Elliptic Laboratories ASA

OSE:ELABS

Earnings Call Transcript 2022-Q4

[Laila Danielsen, executive]

Hi and welcome to Elliptic Labs Fourth Quarter and Full Year 2022 Presentation. My name is Laila Danielsen, and I'm the CEO of Elliptic Labs. And with me is our CFO, Lars Holmoy. For today's presentation, there are 3 main takeaways. First, in Q4, despite the economic and market headwinds, we continue to make good progress to expand our solid platform, position us well for long-term growth.

In Q4, we signed with 2 more laptop customers, strengthening our position in our biggest growth area to become the golden standard for human presence detection in the PC market. It is important to note that it took us 6 years to add 2 of the top 5 smartphone customers, but it only took us 18 months to add on 3 of the top 5 PC customer. This is really good news.

Secondly, as we stated in Q3, we expected lumpiness in the smartphone and PC markets in Q4, and this is what occurred. The revenue in Q4 was down from previous year, and this was due to our biggest smartphone customer. In the past years, this customer has signed a 12-month upfront minimum contract that has been signed and recognized in Q4. However, due to the market conditions clouded visibility for 2023, they moved instead towards a smaller minimum commitment contracts covering shorter periods. We expect that the next few quarters, the market will continue to be lumpy.

We have previously said we aim for revenue of NOK 500 million with more than 50% EBITDA over 2023. But given the current market situation, the target will be delayed to '24-'25. This is due to that we are structuring all of the contracts slightly different because of market condition, leaning more towards a pay-as-you-go model with higher per unit prices -- pricing. Lars will elaborate more about this in the financial section.

Okay. It's important to note, we are a 100% software company that does not have any inventory costs. We are currently not burning a significant amount of cash. In addition, we have a strong balance sheet and do not anticipate that we need to raise any additional funds to achieve our goals. This positions us well for success in both bullish and volatile markets. And that leads me into the third takeaway.

Thanks to our achievements in the laptop market, our company is currently in the strongest position ever. We so clearly see that more so than ever that the PC market is serious in using our software platform broadly. 3 of the top 5 PC companies are now our customers, and they are planning to expand with us broadly, not just into more laptop models with more virtual smart sensor but also across the broader product portfolio.

Sensor touch every aspect of life and drive digital information -- digital transformation. Our vision is to build the leading software platform for all sensor, making every single device smarter, more human and environmentally friendly. And in 2002 (sic) [ 2022 ], we made significant progress towards this vision.

We expanded our platform with more AR virtual smart sensor in new verticals. And those of you that are new to Elliptic know that we deliver 100% software-based sensors that use existing single-purpose hardware and devices for a wide range of new functionalities that can be added to smartphone, laptops, IoT and automotives.

In 2016, we launched our first AR virtual proximity sensor on a Xiaomi smartphone. In this market, we are competing at a fairly low price points and have launched a total of 75 smartphone models and about -- on about 5 million -- 500 million devices to date. Currently, we only have a small concentrated fraction of this market with high exposure to Asia.

In the beginning of 2022, we launched on Lenovo's top-seller ThinkPad T14. And we rapidly expanded with 3 of the 5 largest PC manufacturers in the world. Currently, the PC market has slowed down, but we are in a position to potentially take a large portion of this market. IoT, smart TVs and automotive represent a large and growing opportunities.

In total, we -- obviously, this market we'll be going after is large, and we expect this opportunity to be in the area of NOK 5.5 billion. So to be clear, short-term fluctuation in this market will absolutely not impact our position, ambition and ability to create long-term value for our stakeholders.

We are expanding the customers in the smartphone market. And during 2022, we launched on 33 new models. We signed contracts with 2 new customers in the past 6 months. Obviously, one is yet to be announced, so it's undisclosed. The end market in the smartphone market is currently weak, but we expect this revenue stream to be up and running again as soon as the market regains its footing.

In 2022, we made solid traction in the PC market and is a strong validation of the broad opportunity we have in the PC market as we closed out Q4 by signing 2 additional PC OEMs as our customers. We know -- we now have 3 of the top 5 PC manufacturer as our customer, and this is phenomenal.

On top of that, we have successfully launched with Lenovo on their best-selling product. And as planned, they have been adding more and more models to use our products. As I've said before, we are confident in our products and people, and we will not let short-term commercial gains come in way for our long-term value-creation potential.

General supply chain issues and end-user demand may delay our projected revenue from the vertical as this is recognized per shipped unit in combination with milestone achievements. For 2023, we will keep expanding with our PC customers, and we are on track to add even more customers in this vertical. Our position and opportunity to take the lead in this 300 million-unit market has never been better.

In addition to our expanded customer base, we're also launching new AR virtual smart sensor that would help our OEM customer increase user-friendliness on devices while reducing cost, waste and emission. This represents the launch of our third laptop product, and we will continue to add more functionalities and value towards OEMs in the future.

But to remind you, more AR virtual smart sensor is only 1 out of 4 growth levers. We're also growing through, two, more models; and three, more customers across more verticals. The laptop market is set to be our main growth driver for our NOK 500 million target and beyond.

Our competition in these markets are single-purpose hardware sensor that must be produced, shipped, installed, used and in the end, thrown away or recycled. Elliptic's 100% software-based sensor is none of the above. And consequently, we are able to give competing single-purpose hardware sensor fierce competition.

And our 2 current revenue-generating verticals highlighted in green, there's a large difference in price of the hardware sensor we're competing against. And as you can see, there is large potential upside on pricing alone just from the laptop vertical.

And now I will give the floor to our CFO, Lars Holmoy, that will take us through the finances. Thank you.

[Lars Holmoy, executive]

Thank you, Laila. As Laila mentioned, we have an adverse market environment that impacted our revenue in the last quarter of 2022. OEMs have had a clouded visibility into 2023 and, at the same time, having increased their inventory level. As a consequence of the added uncertainty, we did not receive upfront revenue commitment from our largest smartphone customer for the expected complete year of 2023 shipments as we have done the last years.

The PC market has the same issues, and we also expect delays in our laptop revenue. This means that we get revenue recognized per shipped unit in combination with milestone achievements, basically more a pay-as-you-go model with a higher price per unit as the customer is not signing high upfront commitment contracts due to their cloudy short-term forecastability. This leads to higher average sales price per unit, which is, of course, positive for us, but it will take longer time to reach our revenue targets.

Revenue from the PC vertical in 2022 consists of license revenue from only one model launch combined with milestone achievements. License revenue will increase as more model is being shipped.

But I'm going to repeat what Laila said: as our customer base is more diversified, Elliptic Lab has never been in a better position as a company. We continue to add customers in the smartphone vertical, and we have added 3 of the top 5 PC OEMs in the last 18 months. We have diversified our revenue and opportunities across 2 major verticals, and our customer base is geographically spread out. Moreover, we have expanded our product portfolio by launching even more products.

We are currently managing our organization to capture a large opportunity in front of us. In 2022, that meant adding a 13 full-time employees to our staff, which resulted in an employee benefit expense of NOK 63 million in 2022. This number will increase as we had the full year effect of those hired in '22 while also adding on more talent in 2023.

For 2023, we plan to continue to carefully add talents to our team, calibrating our hiring plan to real needs, focusing only on a specific key roles related to current and new customer projects, meaning we continue to carefully managing our costs. The increase in other operating expenses is related to the full year cost of significantly higher activity level, and the effect are related to our new hires. We even had expansion of our office facilities in Taiwan to support the increased activity in the PC market. In summary, we have expanded market opportunities while running the company efficiently.

We do have a strong cash position to support our business plan. We burned an average of NOK 3 million per month in 2022 and ended the year with a solid cash position in our balance sheet of -- with NOK 178 million. We want to turn the cash flow from operation positive as soon as possible, expanding into our large target markets.

We continue to invest in our technology to defend our position as a market leader and spent NOK 4 million repaying short-term borrowings to Innovasjon Norge.

To sum it up, we are well funded for continued expansion. We currently see no need to raise additional capital to execute on our strategy to reach our goals.

I will leave the stage to Laila, who will take you through the outlook and concluding remarks. Thank you.

[Laila Danielsen, executive]

Thank you, Lars. So we are financially strong to continue our expansive growth plan. And if we take a moment to zoom out. While we expect short-term volatility, we are in a stronger position as a company as our revenue are spread over more customers with more products in 2 verticals. We are early phase of penetrating these markets. And as smartphones and laptops will remain an integral part of our society, we are confident in the long-term sustainable end user demand across these markets.

We will continue to capitalize on our strong market momentum, and we are making steady progress toward becoming the preferred 100% software-based sensor for smartphones, PC and the IoT markets. In particular, we see strong customer engagement in the PC market. And we anticipate that our planned product rollout across more PC models and manufacturer will be the main medium-term growth driver in 2023.

We will continue to work with current and add new customers in the smartphone but expect lumpiness. While our long-term outlook is intact, given the current end-user markets, we will delay our NOK 500 million to 2024-'25.

For this year, for 2023, we will continue to expand and enter into well-planned agreements with more customers and partners. We will manage our organization efficiently to support our future growth and carefully manage cash.

So in conclusion, we have never been stronger -- in a stronger position as we're building up on a large customer base across multiple verticals. We will remain focused and disciplined in how we execute our top priorities to strengthen and expand long-term revenue opportunity in 2023 and beyond. Thank you.

And now we will take a short break, so we can review the questions and then both will return to address them. Thanks.

[Break]

[Laila Danielsen, executive]

Thank you for waiting, and welcome back. First, just want to start by thanking for the gentleman that has put in a lot of questions from the retail market and submitted. So once again, really appreciate that. So...

[Lars Holmoy, executive]

Thank you. Yes. Okay. So it's a 2-phase question because it's a combination of more. But first, do you still expect ELABS' tech to become the standard in all PCs and for the other manufacturers to continue knocking on the door? And then it's a little bit more. Of course, we will ask -- elaborate a little bit on the feedback from the PC OEMs customers. What do they foresee, like broad deployment and so forth? Okay.

[Laila Danielsen, executive]

So yes, for sure, we still see that we have a very clear path to become the de facto standard, the golden standard in the PC market. And there are also more manufacturers that we are working with beyond the ones -- the 3 ones that we have announced or at least announced the contracts with. And the reason for the broad deployment -- because we start out -- I'll jump into it because there are a lot of questions about PC in general in that market, which makes sense because it's our greatest growth market here in the future.

So what we're seeing is that, in general, that we see in the high-end laptops, it's time-of-flight sensor, hardware sensor. So over time, we see that the customer are looking to replace those in those laptops. That's mostly high end, smaller volume. But what we are really focusing in is the -- they want to do the broad deployment in the mid-end market. And the reason for that is that we meet a very attractive price point that they can justify quicker to do broad deployment.

On top of that, when we work with these customers, of course, we have multiple capabilities to really deliver through innovation -- frictionless user experience across not just the laptop but broad set of their product portfolio. So that's sort of like the long game. And then with the start with the human presence detection broadly in the mid, and then as they are designing out the time-of-flight sensor, we expect to move up on the high end. But once again, the high-end laptops are small volume. So we really are focusing on the mid-end volume.

So then, I guess I answered like 4 questions in 1. So a question for you, Lars, what is the CapEx guiding for the next years?

[Lars Holmoy, executive]

Okay. Yes. We don't, in general, do any cost guidance, at least not yet. But yes, I can say for the CapEx, we can say very broadly that we have a very conservative approach to capitalize R&D. As a software company, CapEx is basically investment in R&D and future products. But to capitalize it is -- we do have a very conservative approach. And basically, in -- we do it in accordance with governmental grant, which is in -- per definition, future R&D. And we do not expect this to change in the coming years, so fairly -- yes.

Yes. And then some -- regarding the spring '22 announcements about extension with Lenovo, up to 18 models, does this mean that Lenovo can release up to 18 new models with ELABS' tech without you being able to advertise this?

[Laila Danielsen, executive]

Yes. Unfortunately, that is a possibility. Of course, we work with the customer and...

[Lars Holmoy, executive]

We hope not.

[Laila Danielsen, executive]

We hope that's not going to happen. But of course, we work with the customer in trying to do, if not joint press releases, at least press releases that we can announce the launches. So we hope that. But it is a possibility that, that may occur, unfortunately.

[Lars Holmoy, executive]

Yes. A little bit of vertical that we're not yet in, what is the biggest challenge for Elliptic in the automotive industry?

[Laila Danielsen, executive]

Okay. So I don't think this comes as a shock to people, but it's very long-sale cycles in the automotive industry. And it requires a lot of like rigid -- lot of rigid testing. So it's a market that we are looking at through partnerships and not going direct then.

I mean, right now, we have so much business going on and also the PC market as well as that we are expanding with smartphone market that we have to have our core team -- core professionals, core people really focusing on penetrating, expanding in that market.

[Lars Holmoy, executive]

Yes. And then, of course, smartphone vertical, how many new smartphone customers is ELABS in dialogue with for first-time integration of software-only presence detection?

[Laila Danielsen, executive]

Well, it's proximity detection, which is a shorter distance, a different product. So we don't contact -- we don't comment specifically on the number of customers that we're working within the smartphone market. But we are working with more than we have announced before. So we expect to add more smartphone customer as well. I think this one, #5, we'll look.

[Lars Holmoy, executive]

Yes. What is your expectation for the partnerships with the 2 other 2 laptop OEMs compared to a partnership with Lenovo?

[Laila Danielsen, executive]

Yes. So they probably want to know if -- yes, sorry, if there was -- if we have broad deployment with them?

[Lars Holmoy, executive]

Yes.

[Laila Danielsen, executive]

Yes. So the plan is -- the way every single laptop manufacturer is approaching us just in principle as Lenovo. They look at future products, more products. But they want to start with the human presence detection and then from there, spread broadly into the mid-commercial markets, consumer markets, the mid-end, the low end and the high end and then broadly. So we expect to see -- what we're seeing thus far and the feedback thus far is that they also would move in the same direction as Lenovo. So this is incredibly good news.

[Lars Holmoy, executive]

And a little bit more on how we attack your verticals. How is development going in the IoT vertical?

[Laila Danielsen, executive]

Yes. So we are still navigating and exploring the IoT market. It's very fragmented. So it's a very different in comparison to smartphone and laptop where you have few players with high volume. So in the IoT verticals, you have lots of players with smaller volumes. So what we do in this space, in particular, we are signing up resellers. And so we've been doing that in Europe, in the U.S. as well as in Asia and sort of work through those channels. We also work with integration partners that we put together a set of demo boards. So they go out and promote to their customer base. And the reason that they want to use our software to promote is that because they sell hardware components, and so they need to have features to demonstrate.

[Lars Holmoy, executive]

Yes. And then, of course, are you in talks with the other top 5 laptop manufacturers who had not entered into? I think we addressed this last quarter as well, but yes.

[Laila Danielsen, executive]

Yes. Look, we talk to many PC OEMs, so more than 5. So let me just be clear about that.

[Lars Holmoy, executive]

Yes. And I think you covered it. Can you also indicate if ELABS technology mainly comes in high-, mid- or low-end models?

[Laila Danielsen, executive]

Yes. I think I've said that many times. But we are -- when we're working with a customer, we are planning for broad deployment. They are planning for broad deployment. So we start as we did with Lenovo and T14, which is their highest-selling product.

[Lars Holmoy, executive]

Yes. High volume.

[Laila Danielsen, executive]

High-volume product. And we are following the same approach. So we see mid-end. And then most of the high end has a time-of-flight sensor that over time, the OEMs are also -- they're are signing out. So that's excellent news. I don't know if you have some more, I was thinking...

[Lars Holmoy, executive]

Yes. I have a few more and it's a very finance-related question. What is the final expense relate to.

And -- we have most of our businesses in U.S. dollars, of course. So receivables is also in U.S. dollars. So it's basically exchange rates, the differences. We also have IFRS leases cost and also, yes, interest on our debt.

Elaborate a little bit about the infineon partnership that we just released.

[Laila Danielsen, executive]

Yes. Yes. So this is an R&D project with Infineon, a few other players. It's funded by EU. So this is for future products that we're working on and that we will expect to announce in the future.

[Lars Holmoy, executive]

Yes. Will -- and then, of course, it's very related revenue for Q3. But will revenue boost it as the smartphone revenue normally is recognized in Q4, smoothed over future quarters?

[Laila Danielsen, executive]

Well -- okay. So I want to be really address. In Q3, we talked about this lumpiness that we potentially thought would occur in -- or what we expected to occur in Q4, and that happened. And this is our biggest smartphone customer. So clearly, if they knew how much they would sell for, the volume in 2023, they would have signed that same -- similar contract in Q4 -- end of discussion. So they're still our customer.

So how do we spread over the next quarters? That we don't know because they do not know. But we, of course, continue working closely with this customer and expect to sign more contracts in '23 with this customer. Okay?

[Lars Holmoy, executive]

That did summarize pretty much all the questions.

[Laila Danielsen, executive]

Okay. Very good. All right. Thank you very much.

[Lars Holmoy, executive]

Thank you very much.