Elliptic Laboratories ASA

OSE:ELABS

Earnings Call Transcript 2021-Q4

[Laila Danielsen, executive]

Hi, and welcome to the Q4 and Full Year Report for 2021. My name is Laila Danielsen, and I'm the CEO of Elliptic Labs. I'm here together with our CFO.Today, we'll be covering 3 main areas. First, we do an introduction to Elliptic Labs and market status. Then 2, our CFO, Lars Holmoy, will share further details about our NOK63 million in revenue for the year, which means a 41% growth in revenue and rather more interesting, 81% growth in sales revenue. So he will cover that. Third, but not last, we will also talk a little bit about market moving forward.So let's jump into our vision. Sensors touch every aspect of life and drive digital transformation. Our vision is to build the leading software platform for all sensors in the market, making every device in today's market and future markets smarter, more human and environmentally. So let's take a closer look at what this means. Okay. What we are doing is that we are leveraging existing single-purpose sensors that are in most devices today. We start out in the smartphone and the laptop market, where every single smartphone and laptop will have today a microphone and a speaker. Our platform leverage this. We apply our software onto -- we apply these -- our software into these devices. And then from there, we generate new user experience, for example, like virtual proximity sensor, presence sensor, et cetera.Let me illustrate for an example. Today, most likely you're sitting in front of a laptop, you hear my sound through a speaker. This we call audible sound. We leverage the standard speaker that's on a laptop, but we just lifted up and we leveraged ultrasound, which is a different frequency that comes out of the speaker in parallel with audible sound. This ultrasound bounces off your body and goes back and the microphone listens to this ultrasound. And then from there, we apply our software to do different functionality. What we launched with here recently is with Lenovo that wanted to have a virtual presence sensor onto the device to detect if people sat in front of their device or not. And to make sure when you're sitting in front of the device, the screen and display is on. And when you leave the display and the screen would automatically lock, so to make sure that your laptop is more secure as well as reducing the power consumption. So this is the primary feature we're leading with. But we do more.We also work with partners, for example, like Texas Instruments and Infineon that has sensors like radar that we then -- they then come to us, and we apply our platform, enable a new set of features, for example, heartbeat and breathing. Furthermore, in cases that when we truly, for example, in the smartphone market, we needed to optimize the performance, we took advantage of not just the microphone and speakers on the smartphone, but also a set of other sensors like gyro and accelerometer, and we did what we call a sensor fusion, combining output to truly create high-performing sensors. And I want to make crystal clear that our platform, what we are delivering is 100% software that we use to make devices more intelligent and environmentally friendly.So we're standing on a very strong foundation. There are billions of devices in the market today that already have hardware sensor components. We started out in the smartphone market. And of course, this total market is enormous, $5.5 billion market opportunity and growing. We started out in the smartphone market, high-volume devices of smartphones. However, the price point for the hardware sensor that we place in this market is very low. Thus, the overall market opportunity is about $140 million to $350 million. The next market we're going after, the hardware sensor we're looking to replace in this market and have already started is to have a higher price point, and we'll get back to that. But this is the reason for that this market opportunity, even though they are lower about 450 million laptops and tablets being sold is lower than the smartphone market. But due to the pricing difference in the hardware sensors, we have greater opportunities. And we see we also have a wonderful opportunity in the rest of the market as well.Okay. So how we are leading with our customer is that we look at what type of use case they would like to do. And in 99% of the cases, we see that we can solve and deliver what the customers in today's market would like to do with software only and replace hardware sensors, single-purpose hardware sensors. What does this mean? It means, automatically, we reduce the cost for the customer. Furthermore, we can also add additional features involved and beyond, something that we will discuss later on in future presentations. And also, we mitigate the risk for the supply chain, and we completely eliminate the sourcing risk that since we are replacing software instead of delivering the same functionality with the hardware.So this is -- we see an enormous response from the market. We have smartphone, laptop customers out in the market. We also have signed an agreement, of course, in the IoT space as well. And the physical sensors that we are delivering and replacing -- the physical sensors we're replacing in the smartphone market is an infrared sensor. In the PC, it's a different type, higher cost. It's actually a bigger sensor is a time-of-flight sensor. And in the IoT space for Bosch, it's an industrial PIR sensor that we are replacing. So different price points. But overall, the general underlying platform that we are using is -- can nicely deliver this set of different features and capability across these verticals.And I'm going to try to illustrate with an example again. In the smartphone, the distance that we have to detect, it is basically we use an infrared sensor is -- the phone rings and put up the screen turns on, you put up to your head, the screen turns off, you put it away, it turns on again. We're talking about detecting 3 to 5 centimeters. The same underlying technology, we move then over to the PC market. And now we use the detection we use it in the front of the laptops. So that's about 1 meter. And from there, again, we again take the same underlying technology and we move it over to a new set of market in the IoT with Bosch. And here, now they want the distance 3 to 5 meters. Different physical sensors needs to be delivered for this capability, but we use the same underlying 100% software solution to deliver this.Okay. So we see a -- here we see a string of models that we have launched across multiple verticals. And how we -- we are starting to follow the same principle as we did in the smartphone into this new vertical. So in the smartphone market, we signed our first PoC all the way back in 2013, spent literally the whole company to support this first project to launch on one smartphone model. This is -- it was 3 years later in 2016. And then we started scaling and automating our platform more and more. And instead of using 20, 25 engineers, now we just use a few field application engineers to support large deployments onto these smartphones. Furthermore, today, we no longer sign any PoCs when we are working with smartphone customers. We go straight to the production model. However, in the laptop market, we have signed several PoCs. And of course, here recently, we also launched. So we're following the same process. And we expect and we plan for that eventually, we will also follow the same process as we do in a smartphone market where we go straight to production and do not have to do a PoC as we are scaling out in the PC market.So our commercial scaling is based on a truly strong foundation and our solid virtual smart sensor platform is supported by market enabler like a really strong ecosystem of partners. We leverage this and then we keep adding on more and more PoCs that we are successfully converting into real business and models launch. So let's take a closer look at how we're doing this. First, as I've mentioned several times already, underlying technology, completely scalable across verticals. And what we are focusing now as we're hiring more engineers is that we keep increasing this process of automation, so we can use less and less resource for each deployment that we're doing. Of course, we have spent a decade building this platform and is already very, very scalable to buildings of devices. In addition, we have spent almost a decade also to work with many, many chips providers in the semiconductor industry, so we can embed our software easily into the products for the customers. And of course, we continue training new products, while we are aligning all of our road maps together with partners and customers. So this has been a critical path and a very successful path that we have done over the past decade.In regards to the organization, we continue increasing hiring across engineering sales and sales support in all locations. We are now global in U.S., Europe and Asia, and we are close to where all our customers are. So not only are we moving into new verticals from a just -- between PC and IoT, but we're also creating business in new geographical areas. This is very important for diversification of your business. So we have now a customer, of course, in China, Asia. We also have now customers in Europe, and we have a customer in the U.S. And we expect to keep growing in all 3 geographical areas.So in regards to partnership. So particularly in Q4, this was very critical that we -- obviously, we've been working with Intel for a long time. Intel owns about 80% of the laptop market. So a truly critical relationship that we have established with Intel and primarily due to -- also a few things, but primarily due to the enormous pool they see from the laptop market. But the fact that we work so closely with Intel as well as AMD because if you work with Intel, AMD automatically follows. We can now target basically 100% of the laptop market. So this has been a very long journey to establish this relationship with Intel. So we are extremely pleased that we are in this position. And now we have 4 more like, I would say, a symbiotic relationship with Intel that we're sort of -- Intel is looking to us to also bring new features and innovations so they can deliver to the customer. So extremely nice relationship that we are very, very excited about. And of course, we will continue working closely with Intel and AMD and Qualcomm that is just starting to kick in the tires also in the laptop market.We have a solid track record and a consistent track record in converting PoC into real business. This is important. Of course, as I mentioned, we sort of skipped the PoC in the smartphone market and go straight to business, and we see this here in Q4 that we signed a license contract with a new customer for 7 models. So we -- no PoC needed. But I would say the most exciting PoC conversion that we have done here recently is, of course, the fact that we are able to land such a large customer as Lenovo and not just landing them because any type or model, but landing a high-volume commercial laptop from Lenovo. And that's critical because, in general, in the commercial space for laptop providers, they are more conservative. So we don't do a high-end, low-volume laptop, we do a mid-down high-volume laptop. So this is super exciting. And we'll share a little bit more about this journey with Lenovo. So we have broad deployment already, hundreds of millions of devices with our technology. We keep launching in the smartphone market. We expect to keep expanding in the PC market. And we are on the track for the market launch with Bosch spexor. So an incredibly good track record in converting PoC into real business and seeing that the customer come back for more, and we can keep expanding into new markets.So we always get a lot of questions around who are we competing against. And even though in some cases, we are partner with some of these hardware sensor vendors, in general, we lead many times competing with them, replacing physical sensors with virtual smart sensors. And in the smartphone market, we started initially back in 2013, looking at how to replace an infrared proximity sensor. This was a very difficult task. Why is that? Well, one, because the technology back then has already been for about 10 years since -- in the market since the first Apple smartphone in 2007. So a very, very mature technology, also a technology that has been sold in very, very high volume. And furthermore, a sensor that was tiny, meaning, overall, the cost was low. So it's actually incredibly challenged to replace this technology. But we did it. We did it.Now as I said, we are moving into the next market, the PC, and we look at primarily replacing time-of-flight sensors. Today, we see time-of-flight sensors, mostly in the high-end laptops, which is low volume because of the cost of the time-of-flight sensor. The beauty here in this PC market in comparison to the smartphone market is that there is no standard, there's no incumbent in this market. So we are in a nice beautiful position to become the de facto standard to deliver presence detection and more into this market. So this is extremely exciting. Furthermore, as we are exploring other markets within the IoT, we see that there are lots of opportunity in demo for presence detection. So very, very exciting times here for Elliptic.So now I'm going to hand over the word to our CFO, Lars Holmoy, that will talk about our finances. Thank you.

[Lars Holmoy, executive]

Thank you, Laila.Elliptic Labs are funded for a continued expansion across all verticals. Year-over-year, our customer revenue grew 81%, meaning Elliptic Labs are on a strong growth trajectory. Our other revenue are slightly declining as we are focusing all our resources towards customer revenue. Total revenue grew 41% year-over-year, giving a 28% EBITDA margin in Q4 alone and for the year, it was minus NOK2.8 million. We had one-off costs related to our uplifting to Oslo Bors main listing, but we also had a resettlement and a true-up effect on our share-based payment agreements. We also had consultant fees as will be a one-off for the Q4 alone.As we said, we were solid funded. Our solid cash balance supported by our equity raise in September, and we had negative cash flow from operations. One of the reason is just payment schedule from the customers. We also have an increased recruitment and new hires cost. Investments mainly reflecting capitalized software and development costs. All in all, we have a robust balance sheet. Elliptic Labs are funded for continued expansion across all verticals. Cash position is good, and there is currently no need to raise additional capital.Over to you, Laila.

[Laila Danielsen, executive]

Thank you, Lars.So we are set to grow, and we're nicely positioned to grow along multiple dimensions. Everything is surrounded and built around our core platform. So in 2021, we added on 2 more verticals. We are now in a total of 3 verticals. For each vertical, we are expecting to expand with more and more customers and each customer would add more and more models into their portfolio. On top of that, we also see that we are in a position to even add more products for each customer.So let's illustrate with an example. So we started out in the PC market, where we landed and launched with Lenovo. Of course, Lenovo has many, many PC, tablet and laptop models that we are targeting to launch with in the future. Furthermore, on top of that, for each of the model, we also are targeting to add more of our products, different type of virtual smart sensors. So multiple opportunity for expansion with our underlying solid platform. So this is very, very exciting.So in conclusion, we see a clear path to our significant revenue uplift. Our revenue is target NOK500 million. And of course, this is an ambitious target. But this is what we see today. So let's break it down. We expect to continue growing in the smartphone somewhat. But as we've been stating, our next significant key growth vertical is the PC market, where we expect to have the majority of the growth over the next 2 years. And then in the IoT market, we are in the process of building a strong position, starting, out with a large enterprise as Bosch. Just want to mention here all the way to the end, I just want to make a note that we see an increased price point for our virtual smart sensors or our software sensor outside the smartphone market. This is essential for us to reach our ambitious target of NOK500 million.Thank you. So we will take a quick minute break just to review the questions that has been kicking in. So we'll be right back. Thank you.

[Laila Danielsen, executive]

Hi. So we are back, and thank you for all the questions. And also thank you, as a gentlemen that before every quarter -- quarterly report gathers many questions from other investors and share beforehand. So once again, really appreciate that. So I'll jump straight in.So this first question is to you, Lars or the both of us. I'll have you answer it. Are you still targeting EBITDA of 50% and revenue target NOK500 million in 2023?

[Lars Holmoy, executive]

Yes. We are still targeting 50% EBITDA at NOK500 million. As a software company, we do expect high margins. We have done our heavy lifting in investing in our scalable platform, and we do see high margins coming in as we ramp up revenue in the future.

[Laila Danielsen, executive]

Yes. So I'll just ask -- well, the next question is for me, but I'll just ask it since you're looking at. How good is Elliptic Labs' virtual sensor technology for laptops in comparison with, for example, radar and time-of-flight?And this is specifically in regards to having to build it for the presence detection. And it's when the customer or, for example, Lenovo, when they are testing, going through a testing process, we have the same set of specs for time-of-flight and what they're using for radar and they do dead on head-to-head -- completely head on that comparison. And we are absolutely at the same level, and we expect to continue training to even go beyond that. And of course, on top of that, there's more we can do than just detection. But for now, we see that for the use case for the presence detection. We are on par with the hardware sensor. And this is, of course, super exciting because if you have the ability to replace hardware sensors with software only, there are lots of benefits for everybody around.

[Lars Holmoy, executive]

And the next question is...

[Laila Danielsen, executive]

This one?

[Lars Holmoy, executive]

Yes.

[Laila Danielsen, executive]

So this is for you. Does Elliptic Labs planning to be listed at other exchanges?

[Lars Holmoy, executive]

We continue to assess whether or not to do secondary listings. When the timing is right, that will -- and if you see the demand from the market, of course. So yes, we're exploring it.

[Laila Danielsen, executive]

Okay. So I'll jump in for one for me.

[Lars Holmoy, executive]

Yes.

[Laila Danielsen, executive]

Regarding the IoT vertical and assume high market potential going forward. You have already signed an agreement with Bosch. Yes. And Bosch spexor. And then, of course, you have some PoCs with other verticals as well. What do you consider for the IoT market be the most relevant for the Elliptic Labs technology?So what we're seeing when we got -- of course, we stated that in the IoT market, we are exploring and navigating this market for it to identify the most low-hanging fruit. Of course, it is an enormous market. We start out with Bosch. Bosch is a wonderful company to work with because they have so many different departments. We have all the way from automotive to appliances in the house. So we are expanding, of course, planning to expand, target to expand with Bosch. And then we are navigating and looking at other similar type companies. But what we are seeing is that all in the IoT space, companies are looking for the ability to turn off and on a device based on somebody's presence. For many reasons, for security, for power saving, this is what we see. So we see our core technology, we put the ball everywhere. But once again, we're exploring figuring out with the lowest hanging fruit, and we have to be practical how we are attacking this market.

[Lars Holmoy, executive]

Laila, this is for you as well.

[Laila Danielsen, executive]

Okay.

[Lars Holmoy, executive]

Can you please say something about competition, market shares and potential and technology?

[Laila Danielsen, executive]

Yes, so we have talked a lot about the competition. So in general, what we're seeing is that, I mean, sometimes we compete against hardware sensors, sometimes we are partnering -- I've already told you several times that we work with companies like Texas Instruments, Infineon to apply our software, for example, on the radar sensor for new features such as breathing, heartbeat, fall detection, et cetera. So in general, what we are seeing thus far is dedicated single-purpose hardware sensors that we are competing against. And of course, there are billions of hardware sensors and devices today. So it's solid foundation for us to go after.So I'll do this one, but...

[Lars Holmoy, executive]

Yes, go ahead with one.

[Laila Danielsen, executive]

So China is supporting Russia. How do you -- what type of diversification are you doing against potential sanctions against China?

[Lars Holmoy, executive]

Yes. So yes, we had to -- we also put that in the report this quarter due to the war coming on in Ukraine. And so we continually monitoring potential sanctions in countries where we have operations. We currently do not have any operations in Russia or Ukraine. And looking into 2022, we're having a more diverse revenue stream than we had prior, and we also see now both in U.S. -- revenue streams for both U.S. and Europe. So in terms of risk diversification, I feel we are on a good foot there.

[Laila Danielsen, executive]

Yes. Entering into new verticals and also in new geographical areas. Bosch is in Europe. Lenovo has a huge presence in the U.S., has also headquarters in Hong Kong. And then, of course, the other laptop manufacturers, many of them -- I mean, they're all based outside China. So I don't know, do you have any more on this one or?

[Lars Holmoy, executive]

Yes. I have one here, an update to the one-off relating to true-up or also consulting fees.It's including both. So the one-offs is -- we are approximately NOK6.5 million. So yes, that's there.Can you say how much revenue we're getting out of the Lenovo deal, Laila?We are not at liberty to speak about those numbers, so.

[Laila Danielsen, executive]

Yes. So in general, we get, of course, many questions about -- specifically about our pricing, specifically about customer, number of models and so forth. This is in regards to our pricing, we do not want to share that because of competitive reasons. And also as we're going into other customers and markets, et cetera, furthermore, in regards to sharing any details about the customer, we can, of course, not do that. But can you say, in general, we received very, very fantastic feedback in regards to our implementation with Lenovo. So this is exciting. And of course, we're targeting all the other companies.And I just want to mention this also here to because I don't think we have more questions is that last quarter, in Q4, we did announce this partnership with Intel, which is that this is critical and the fact that Intel is now aligning the road map with us also demonstrate the traction that they are seeing from other PC OEMs. Note that they own over 80% of this market share. So we're starting to see a really solid symbiotic relationship with Intel and also, of course, AMD.

[Lars Holmoy, executive]

Yes. Just one last one. And it is just IR related in terms of what type of communication we will give out after we know on the main listing of Oslo Bors?Yes, it will be a little bit changed, but we will be in line and compliant with all the regulations, of course.

[Laila Danielsen, executive]

Yes, absolutely.

[Lars Holmoy, executive]

Absolutely, so.

[Laila Danielsen, executive]

Well, thank you very much for the questions, and have a good day.

[Lars Holmoy, executive]

Thank you. Bye.