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Good morning to Hotel Continental in Oslo, and also good morning to you who are on the webcast following this presentation. I hope you all had a good summer. We're here today to talk about Smartoptics and the Q2 results of 2023.
So we have an agenda. We will start by talking about some highlights of the quarter and, to some extent, first half of the year and then reiterate a few words around our strategy, our position in the market and the more long-term perspective of this growth journey; followed by breaking down the financials, in particular, looking at the revenue, where is it coming from and also looking at the balance sheet and some other financial metrics; and then last but not least, wrap it up and look at the more long-term perspective in terms of outlook.
So without further ado, as always, we start with an overview of the financials. If we look at quarter 2, this is a quarter that is -- that I'm very happy with. Good growth, $17 million, 16.3%. I'm happy with this specifically because we are in a slightly more challenging market today than we were a year ago, and I will come back to what those challenges are in more detail very, very soon. We're maintaining the same level of gross margins as we had in Q1, and we are well in line with our long-term aspirations on profitability of the company. So everything is good. Mikael will come back later to talk about the cash flow and more details around the margins.
So looking at quarter 2, as I said, good momentum in the enterprise space and the more traditional Smartoptics customers. This is very, very similar to what we said in quarter 1. What are the typical Smartoptics customers? Well, it's smaller service providers, it's Tier 2 cloud operators and it's government customers and government projects. The demand for our products, particularly the new products, is still very good. We have numerous ongoing trials on 400 gig. We have captured numerous new customers on 400 gig.
So why am I saying then that the market is a little bit more challenging today? Well, if we turn to bullet #3, and we remember what we talked about in quarter 1, we said the same thing there that the quarter was dominated by business as usual revenue. And we were lacking the large 5G-related projects from 2022, and the situation remains like that. So to bring you back to 2022, about 15% of our revenue was related to 5G mobile backhaul in the U.S., and that revenue has not materialized this year.
So if we look at the market as such, so this is one part of the market that is more challenging. So what are we hearing? Well, we're hearing that the largest operators are more careful in making their investments at the moment, and we're also hearing that the hyperscale segment of our market is also changing a little bit their behavior. That's a market that we have no exposure to. So our exposure to the larger operators is predominantly through the 5G projects that we had in 2021 and 2022. So 5G is that a done deal? Is it ready? Is it built out and done and dusted? No, probably not. It will come back. It is difficult to say when, but if you listen to the industry, in general, 2024 seems to be when people talk about a return of deployments of 5G. So we are looking forward to that.
Looking at our supply chain, where we have had a challenging situation for a very long time and in the past couple of quarters, we have talked about major improvements. We have now come to a point where we think that our supply chain is more or less fully healed. We have a good level of good inventory of components, and we can deliver very, very quickly to our customers. The inventory level is probably still a little bit too high, if anything, and we're working to get that down slightly as we go along.
So what does this lead to? Well, it leads to -- and you can see that on our cash flow, that our revenue is very late in the quarter. We are doing much, much more in and out revenue in the quarters. And we expect this to continue until the larger projects come back. So slightly shorter visibility and slightly more difficult to discuss the quarters at the moment.
So good growth. In fact, the growth in our classical business is way over 40% if we exclude the 5G projects, so that we are very, very happy with. And we're also progressing discussions with new larger accounts that are some of them may be 5G related, but please remember that we have several legs to stand on. And I will come back to that when I discuss our market, what are the applications and which parts of the networks are we really addressing successfully at the moment.
Building the company, we're continuing to build the company. We're continuing to strengthen the R&D in order to capture future growth. We are investing in new features, new products and a more complete software offering. Our SoSmart software platform is now in its third release and it's deployed in networks and customers are using it, and I will come back and talk about that a little bit more. And of course, it's an instrumental part of our offering when -- particularly when we are to build larger networks based on ROADM technology, our DCP-R platform.
And we are, since some time ago when I was here in Q4, I talked about business area devices as an untapped potential in the company. It is an area where we have had slightly smaller growth ambitions than on the system solutions software side. We're now starting to look at initiatives for growing devices also going forward a little bit faster. So that's good.
Looking at our position in this market, and I would like to remind you who we're selling to, what we're selling and what are the key drivers for the products that we are delivering. So we -- on the top of this slide, we're showing our market segments, enterprises, building typically data center interconnect between their main site and a backup site, as an example. There are, of course, numerous potential customers out there, and we have hundreds of them. We normally say that we win a new enterprise case every week. This is continuing.
Cloud providers and Internet exchanges, well, cloud providers for us is it's really the Tier 2 of the cloud, the so-called hybrid cloud industry, people like Basefarm that we have on the slide here, Firstcolo, et cetera. So some of the enterprises will choose to outsource their IT environments and then they typically put it in a hybrid cloud. For us, the difference between the 2 segments is not that big. From a technology standpoint, it's the same products, the same applications. It's, if anything, a little bit more of the same when we talk about the middle customer segments, so the orders are slightly larger.
And then last but not least, telecom and network operators, which has been a focused market of ours, a growth market for a very long time where we have developed many, many products and we are continuing developing products for this market segment. Why are we doing that? Well, this is where we will find the bigger accounts like Crown Castle Fiber, which is the big cell tower operator that we have been talking about for a number of years and the long-term growth of the company. For that, this segment is, of course, also important.
So what is driving the demand for our products? Well, it is the ever-growing demand for bandwidth. And generally, we don't have to talk about this, it's something that's widely known among investors and among the general public, that the need for bandwidth is going up driven by the change in behavior from a private person to an enterprise and driven also by changes in architecture, how services are delivered, which is kind of triggering investments in broadband infrastructure and bandwidth.
So at the moment, a broadband infrastructure in the U.S. and the European Union is an important driver. There are huge government fundings, 4 projects rolling out fiber to the home and similar solutions both in the U.S. and Europe. When that infrastructure is built, there is then a need to transport more bandwidth, and the network operators need to upgrade their networks to cope with that bandwidth. And that's how we can positively ride on such a trend.
For the introduction of 400 gig is, as I said earlier, a very important driver for our business at the moment. In this industry, what used to be 10 gig services and 100 gig services is migrating now to 400 gig. And if we look at 2022, we said that 30% of the revenue in the second half of the year was related to our new products, and that is mainly driven by 400 gig. So the products that we release come quickly out in the market, and we're seeing a big demand. And as I said, particularly now, we have numerous trials and lab evaluations of our 400-gig products ongoing. So I'm very, very positive on that.
And then, of course, 5G. What is 5G doing? Well, 5G -- our play in 5G is really the backhaul of 5G traffic from things like base stations to the more central parts of the network. The difference between 3G and 4G and 5G is that the amount of fiber connectivity to these base stations is going up and the need to build more advanced optical solutions at the edge of the network is, to a large extent, driven by 5G. Although temporarily weak, we expect that to come back.
So what do we do? High transport -- high-capacity optical transport solutions. So for us, it doesn't really matter what the traffic is. We are transporting the data between data centers from a base station or a broadband access node to the central part of the network from one city to another city or from one country to another country. So for us, it's all about capacity. What we do in addition to hardware is, of course, software. Software for us is 2 things. One is the software in our products, the embedded software that takes care of all the complexities of optical communication, all of the control loops, all of the interfaces that a product like this requires.
But it's also our brand-new software suite for network planning, network operation and simulation, the SoSmart that we released last year. That one is growing in importance. The more advanced networks we build, the more important that piece of software will be. And what you see on this slide is one of our product families, the DCP-R, which is a product that's designed to build very complex network architectures. And it is the lead product for going after bigger networks such as regional operators in the U.S.A. or whatever.
This market is -- in total, the optical transport market is a $16 billion market. Generally, you can say that half of that is in the metropolitan areas and half of that is long distance communications, such as connecting the West Coast and the East Coast of the U.S.A. or connecting Continental Europe with United States of America as an example. That market is not so interesting for us. That's a market we leave pretty much to 100% at the moment. We are focusing on the metropolitan area, where you have more nodes, where our value add in terms of cost efficiency, and what you see on the right side of this slide, our more modern way of building networks, the shift towards IP over DWDM, meaning that you merge the IP layer with the optical layer, you disaggregate and you make more open solutions. That's where all our benefits come into play.
So the metro market is the important metro segment for us. And as you know, from previously, we are mainly targeting EMEA and North America. The majority of our revenue is coming from there, although we have all the time nearly good signs from selected parts of Asia. So 50% is metro, 50% is EMEA and North America. And in total, if we include some of the some of the APAC markets and CALA markets that we are talking about, we believe that we are addressing about 30% of the $16 billion, so still a very, very big market for us to capture market share in going forward, which is, of course, very, very good.
Speaking of market share, we have in this quarter introduced the concept of talking about market share. So this is a new slide that we have not used before. What is the market share of Smartoptics and how is that developing over time? And what you can see on the right of this slide is that we are constantly growing our market share. And our ambition is, of course, to continue growing our market share from these relatively low levels, of course, it's a little bit easier to continue the growth journey here at 1.7% of the market in the first half of 2023.
I did not plan to talk that much about the left side of this slide, a couple of important points, though. You can see that this market is dominated by very, very few players both in EMEA and North America. So Smartoptics is clearly one of very, very few challengers. And in order for a new challenger to come in, they have to do what Smartoptics has done, which is effectively 6, 7 years of software development. So the barriers of entry are fairly high, and you also need domain competence in the area of optical transport, which is not available everywhere. So we have a beautiful position in this market being the global challenger growing in market share year-by-year. So that's very, very good.
You can also see that the situation is a little bit different in EMEA compared to North America. And I think the main difference here is that the presence of Huawei. Declining presence of Huawei, I should say, in Europe, and they are not present at all in the United States of America. So slightly different split between the different players there.
Good. So why do we believe that our long-term growth opportunity is good? Well, to the left, I'm talking about the assets that we have today. We have many years of growth, and we have developed a very attractive and future-oriented product offering, which is based on the open standards, the concept of disaggregation, meaning breaking a partner network, the concept of IP over DWDM, which we believe in very much and, of course, cost efficiency, cost efficiency in everything we do. And that's how we win business, cost efficiency by design.
We're well positioned in our market segment. And we have, as you saw on the previous slide with the customers, we have a number of very, very good accounts where we can grow share of wallet and become relevant for new applications as they start rolling out new services and modernize their networks in the future. So are we happy with the set of accounts we have? No, of course, we are targeting to win more major accounts as we go forward, and I will come back to that very shortly.
We have a unique market position being the challenger in both EMEA and North America. And we have a very good financial position, which allows us to continue to invest in this business, aiming at $100 million and above. So the milestones, what do we need to achieve to grow beyond the $100 million? Well, we have to constantly expand our product offering. We're doing that by selecting a number of target applications, like we have done in the past, develop new products for layer 1 transport and, of course, complete our SoSmart software offering for particularly the bigger customers.
I think, in parallel, what's becoming more and more important to us is to continue to grow our more traditional businesses in the enterprise space. I talked about smaller service providers, I talked about government networks, but also business area devices. We don't want to end up in a situation where we are dependent on a few very large accounts. Although they will be important, they should be one part of the revenue and we should have a solid run rate business, which we do in the company at the moment also in the future.
But going forward, looking at 2024, '26, '28 and so on, it will be important that we, every 12 to 24 months or so, manage to capture a new account where we can do what we have done in the past, namely grow the number of applications. We can address with that customer and grow the share of wallet. That is how that game shall be played and that's how we're playing it. So our ambition is clearly to grow in market share in all of our target markets, including parts of APAC.
So this strategy, developing products to target some selected applications, rolling them out, becoming more relevant for more and larger customers as we go along, that has been very successful. And this is just a reminder slide of what we have looked like in the past 5 years. So to the right, you can see our product releases, I will not discuss in detail these product releases, but they are different families of open line systems addressing different applications, such as the DCP-M being tailor-made for point-to-point data center interconnect; DCP-F very heavy on the edge of the network such as mobile backhaul; DCP-R, more suitable for the more central part and more complex networks; and then a number of 100 gig, 400 gig and 800 gig transponders and muxponders to complement the line system technology.
And you can see where we had our major releases in 2017, '20, '22. You can also see that the revenue has been growing accordingly. And it is really reassuring to see that when we release a product, they come quickly into the market and they contribute to the growth of the company very, very quickly. And so far, all of the products that we have developed have been successful and have contributed to this growth. So many quarters and many years with solid growth based on this strategy, and we have a very high confidence in this strategy also being very relevant going forward.
So coming into the financials. I will start a little bit by looking at the revenue of the company, and then Mikael will talk through the balance sheet and some more details on the financial metrics. So starting with our different product areas, what they look like in quarter 2. Little bit different than in quarter 1. In quarter 1, business area devices was very, very strong. And we can see that, that is going back a little bit now, probably because of the success in Q1. Still untapped potential in the red part here, still something that I want to put a little bit more focus on going forward.
The main element of our strategy for the past 5 years has been the black and the green segment -- the black and the green product segment, which is our solutions, the more advanced products, our software and our services. And it's very reassuring to see that those are growing much faster than the company as a whole. And that has been the case nearly exclusively through this 5-year period. So that journey is continuing, which is very, very good.
The different geographies, and I normally say that you have to take a more long-term perspective on this in order to say which is the most successful region, Americas or EMEA, because they have been bouncing back and forth every quarter. Really, this quarter it's EMEA driving the revenue, and we have fairly low growth in Americas. I would say that is solely related to what I discussed earlier, the 5G projects that we had in Americas in 2021 and 2022. A reminder, it represented about 15% of our revenue in 2022. So pretty significant, although not the only growth vehicle we have. So that's basically the reason why we have low growth in Americas this quarter.
APAC tagging along nicely. It is the same markets as it has been in the past. Australia, New Zealand, Japan, some other parts, Singapore, Hong Kong, to some extent and a few other places, we are not addressing, as an example, Mainland China, and we have very little activities in India at the moment.
Mikael, I turn over to you to look at the balance sheet.
Yes. Thank you. So very solid financial position, very little debt and that's on the left-hand side. So we have a very solid position to stand on. On the right-hand side, you can see development of working capital, which is important for us because that's a part of -- a big part of our balance sheet. We've been talking about supply chain shortages, semiconductor shortages, and that has driven up the inventory. Now the inventory has gone down this quarter, from growing to flattening out to coming down.
So that's very reassuring. Working capital is going up, but that's due to large parts of the revenue coming in June. So June was a very, very busy month. That is the case when we have a lot of projects. We build and build them and then do we deliver at the end of the quarter. So that will, of course, translate into cash in the third quarter. So very good development.
A summary of the financials. As Magnus have said, we're growing. We're growing by 16% to a revenue of USD 17 million. Gross margin, at a fairly high level. The trend is still upward. If you look back, that translates into EBITDA and EBIT. That is very, very healthy. The EBITDA and EBIT margins are in line or slightly better than we expect at this point in time in our business development plan. We are at 18.7% and 16% margin. I would say that is ahead of the curve. We are very profitable.
Another metric that we are introducing in this quarter, and you can read more about it in the report, is return on capital employed. And that is EBIT divided by capital employed, and capital employed is defined as fixed assets plus current assets minus current liabilities, more or less sort of the load we have to carry. And we are -- have a good solid trend. We're above 30%. And above 30%, in my view, is a super number.
Operating cash flow, negative for this quarter due to the reasons that we had very, very late revenue that we shipped in June. That is now coming back in Q3. So all looking good.
Good. And we can expect that trend to continue. It's been like that for the past 3 quarters, late revenue in the quarter, a very similar story in Q4, Q1 and Q2. And we can expect that to continue.
So looking ahead, the $100 million. Well, we are at 62% of that, looking at our last 12 months. We have not changed anything here. We are in the middle of -- to upper end of our EBITDA and EBIT margin range. And we have absolutely no reason to change this outlook at the moment. And we'll, of course, as we have talked about earlier, at some point come back with our new long-term ambitions that we are working with in the company, but not now. We are continuing to focus on the $100 million because in order to reach whatever is beyond that, we need to pass $100 million simply.
So with that, I leave the floor open for questions in the room and on the portal.
So we have one question. Is the uplisting progressing?
Yes, the uplisting is progressing. I cannot say at what pace at the moment. I mean, in terms of preparing the company for uplisting, the majority of the work has been done. We have some elements of, for instance, our Board composition that we need to fix in order to be prepared for an uplisting. But we consider the work to be done left to be fairly minor to us. So when we do take the decision, we think this is going to be a fairly swift process. Yes.
Can you say anything about the spread of the 5G revenue last year? Like will there be tougher comparison in H2 versus H1? Or...
So of course, if you have started last year, we have tougher comps in the second half. We grew more in the second half. So in general, we have tougher comps. I would say the spread was nearly the same as our normal seasonality. So Q2, kind of -- yes, Q4 was a little bit bigger than Q2, but those were the 2 biggest quarters. And I would say Q1 and Q3 was about 25% lower than Q2, right? 25%, 30% lower. So it was all through the year, and you can model that as a normal seasonality.
Øystein Lodgaard, ABG. I was wondering about -- you're talking about being in several discussions with several larger potential customers. What are the triggers here for that to actually end up as some orders. Is there -- are there some investments being dragged out due to higher cost of capital? Or is it something to do with evaluating the technology? Could you give some flavor on this?
Yes. So I would say that the center of gravity for those discussions at the moment are 2 things. One is the introduction of 400-gig. How are they going to take advantage of the new pluggable 400-gig technology in an efficient way, where we are an excellent alternative for line system technology and also the pluggable interfaces and our transponders and muxponders where we have a very low cost and efficient product offering in general. So the trigger is, of course, on the customer side to set the strategy going forward.
How is this going to be deployed? This is new technology. There are not that much deployments of 400-gig routers and switches done yet due to the component shortages and stuff. So there are still long lead times on that technology to introduce it. And there's no point -- well, there is actually, to multiplex 100 gig to 400 gig, we do that. But the big 400 gig is, of course, driven by our customers having 400 gig ports in the network. So I would say it's architectural discussions. It's trialing out this new technology, and it's for them to make up their mind and make a plan and really get to pushing the button for deployments in that area.
The other center of gravity is somewhat 400-gig related, but also a general modernization of ROADM networks, bigger networks that were deployed with previous generations, technology suitable for 10 gig services and, to some extent, 100-gig services, making those networks prepared for 400-gig, 800-gig and 1.6 terabit. So that depends then on what state the customer is in and when do they need to make that upgrade and how do they come to that point. So that's probably. Yes, it's more spread out in time between the different customers, I would say. Yes.
Very helpful. Can you say in these discussions, are you kind of alone in these discussions? Or are they evaluating multiple vendors? Or do you think that when that discussion -- when that decision is taken, you will be the vendor that is chosen? How -- can you say something about the competitive dynamics?
We are never alone. If you're alone, you're doing something wrong, right, probably. So there are always alternative technologies out there. There are always other ways of building it. I think it is -- we are -- we have the position that we have in the overall market in those discussions. We are the challenger. We are the one focusing on open and disaggregated. We are the one focusing on cost efficiency rather than top of the notch functionality, as an example. So yes, so that's -- it is pretty much as it is in the market in general in those discussions.
And last question from me. You say you'll introduce several new products over the next 12 months. Can you say something about kind of what product families or types of products? Or is that still a secret?
No, it's not a secret. Not at all, no. We are continuing to develop our ROADM, our DCP-R product family. So we are releasing new versions of that. We are delivering more transponders and muxponders, more versions of that. We are now looking at 800 gig. As an example, that's not for 2023, but rather for 2024. What will our product offering on 800 gig look like, this is very premature, but we have to have that story in. And our customers selecting us has to have the confidence that they select us for 400 gig. There should be products for 800 gig coming out as they develop their strategies.
I think 400 gig is going to be a rollout period that's very, very long. 100 gig has been with us for 10, 12 years. 10 gig was with us for 10, 12 years, 400 gig will be with us for 10, 12 years. But the early adapters will, of course, start looking at evaluating 800 gig technology. So it's important for us to have products that are capable of, yes, transporting 800 gig simply. And we do. In the ROADMs, we can do that today. But we are developing that capability further.
And then, of course, it's on the SoSmart side, the software to make that more complete to. In the first instance, manage, simulate and operate our networks. And that we will be working with for a considerable amount of time now. Probably the next 2 years, we will continue to develop our product to be perfect for that applications, and then we can move out of that with the software and do other things if we choose to. That's a bit premature to discuss at the moment. But there are options also on the software side where we can use our software more broadly.
On the cost side, the kind of tempo you had this quarter on new employees, at least looking at the average, that was like 4% up quarter-over-quarter. And in Q1, it was really high. Is Q2 kind of representative of what we should expect going forward?
In terms of development, you mean?
New employees, like the hiring tempo.
So if we look at this from a broader perspective, to begin with, I think if we roll back 1 year, and you can also see that we were way ahead of the EBITDA curve early last year. That was due to 2 things. It was currency effects, and also that we were lagging on our investments. And that we discussed through the fall and continuously. So the big difference, we're still seeing because the court left the bottle last summer, where we all of a sudden started to be able to find more developers, et cetera.
Mikael, comparing the growth of OpEx in Q2, is that representative to what we see going forward? Do you have an answer on that? Or do we need to come back, maybe?
Well, depends a bit how you sort of develop -- sort of increase in OpEx. In Q1 and Q2, it's been quite high. Do we expect sort of a similar increase quarter-over-quarter? Perhaps not quite. I mean, we had sort of a breakthrough in terms of hiring the last 12 months. And looking ahead, we perhaps won't have the same amount of sort of hirings in the next 12 months. So that...
I mean, it's been a surge. It's been a surge for sure. And I mean, we have -- our intention is to responsibly grow our OpEx going forward.
So just a short question on the software side. If you look at your software revenues compared to your solution revenues, it's been increasing sort of relative to solution. How do you expect that sort of mix between software and solution to develop going forward?
Well, we have not modeled that in detail for the $100 million target or beyond, really. If we look -- what we have said earlier is if we look at the most successful examples in our industry, I mean, some of them have software and service revenues that exceed 20%. I don't think any one of them has reached 25%.
So I think when you think about long-term Smartoptics, what can we achieve? Well, we think that we can reach that kind of level with the current offering. And in order to move beyond that, as I said, we have to find new applications for our software rather than being tightly associated with our networks, our products, if that makes sense. So that level long term can be expected.
Great. We have no further questions on the portal. So -- and if there are no further questions in the room, then I would like to thank you for your attention, and looking forward to seeing you all soon again. Thanks.
Thank you.