems like we have addressed.

[Thor Andre Talhaug, executive]

There was a question about the accounts receivable there? Yes, I can address that as the question was why is accounts receivable so low in the balance sheet as per [ 31/12 ], whereas you have so significant revenue in the fourth quarter. And the reason for this is that, one, much of the invoiced revenue was more or less all paid. The accrued revenue, you find under other current receivables. This will be invoiced early 2021.

[Laila Danielsen, executive]

Okay. We'll do one last one here. It just kicked in. Could you comment on the numbers deviating from guiding charge from the IPO process in October?

[Thor Andre Talhaug, executive]

Yes. During the IPO process, we were guiding at NOK 60 million. We could reach NOK 60 million in revenue for the year in the total, subject to significant laptop revenue in the fourth quarter as we have not announced contracts in the laptop space. We have announced POCs, but not contracts. This is postponed. It is -- we see it is coming, but it was not coming in the fourth quarter.

Despite this, we were able to generate very good revenues, maybe more than we had expected in the smartphone space and also good profitability in the last quarter.

[Laila Danielsen, executive]

Okay. Thank you. Yes. So thank you for your time. Thank you for the questions, and have a good day.