Elliptic Laboratories ASA

OSE:ELABS

Earnings Call Analysis

Elliptic Records Strong Growth Amid Challenges

Elliptic Labs showcased a solid performance in a difficult market, with a 34% revenue increase in 2023 to NOK 69.6 million. Their AI Virtual Smart Sensor platform's integration with PC and smartphone OEMs, notably in over 500 million devices, is winning new customers and set to propel further growth. They have achieved operational profitability and are in a good funding position to pursue their NOK 500 million revenue target by 2025.

Shaping the Future: Elliptic Labs' Market Position and Industry Trends

The leadership at Elliptic Labs presented their Q4 2023 results, outlining a vision where the company is actively defining new industry standards for AI Virtual Smart Sensors in both PCs and smartphones. With key partnerships including tech giants like Lenovo, Xiaomi, Microsoft, Intel, and Qualcomm, Elliptic Labs is recognized for its innovative leadership. They are pioneering with AI, ultrasound, and sensor fusion. This prowess is culminating in the new AI Virtual Seamless Sensor product contracted with a large PC OEM, underscoring a growing influence in the tech ecosystem.

Financial Health and Operational Highlights

Financially, Elliptic Labs exhibited a healthy profile with a 34% increase in total year-over-year revenue for 2023, closing at 69.6 million NOK. This indicator of growth is particularly notable since only one of their four PC customers has commenced shipping. Despite the current challenging market impacting contract timing and revenue recognition, there's a clear transition in Elliptic's journey from speculative growth to a definitive expansion trajectory.

Smartphone Market Expansion and PC Market Penetration

Elliptic's presence in the smartphone space has been expanding. In 2023, they enriched their portfolio with more models from existing customers, onboarded three new OEMs, and in early 2024, secured another software license contract. This growth cements their ambition and capability in the smartphone arena. Moreover, the company's foray into the PC market is likely to follow a similar path of expansion, given their dialogues with top OEMs and their strong market offerings.

Revenue Continuity and Business Strategy

CFO Lars Holmoy reaffirmed that despite a tough economic climate, Elliptic Labs' managed to achieve a 31% year-on-year growth in customer contract revenue. This echoes a pragmatic optimism for sustained growth and reflects a deliberate move towards a diversified customer base in both smartphone and PC industries. The implication that only one of their PC partners has begun distributing products with their software offers a glimpse into the future potential this untapped market holds for Elliptic Labs.

Earnings Call Transcript 2023-Q4

[Laila Danielsen, executive]

Hi, and thank you for joining us for Elliptic Labs' Q4 2023 Investor Presentation. I'm Laila Danielsen, the CEO of Elliptic Labs, and here with me is our CFO, Lars Holmoy.

Let's delve into the key highlights for today's session, focused on 3 main takeaways. First, the overall industry trends. AI interoperability and sustainability are fueling expanded interest in our AI software platform. Our progress in 2023 shows that we are setting the market standard for shaping the future of AI Virtual Smart Sensor in both the PC laptop and smartphone industries.

Customers and partners acknowledge our technological leadership position of our AI software platform across the ecosystem, and we are defining new industry standards with global customer and partners such as Lenovo, Xiaomi, Microsoft, Intel and Qualcomm to name a few.

These large enterprises recognize our innovative leadership in AI, ultrasound, and sensor fusion for AI Virtual Smart Sensor deployed at scale. And acknowledge our role in enabling advanced use cases.

By integrating our AI virtual -- AI software platform into PC and smartphone OEMs, we have been winning new customers and helping them drive new capability across their entire product portfolio. And I'll reiterate here that we announced a contract with -- for our new product, the AI Virtual Seamless Sensor with a large PC OEM in Q4 2023.

Second, in Q4, we had positive operational cash flow and a total revenue in 2023 increased by 34% compared to 2022, ending at NOK 69.6 million in total. It's important to underscore that even though we continue to expand in the PC market, only one of our 4 PC customer has started shipping.

The challenging market conditions in 2023 have impacted the timing of new contracts and revenue recognition from many of our customers. Converting our substantial contract base into revenue is a process that requires time. Nevertheless, it is evident that our journey of growth has shifted from a question of "if" to "when."

Third, we have continued to expand our foothold within the smartphone space. In 2023, we rolled out more models with existing customers and added 3 new OEMs and signed a software license contract with a new smartphone customer in February of 2024.

So now we are in a market in over 100 models and deployed in over 500 million devices. Our smartphone business is healthy with more diverse revenue and is expected to continue to grow.

During 2023, we have also continued to build our position in the PC laptop market, having made inroads with 4 of the top 6 OEMs in this market. We are in close dialogue with these OEMs for rollout of more models in the quarters and the years to come. Once integrated, the OEMs clearly see the value on our technology and our technology is sticky, meaning we are here to stay and expand.

We entered 2024 with technological leadership position, a solid commercial fundamental and a lean and scalable organization, and we are well funded to continue our growth.

Elliptic Labs work with global leaning partners and customer to redefine user experiences with our AI Virtual Smart Sensor platform. As the market is more familiar with our technology, they discover new ways for consumers to engage with and utilize their products.

On top of this, due to AI interoperability and sustainability, industry trends have further fueled the demand for our AI software platform. Our platform is entirely software based and leverages AI, ultrasound and sensor fusion to deliver exceptional user experience to companies across various industry.

As our technology becomes more widely known, both the market and our customers uncovered novel ways to engage customers and optimize their products. They rely on us for innovation, leading to the development of exciting new applications.

Following the launch of our new and latest AI Virtual Seamless Sensor, we see a broad interest from both smartphone and laptop customers. It is important for our customers to enable interoperability between their own devices as well as seamless interoperability with Apple's broad device portfolio.

As we collaborate with large global companies for revenues exceeding NOK 60 billion, they gain greater visibility into the project and their user experience they aim to create. Consequently, as their awareness of our capability expands, we expect for even additional use cases based on our AI software platform.

So it's clear that our value proposition is resonating with the market, customers, and partners, demonstrated in our year-on-year growth. Our AI software-based solutions are an obvious choice when compared to expensive single-purpose hardware components and sensors.

Okay. So we can all agree that we are well-positioned in a very large market. We continue to launch with more and more models in the smartphone market. And we now to-date have launched in over 100 models, and we continue to grow in this market as well.

In 2023, we launched more models in the PC market. And per today, we're target to launch with a large PC OEM for the new functionality, as well as launching with new PC customers and signing more expansion deals.

All our customers are per to-date on target, and we have over -- for the launches, and we have overly delivered our AI software platform successfully.

Okay. We have talked about revenue models many times. And as always, we are in ongoing negotiation for more contracts, and we have already signed contracts that are highly confidential. This is simply the nature of our business.

The advantage of being a 100% software company is that it allows us to have a flexible business and revenue model. The dynamic nature of our revenue numbers quarter-to-quarter is influenced by various factors that we are proactively addressing, and we are growing year-on-year.

We have taken proactive measures to adapt to 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. It is important to emphasize that we are well funded and possess the necessary resources to achieve our growth target.

Understanding these dynamics is critical to grasp the full picture of our revenue trajectory. We are confident in our ability to drive sustained growth in the long run. Converting our substantial contract base into revenue is a process that requires time. Nevertheless, it is evident that our journey of growth has shifted from a question of "if" to "when."

Due to the traction and the push from our PC customers. And, of course, it doesn't exactly hurt that we are on over hundreds of millions of smartphones in the market, as well as many, many laptop models, the ecosystem partners have an extraordinary interest in working with us.

And as I mentioned before, the industry trend of AI interoperability and sustainability, we have a seat at the table to define standards and architecture together with companies such as Microsoft, Intel, Qualcomm and Cirrus, et cetera.

Some of these meetings are organized through standard groups that we have joined like the MIPI and at MIPI, we are a contributing member. This interest for our AI software platform to become a standard in the market is driven clearly by significant pull from our PC customers and a push from our PC partners.

By defining the current and future standard, we strengthen our position in the market and simplify the adoption of our AI platform by OEMs as well as our partners.

Okay. In this market that we have such a strong position, we will, of course, continue with research and development in our space, as well as filing more patents. To date, we have close to 200 granted and pended patents across our product portfolio, and we will continue to innovate as well as filing more IPs in the quarters years to come.

Everything we have talked up to this point demonstrates a great -- the great position we are in. We have multiple growth and value drivers as we move forward. We're scaling laptop revenues, and we will continue to scale. And thus far, we have only started shipping with one of our 4 PC customer. So, definitely, more to come.

We continue the smartphone expansion. We are driving more AI Virtual Smart Sensor products per customer. And with these new virtual Smart Sensor products, we also see demand into other segments of the IoT market like the peripherals and accessories.

And then in the PC market, we have a solid traction with multiple opportunity for expansion. We've signed with 4 of the top 6 PC OEMs, only starting, and I keep underscoring this, but only started shipping with one of them.

We have 5 products launched, but signed license contracts for 2 of these products already. And we have lots of models in the market using our technology. So more models, more customers, more AI Virtual Smart Sensor across more verticals, which will underpin our future growth.

So now I'm going to give the -- leave the word to our CFO, Lars Holmoy.

[Lars Holmoy, executive]

Thank you, Laila. Elliptic Labs has a solid trajectory in 2023. Despite the challenging macroenvironment, Elliptic has achieved a 31% year-on-year growth in revenue from customer contract.

As Laila pointed out earlier, it takes time to turn our significant contract base into revenue, but we are growing in both the smartphone vertical and PC vertical.

The overall trajectory of Elliptic is positive. We have a broader customer base across verticals we operate. Currently, only one out of our 4 PC customers has started shipping PCs with our software in it to the market.

We are keeping and maintaining a lean growth for the year. In 2023, Elliptic Labs demonstrated a robust growth amidst market fluctuations, achieving a full year revenue of NOK 69.6 million, making a 34% increase. Despite facing a slight downturn in Q4 with revenues at NOK 9.2 million, a decrease of 6.4% from contracts with customers.

Our organization continue to grow to meet the increasing demand for our products. Employee benefit expenses rising to NOK 21.8 million, reflecting unnecessary investment in our talent pool with expanded by 13 fulltime employees from the previous year.

Additionally, our strategic adjustment in the share option program reduced expenses to NOK 1.4 million for the quarter, contributing to a more efficient cost structure for the year at close to NOK 10 million, NOK 9.8 million, down from NOK 12.5 million in 2022. This careful balancing of growth and efficiency underscores our commitment to long term financial sustainability.

We had a positive operational cash flow with our continued strong Cash position in Q4 '22. In Q4, our operational cash flow reached NOK 2.6 million, primarily due to a NOK 16.1 million reduction in accounts receivables.

Our investment in R&D, particularly in the AI Virtual Smart Sensor platform were carefully managed, showing a 10% decrease from Q4 2022 with a 4% increase from the previous quarter.

Financing activities had a NOK 3 million generated from issuing shares and NOK 1 million in short term debt repayment. Overall, we are ensuring we continue to innovate, while maintaining a financial healthy position.

Elliptic is well funded for continued growth. As we close Q4 '23, our financial stability was highlighted by a strong cash position of NOK 116 million. These strengths come from a diligent management of our current asset, notably through our timely payments from our customers, which also led to reductions in current assets.

Our forward-looking investments has led to an increase in our long term liabilities, primarily due to an uptick in non-current lease liabilities.

Meanwhile, our short term liability, mainly consists of lease obligations, with an equity ratio standing strong at 88%. We are well positioned for sustainable growth and seizing future opportunities.

And with that, I'm going to leave the stage for Laila again. Thank you.

[Laila Danielsen, executive]

Thank you, Lars. So our smartphone business is healthy with more diverse revenue and is expected to continue to grow.

During 2023, we also we have also continued to build our positioned in the PC laptop market, having made inroads with 4 of the top 6 OEMs in this market. We only started shipping with one PC OEM, which is the largest one in the world, which is Lenovo. And we are on track with our customer base for roll off of more models in the quarters and years to come.

Once integrated, the OEMs, clearly, see the value in our -- that our technology is sticky, meaning we are here to stay and expand with them.

Market conditions have been challenging for many of our customers throughout 2023 and this has affected the timing of new contracts and recognition of revenues. We have, nevertheless, experienced significant traction, and our growth journey has moved from "if" to "when."

We entered 2024 with a unique technological position, a solid commercial fundament and a lean and scalable organization. And we are well funded to continue our growth. From our reinforced position, we maintain our goal to reach the revenue target of NOK 500 million by 2025.

So now we will take a quick minute break to review the questions, and we'll be back shortly. Thank you.

Thank you, and welcome back.

[Laila Danielsen, executive]

First, Just want to say thank you to the retail investor that sent in some questions beforehand. And we will go through the questions. We have some taken in here as well. So I'll start just reading through the questions.

When can we expect launches on PC laptops, Q1, Q2, Q3, Q4, 2024? Launches on smartphone happens frequently. Can we expect the same with PC in 2025?

So first, we have reiterated that all of our contracts are quite sensitive, so we don't specific -- we don't comment on the specific quarters. However, we do expect more PC launches in 2024 and 2025. And we do also expect to launch with a new PC customer, so, somebody else in addition to Lenovo in 2024.

So then second question. With the mobile market opening up for more sales, do you expect Xiaomi to sign with -- or sign a new enterprise license agreement. I assume that mean, like, an annual, license agreement?

[Lars Holmoy, executive]

Yes.

[Laila Danielsen, executive]

So what we're seeing at least per today that we anticipate that Xiaomi will continue to play -- place orders throughout the year and not necessarily sign one annual enterprise license agreement. That's at least what we have lined out thus far for 2024 with Xiaomi. This may change, but this is what we have now.

So question number 3. A year ago Elliptic Labs partnered up with Infineon on Listen2Future project for future smart home devices with the goal of participating on 2 future innovations. What is the status for IoT? And if possible, can you give some updates from the Listen2Future project?

So just say that, I mean, this is like a few years out. The project is moving along well together with our partners. This is, of course, for future products. And these future products is aligned with our road map.

So as we are working with customer as well for new opportunities, we have some short term and some longer term with both customers and partners. This fits in nicely to the project we're doing here with Listen2Future that is going well.

Okay. So next question. There's a bunch of questions here. How will you say the recent AI hype has influence on Elliptic's lab precision among partners and OEMs.

Okay. So, I was going to say, we get a lot of interest from our partners from -- in the semiconductor partners as well as or laptop, smartphone OEMs. We also see a little bit of tension now into even automotive. So AI is important for our OEM customers and partners to deliver use cases based on AI-ing out.

It is also worth underscoring that all our partners and customers have also a focus on being carbon neutral in the future. They have different -- some are 2030, some as earlier, some as later. And they also view us to be an enabler for this. So we have some strategic partnership and sort of role also based on meeting some of these commitments. So they're starting, here early on this.

Then another question. Let me see. I see that some of these are overlapping.

[Lars Holmoy, executive]

Little bit overlapping, yes.

[Laila Danielsen, executive]

Yes. A few years ago, you stated that the goal, 550% EBITDA could be achieved with one major PC OEM or several small ones. What are your thoughts on this in today's situation? For example, can the goal be achieved only with Lenovo, for example?

So the answer to that is, yes, it's still possible. However, it is more likely it will be a combination of many OEMs that would add up to the total target. And, obviously, that is also better business model. It's better to have grow your revenue -- I mean, to be more diversified over several smartphone customers, as well as several PC customers than relying on one customer. That is clearly more risky.

So since we have signed with 4 laptop customer thus far, as well as we have many, many, smartphone customers, we expect that the combination of these customer will be adding up to the 500% target.

Another question. This is good. It's good questions. Very good questions. I appreciate that. Elliptic Labs has guided NOK 500 million revenue, 50% EBITDA for a long time, now guided in 2025. The guidance was communicated before the seamless product was released. In this guidance is the seamless product included?

So the answer to that is, yes. Because, when we're setting a goal, we're setting accordance with also our road map. We're looking at our whole a AI Virtual Smart Sensor platform or our whole platform. So just to sort of really explain, take it one step further.

For the seamless sensor, this is actually a technology that -- or not technology, that's the derivative of our online platform. But this is a use cases that we patent back in 2015, as a matter of fact. So it's clear that this is on a road map. And then as the market mature, we see new opportunities for multiple products.

And then, of course, that is one way to do it, is like products that we have thought about in the past, now the timing is now. And then, of course, we also look at, as we're assessing the market, seeing different trends, we also come up with new use cases.

But for this one, it was included, and we look at our whole platform. We don't look at just, like, one product or one virtual sensor.

And then -- okay. So all these 3 -- these 4 here are for you.

[Lars Holmoy, executive]

Yes.

[Laila Danielsen, executive]

But I can read it to you if you want to.

[Lars Holmoy, executive]

Okay. Perfect. I will address this as well.

[Laila Danielsen, executive]

Okay. That's fine.

[Lars Holmoy, executive]

Yes.

[Laila Danielsen, executive]

How much of your revenue is from laptop customers? Let me show that in the slide. But -- and how many PC models are part of this revenue?

[Lars Holmoy, executive]

Yes. So we give that once a year. So we gave it last fourth quarter in 2022 and we gave it this quarter as well. So I think that will answer the question.

[Laila Danielsen, executive]

Yes.

[Lars Holmoy, executive]

Yes.

[Laila Danielsen, executive]

Yes. So do Elliptic Labs expect a positive cash flow for 2024?

[Lars Holmoy, executive]

Yes. So we do not give guidance for 2024. And I also have getting the reveal of that question, which is the cash position and need for capital increase. And the answer to that is, no. There is no plan for increasing or raising capital for our current growth plan. That we are well funded for all our strategic initiatives and, yes.

[Laila Danielsen, executive]

Okay. Well, I mean, it's the same, positive result, positive cash flow, the management -- positive income at a same level. Should we -- this one -- I mean, it's -- I can read it.

[Lars Holmoy, executive]

Yes, you can answer that.

[Laila Danielsen, executive]

I can read it again. But the management of Elliptic Labs has in previous interviews and presentation been very positive and confident about the '25 targets. Is this positivity confident still on the same high level?

I'll direct it to you. And then I can -- okay, yes.

[Lars Holmoy, executive]

Yes, we are.

[Laila Danielsen, executive]

Do we have -- and there are there more here -- questions, kind of taking them?

[Lars Holmoy, executive]

Yes. So it's a question about -- it's the same, of the large smartphone OEM that we have been discussing last year as well.

[Laila Danielsen, executive]

What was the question?

[Lars Holmoy, executive]

The recognition of the big smartphone contracts that typically come in Q4 appears to be missing. Is that lost or has it slipped in time like last year?

[Laila Danielsen, executive]

It has not been…

[Lars Holmoy, executive]

Lost.

[Laila Danielsen, executive]

It has not been lost. They are -- I can just say it, I mentioned Xiaomi further up here in regards to. Will they do one big annual contract versus spread it out throughout the years. So the answer is, they were spread out throughout the year. So it has not been lost.

[Lars Holmoy, executive]

No. And then a very IoT related question again.

[Laila Danielsen, executive]

Okay.

[Lars Holmoy, executive]

And how is development going on for TVs?

[Laila Danielsen, executive]

So we also have the new opportunities around TV. But, basically, on TV has gone a little bit slower as expected. It's -- we have done -- we did announce like a proof-of-concept a while back. But we expect that there will be some opportunities in the future for smart TV. But now in regards to use cases, that we -- for some of the POC that we work with, we see a shift in some of these business models around TVs. And therefore, we can just state right out that, this particular POC that we did is not converting into license revenue. But we have other opportunities that we are working on that can potentially turn into revenue.

And I don't want to go into the specific use cases, because that's confidential.

[Lars Holmoy, executive]

Yes.

[Laila Danielsen, executive]

But, sort of the standard use cases we saw initially, that is something that we -- the TV is -- is no longer interested in TV OEMs.

[Lars Holmoy, executive]

Yes.

[Laila Danielsen, executive]

Any more questions? Yes. Well, I mean, we can't really answer that. But when do you expect revenues from seamless sensor? Do you still expect to launch with a new PC OEMs in 2024, as communicated last quarter?

[Lars Holmoy, executive]

So that you can answer.

[Laila Danielsen, executive]

Yes. But I already answered that, but I'll answer it again. Yes, we do expect to launch with a new PC OEM, so a new brand. This year, specifically, when the seamless sensor is coming out, we can't share that specifically. But there was one question about…

[Lars Holmoy, executive]

I think we have covered them all.

[Laila Danielsen, executive]

Covered all. But I thought it was with respect -- if -- in regards to the seamless sensor.

[Lars Holmoy, executive]

Yes. This is the seamless sensor, revenues from seamless sensor?

[Laila Danielsen, executive]

That's the only thing that's coming out?

[Lars Holmoy, executive]

Yes.

[Laila Danielsen, executive]

Okay.

[Lars Holmoy, executive]

Or in terms of OEMs with -- there have been PC OEMs with seamless sensor?

[Laila Danielsen, executive]

Yes. Well, they're not really been seamless sensors. They've been with seamless use cases, which is different. So, in the market, clearly, there's been announcement from -- Samsung has announced, like, seamless experience ease-of-use, et cetera. Qualcomm has their seamless concept. And of course, Apple has, with their Ultra Wideband sensor has a strategy around seamless sensor. So those are different.

Basically, when we are talking to partners and customer, the missing link is what we deliver, and that is this near proximity capability. So, creating -- giving these, like, instant visual feedback that your device is nearing can easier connect. And that's what we see this missing link.

They come in and they have this seamless user experience from an app point of view, but really make it ease-of-use. They are looking at a set of capability that we are delivering. And that's Some of that capability, because some of that capability is what we are launching with our PC customer that signed a contract. So, it is -- it's not the same.

And I'll just want to sort of highlight. I think, it's important to reiterate, the big -- what is happening also in the market. So in -- around Apple, which has a wonderful ecosystem and a slew of beautiful products, they have also a much higher price point, so they can afford to put a highly single purpose expensive sensors into all their devices for tracking and distance measure and so forth.

We can solve -- we can do the same thing with software only. And so, for example, if you are an HP, Dell, Lenovo, et cetera, number one, you don't have phone, you don't have the same ecosystem, you don't have the high volume phone like Apple. Also in the Android, they don't have Ultra Wideband sensor, less than 5%.

So, it is important if you are HP or Lenovo pushing a product and you know that in the U.S., for example, the newest market, 21 -- 80% under people -- for people under 21 years old has an iPhone. So it is important that they are able to not just create interoperability between their own internal set of accessories and so forth, but also can support the hardware agnostic -- completely hardware agnostic and also to interoperability between the PC and Apple, PC and all the Android phones.

And I think we also got another question there about working with other devices, accessory, and that's exactly also what we're seeing that they're looking for.

[Lars Holmoy, executive]

Yes.

[Laila Danielsen, executive]

So overall, the seamless sensor, once again, something we have looked at and patented a long time ago and waiting for the market to mature to have that ready. And now we have signed and have a great interest for that product.

[Lars Holmoy, executive]

Yes.

[Laila Danielsen, executive]

So I think that's covered all.

[Lars Holmoy, executive]

That covers all.

[Laila Danielsen, executive]

Unless there are some…

[Lars Holmoy, executive]

There are some very specific question that we cannot comment. So we will leave that to it.

[Laila Danielsen, executive]

All right. So thank you very much and have a good day.

[Lars Holmoy, executive]

Thank you.