Asetek A/S (A31.F) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome and thank you for joining the Asetek Q1 2022 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Peter Madsen. Please go ahead.

Perfect. Thank you, operator. And to the audience, welcome to this Q1 2022 Asetek Earnings Call. My name is Peter Madsen. I'm the CFO. And I have with -- on my side here André Sloth Eriksen, who is our CEO and Founder. Hello, Andre.

Hello.

And then for this week, we have -- are being visited by our COO, John Hamill, who is also in the room here. Hi, John.

Hi. How are you doing?

Perfect. So the way we will do this earnings call, as usual, is that we will go through the presentation which our Board just met a few hours ago and approved. And we launched the numbers also a couple of hours ago via the website and news services. And we'll go through the presentation. There will be a Q&A session afterwards. [Operator Instructions] With that, operator, please forward 2 slides to the highlights [ present ]. And then over to you, André.

Yes. Good afternoon, everyone. Just on a practical note: I have been sick the last 2, 3 days. And I actually still am, so if I start to cough or something like that, then please bear with me, but I'll try to pull it through. So some headlines from the quarter: first quarter revenue of $14 million compared to $25 million last year; gross margin of 38% compared to 43%; SimSports orders and backlog of roughly $1.5 million by right now, essentially end of April, where we started shipments in March and additional products to come still. We maintain our '22 outlook basically because we don't know better. We don't have a better guess right now or a better estimate given the situation out there, so we have chosen to stock -- or to stick with what we know. Please change the slide. If we look at the revenue and the margin, I think there's no big surprise. When revenue is high, earnings are high. And when the revenues are not so high, the earnings are also not so high, so I don't think there's anything surprising in that. Please go to the next slide. So if we just rewind the tape a little bit. When we gave our '22 growth expectations, we felt they were conservative based on what we knew at the time. And they may still be or they may not. It's simply impossible to tell. What we can say is, from the company side, there is hardly nothing that we are not hit by right now of what's going on out there. Of course, we are seeing the shutdowns; the power outages, going back a little bit in the quarter to the Winter Olympics; of course, the COVID impact; of course, logistics, supply chain, shipping. You name it. Of course, we are hit by all of that and then some. And so that's how the world looks right now, and we are trying to navigate the best we can. And from an industry perspective not specific to Asetek, of course, the supply chain challenges is a big, big concern for our customers; and the same with the rise in components and, not the least, just the ability to get the components. We and they are, of course, seeing the shortage of semiconductors. We see that GPUs, CPUs, hard drives, everything is affecting the PC market. And then of course, the U.S. tariffs; and the added, increasing logistics cost is a big concern. I'm sure Maersk is happy about it. We are not so happy. In terms of the outlook, what we can see right now is that the volatility seems to continue. I don't have any crystal ball that the rest of you do not. I'd probably see the same as you. Of course, structurally, our 15% growth target year-over-year has, of course, not changed in the long run. What we see right now, we believe -- I believe everything we see right now is temporarily (sic) [temporary]. So there's no structural change in that. Of course, we are uncertain to when things will normalize, and that's the world we live in. And from our side, what we try to do, of course, is to continue to focus on strengthening our supply chain capacity and capabilities as well in terms of sourcing, getting the right parts, getting the right part booked, getting them shipped and all of that stuff. We have, of course, also adjusted our prices on the ways. It's always difficult not just to increase prices, but it's also -- as the world is right now, when you think you have adjusted your price to cover for something, then you wake up next morning and then everything just got -- went up once again. So it's a difficult situation, especially with, what you call it, inertia we have in the system. Keep in mind our OEM customers, some of them are building inventory months ahead, so if we change the price today, it will not have effect until 3 months. And how does the world look in 3 months? And it's complicated. We do expect major launches from both NVIDIA, AMD and Intel in the second half, so it will be interesting to see if that will be paper tigers or there will actually be products out there. And how the inflation is impacting end users, difficult to say right now. One positive note is that, if you want to turn something negative into something positive, the positive of the shipping rates is that they are so high that it makes sense to assemble our stuff in Denmark, which means that we don't have to pay U.S. tariff on the SimSports product. Please change the slide. So starting with SimSports. I think it's more or less 17 months ago, I said that we are going to enter the SimSports market, and here we are. Or from the time of shipping, 17 months later, we were shipping. And it has been a very positive launch. I can say that now we have gotten extremely strong feedback both from sim racers, reviewers, press, influencers. And by the hour right now, end user feedback is ticking in as well. And it's actually something I'm proud about. It has been even more positive than I had hoped, especially in the situation we are in, because we have the same challenges on the SimSports side with components and getting stuff to the factory and getting in at the right cost, but as it looks right now, we have orders and backlog of roughly $1.5 million, per right now. And that's, of course, thousands of pedal sets. There is a risk at least on paper. And I want to mention it because we have taken the stance as a company. And I think it's also legal, by the way, in Denmark, that we do not charge people's credit cards until we actually ship. So when we have, let's say, 1,000 preorders, there is, of course, a conversion rate or the risk of people dropping off. It's not a lot we have seen, but I just want to mention it. On the flip side, we have new products in the pipeline that indicates more will come also in this quarter. I'll get back to that. Please change the slide. Yes, you can change it again. Thanks. I don't want to spend a lot of time on this slide. I do it more or less systematically every time, so I think I'll skip it this time, other than just noting that in the right-hand corner you can see we now have a spot in Malaysia where we are working on outsourcing some of our manufacturing. And if everything goes well, I think in Q3 this year we will be able to manufacture in Malaysia and thereby avoid some of the U.S. tariffs. Please change the slide, and one more. So looking at the product release activity, I think the headline of that representing our customers are it will be uncertainty. We have 4 new products that started shipping in the first quarter, one new customer, including 2 new coolers for graphics cards. We have 11 new products estimated to start shipping in this quarter. However, we can see the OEMs and the customers. They continue to assess the timing of the new product. And it's, of course, because of shortages in their end, the logistics and the costs associated with the logistics. And there's not much we can do other than observe and listen. It's just how it is. And that is, of course, the SimSports business is really small, but that is one of the advantages we have in that business that we don't have here. We can, if we want, go and sell stuff to end-users. We can do campaigns. We can do marketing, where on the OEM side it's not so easy. We can do the development together with the customer. They make a plan. And if they change the plan, all we can do is pretty much take a note of it. So that's one of the uncertainties. We, of course, continue our investments in product development and in branding towards key customers. And then again there's no structural change here, so we keep doing what we always do and then, yes, wait for the market to pick up. Please change the slide. We are currently shipping to more than 20 OEM customers. And as usual, I will say, top 5 represents most of the sales. That, of course, also means that, if 1 customer is not performing, then it hits us hard. And if you can see, to the far right, there is actually a quite substantial shift in the distribution between the individual customer. And of course, as always, our ambition is to increase the number of customers over time. Please change the slide. So looking into a top-down view on the G&E business. Not much have changed. We work on the branding. We work on growing new customers; widening the OEM base; product development; exciting new technologies, bringing them to market. That's the same story as always, I would say. And we focus on delivering what we are good at. We are trying to ramp it up. We are trying to drive out costs. We want to be the performance leader. We have branding agreements in place with several OEMs. We connect with the gamers. We do everything as -- let's say, as we used to do and more of the same. And we believe, at the end of the day, it will come back. Next slide and one more. On the SimSports business, which of course is, to a large extent, the same type of end users, it's gamers. Our product rollout is progressing to plan. We released our Invicta pedals, as you have probably seen and heard. And it's the Invicta pedals that I just gave you the numbers for. We have just opened the preorders for our next-tier pedals called Forte, which is a mechanical brake cylinder system. And if everything goes well, if we can get the components, we will actually start shipping those in this quarter. So that's what we planned for. On top of that, we are expanding our line of accessories, pedal plates. As you can see on the picture here, we have also designed our own racing boots for sim racing. And just to give you a flavor of the challenges that we are facing: That's 110 days of delivery time, so even though the boots are done and dusted, I have the golden sample here next to me, it will be 110 days before we can get them. So that just shows you a little bit about why the supply situation is as critical as it is. Next slide, please. In terms of a full ecosystem, which is our ambition, for sure, things are also more on -- more or less on track. And when I say more or less, it's because I know that we could have been out faster if we did not have the supply situation on chips and semiconductors, but we are hanging in there. And we have done the exclusive agreement with what we believe is the leading manufacturer of servo motors for sim use. Our wheelbases are well underway. We are testing them. Right now we are in tooling. They are up and running with our own IP, our own software. And we are still planning to launch them later this year. And for sure, that will make '23 really exciting because then not only do we have the pedals. Then we also have the steering wheel and the wheelbase, so then at least we have, let's say, half of what a full ecosystem requires. On the marketing side, I hope to be able to announce soon campaigns within both Formula 1 and GT3. It doesn't make sense to spend millions and millions on product development if we don't tell the world about what we are doing, so we have some interesting news coming within the racing world. And as I've said earlier, our product development is really founded on the deep experience we have in mechatronics in Asetek. And I know the numbers are not what any of us hope right now. I think there are very good explanations for that, but I also think -- if you think about it, that in 17 months, from having a vision to launching a product that's already recognized as being market-leading, I think -- that's something I'm very proud about. I'm proud about the team, that they've been able to pull that off. And we could not have done that had it not been for the liquid cooling business. So I think one of the things where we saw this right was that our existing capabilities within the organization could be used for other applications. And I think this is really the prime example of that. Next slide. So looking a little bit more strategic on the SimSports. I almost always -- or already said it, yes. The goal, of course, is to become the leader in this marketplace as well by leveraging what we already are good at. Of course, it's new to us, to sell directly to end-users. And of course, it's new to us to be actually a branded company, but I think that's going pretty well and I think it's a strong market opportunity. Of course, it's also affected by everything that's true for other gaming businesses, but so far, so good. And we keep focusing on innovation, bringing new and different products to markets than what our competitors have, bringing real value. Some of the customer feedback we have gotten, which is I think the greatest you can achieve: One thing is you can talk about quality. And you can talk about price. And you can talk about industrial design, but we went to market with a radical, different braking system than anyone else out there. And that was a big bet, but we believed it was the right bet because we wanted to recreate the sensation of a real race car. And some of customer feedback we now get is really that, after getting our pedals, people drive faster. And as this is like in any other game or any other race, it's about winning, so if our customers can drive faster, we are really giving them substantial value. And by the way, we have an Asetek SimSports community group at Facebook that you can join if you want to see some of these end user comments for yourself, so feel welcome to do that. We are, of course, building on the channel strategies. We have a lot of different companies and resellers and distributors and what-have-you come to us; and of course, we are also chasing some ourself. And it's typical electronic outlets, to specialist shops, to motorsports shops. And right now we are still working on it as we go. There's no stress because we sell direct on our website, so it's pretty easy to try out different things. The challenge for us, of course, is we want to have the best products, but we also want to have the best price. Not necessarily the lowest price, but we want to have the best price. And some of the competitors we are dealing with or are fighting with, they don't have resellers. They only sell direct, so for us to make margins, good margins, I would say, and to make sure the customer gets the right price and make sure to have room for a retail outlet as well is not an easy task, but I think we can manage. And that's, of course, a huge competitive edge for us, yes. Next slide. On the data center side, you would think that -- with the gas situation we have in Europe, that there would be much more focus on reusing waste heat and things like that. And I will say that we are doing as usual. I have meetings with some politicians here at Asetek next week also, but I will say in general the interest has not sparked by what's going out on, I mean -- going on out in the world. So we keep doing what we do. And that is to work on the European side of things and there's not really a lot of new things to report. One thing I can say is that I have heard the news that there is a citizen in Denmark that is going to -- I'm not sure how to translate it, but as a citizen in Denmark, you can come up with a proposal. And if you get 50,000 votes, then the parliament actually have to consider it. And I know that this proposal will be launched within the next few days or weeks. We will, of course, link to it on our Facebook page. It has nothing to do with Asetek officially, but at least if you are located in Denmark, I can only encourage you to go and support this. And hopefully, we can force the Danish politicians to at least tell us why, if they are not interested, yes. Please change the slide into the financials, so one more. Thank you. So I'll hand over to you, Peter.

Thank you, sir. Please change the slide once more, operator. Thank you. Starting from the top line on the profit, loss, a soft quarter 44% down compared to the same quarter last year, a $14 million top line, as André mentioned. However, look at -- keep in mind that Q1 is always a low quarter compared to the Q4 that we come out of. It's always been the case. Even the $25 million last year, it was a lower quarter than the Q4 behind it, but still it is a soft quarter and there's no reason to hide that. We sold 211,000 units in Q4. That's a reduction of 49% compared to last year's. Gross margins, I'm coming back to. Total operating expenses. On the surface, it looks nice. It's on level with the -- with last year and it is nice. It's a shift from data center expenses over to SimSports expenses. That's what's being reflected here. And then we've been helped by the Danish krone being a little cheaper compared to U.S. dollars compared to last year. It has given us $100,000, I believe, on the profit of in last year. And then we also see the effect that, because the SimSports launch has been as positive as it has and the business case have been validated, that means that we need to capitalize a higher amount of R&D costs. And of course, that also helps us on the P&L side, for the operating expenses, for this quarter. And that will be the case also for the coming quarter. And then we will start seeing -- as we start selling the SimSports products, then we'll start seeing how those capitalized expenses are being written off, but of course, that comes with revenue and earnings also. Next slide, please, on margins, at 38.2% versus 43% last year, a reduction, yes, and lower than the stated minimum goal of 40%, yes. Keep in mind, though, that with lower revenues almost always comes lower margins also. Our logistics costs, our quality costs, our inventory adjustments, et cetera, even though they are qualified and classified as variable, then -- they tend to be fairly fixed. And that means that, when the revenue is lower, then also the margin goes lower. We still believe that the gross margin should be over 40% as such for the year, but we do see -- and I think this is well repeated as from André. We do see higher increase in shipping costs and we do see higher costs of goods also. The -- I think our lower cost of goods was adjusted upwards due to a ForEx exchange here in January, but again we aim at above the 40% marker. Next slide, please, balance sheet. The big thing here is that our cash position has gone from around $25 million, that neighborhood, to $13 million, I believe. And of course, that's a big amount. We are still fairly, yes, cash-rich, I would say. The reason for this reduction here is that our accounts payables have been reduced in Q1. If you look back at it, then you will see that our accounts payables have been very, very high for the last few quarters even though the revenue has been at a lower level. And that has caught up with us at this point where the -- where we have to pay down the accounts payables to a normal -- more normal amount. That also means that the accounts payable days have been reduced from, I think, 150 to 112, something like that. So it's quite an impact, but it's a one-off. Apart from that, we have low interest-bearing debt. As always, we still have the flexibility that we need, and from that structural point of view, there's no changes. Change the slide, please. The financial strategy. Not so much -- no structural change in that since last quarter and last many quarters, I would say. We are more operationally focused these days, where we're seeing the troubles around the world that also impacts us in -- here in finance. And we've been working diligently on getting our new SimSports business up and running. It's a totally new business for us. And that also means that operationally there are some -- quite a lot of tasks to be dealt with, and that's what we are busy on. With that, André, back to you. Next slide, please.

Yes. One thing I failed to mention but I think is worth mentioning is, if we look at the quarter and the revenue of the quarter, I would say there is 1 customer that's probably representing 60% to 80% of our revenue miss. So you can read a lot into that if you want to and interpret it in many ways. The way I read it is that in general terms the business is not so bad, but when 1 customer is failing, and we have, remember, top 5 accounting for 80% of our revenue, then we hurt big time. So I would say that -- the miss we have this quarter, I would say that it's related to all the issues already described, but it's on one customer's side, more than others. I don't want to mention who it is or the type, but I think that's worth taking into consideration, I believe. And that's also why we are not shaking our hands (sic) [heads]. And that's also why we keep our long-term ambition, because we don't see customers abandoning us, but I think it's fairly easy to understand that, if you make a living out of selling PCs and you cannot get the other parts in the PC, then of course, what should you use a liquid cooler for? I think that's easy to understand. Our '22 growth expectation, I would put it plain and honest. My focus right now is to drive a profitable business and then roll it out as we roll it out. There is not much we can control right now, but we try to control what we can control. And one of them is that we -- I'm not happy with a quarter that's into the negative numbers, and that's my focus. I don't like that. So that's where we are mentally. And in terms of what levers we can pull, we cannot really pull any levers on the OEM side. It's not a price game. It's not a competition game. It's an -- it's the reflection of the world out there, but what we can do at least is, on the SimSports side, push as hard as we can because, as long as we have products and the ability to sell there, then -- of course, it's a brand-new business. It cannot make up for our big, 20-year-old liquid cooling business, but for sure, a dollar on the bottom line is a dollar on the bottom line. So of course, we are pushing full force ahead there. And yes, same with development, we are really pushing. I think that's what we are going to say for now. And...

Yes. Please change the slide, operator, and then we will do the Q&A. We'll start out with all the questions via the phone, but I can see that the web app is also working. There's a couple of questions there. We'll address them afterwards. And feel free to type in any questions as you see, but operator, if you could go through the oral session.

[Operator Instructions] The first question is from Mr. Zhou from SEB.

I have 3 questions here. And firstly, André, you have mentioned that you have adjusted price for the G&E products. Is it possible for you to give us an indication on what ASP level are you -- or it was in Q1? I'll do 1 question at a time.

I'm sorry. I did not really understand the question.

The average selling price for the G&E segment in Q1. Is it possible to indicate?

It's -- in a way, it's completely stable compared to Q4. And -- yes.

Okay, great. And my second question is on the operating expenses. And looking back over the last 2 years, you had booked some legal costs. Is it possible to give us an indication on the legal costs for this year, for 2022?

Not in total. That's too early, but we have been -- there has been some actions, or whatever the term should be, in Q1, which means that Q1 has been actually not on the higher side but on the average of last year which was a high year...

Okay, okay. And if you compared to last year, which was USD 4.7 million, and -- could you give us an -- sort of a sense? And should we -- looking into lower at this -- other than this level?

André, can you comment on -- do we want to comment on the litigation level this year?

Very briefly, yes. I can say that I expect it to be lower. And we were building up to a lawsuit, but then the court -- I don't know how it works in Europe, but in the U.S. at least, and that's where we have the lawsuit, the way it works is, if you're on a patent case, it has to kind of get out of the way if there's a civil case that's more important. And that's exactly what happened. We should have been in court here essentially now, I think, but the court case got postponed because of a more important civil case. So because of that, I expect that -- the burn rate to go down this year. That's pretty much all...

Okay, great, great. And my last question is on the revenue side, $14 million revenue for Q1. Is it possible to break down to the divisional level?

No. We are staying away from that at this point.

[Operator Instructions]

That's fine, operator. We'll take it from here. It's -- that's the usual level of oral questions, so we'll change the -- to the questions that come in via the web here. The first one, André, can you -- I know you forgot your glasses today. Can you read questions...

Yes, yes. It's actually the other way around. I cannot see if things were small.

"So you did expect some final orders from the HPC data center customers. Do you still think they will place final orders?"

Yes. And they are and they have been, and they will continue to do so throughout the year, yes.

Yes. Then changing gear totally, there is a question on our tax situation, and I'll take that as a more general question. We are -- by the words, "tax situation," I'm sure the person here is alluding to the fact that we are, as a company, considered a taxed citizen, tax subject of both United States and Denmark. And that happened because the company in 2012 moved back from U.S. to Denmark where it was originally founded many, many years ago. And at that point, the Americans had decided unilaterally that, that would be a -- considered a tax move to a tax haven kind of country and situation. So that's they decided that unilaterally. That, we are challenging because there is a tax treaty between the 2 countries saying that you should only be taxed in one place. That sounds like the fair approach. And we are working that situation, but it is a really slow process. We have requested the Danish tax authorities to take up the matter with the U.S. tax authorities. And that's -- yes, that's a slow process and it's a process that happens behind the curtains. They make deals, so to speak, with each other. And we are, sorry to say, a small piece of that puzzle. And it's slow. So we are hoping for us -- we're hoping for a situation where we can be a part of a deal. That has not come yet. We are hoping to hear more, aiming to hear more later this year. They ask -- here's the -- he's asking about legal costs, other costs. There is no legal cost. There are no other costs related to this. And the situation only -- if I may use that word a little liberally, the situation only pertains to Asetek A/S, the parent company, when we pay out dividends to our shareholders. It's not an operational situation that impacts. That was a long explanation. Oh, oh, oh. John or André, revenue miss, can you add some color to that?

No. We are not doing quarterly guidance, so I don't want to go into that.

Very good. And then there is a question about the one customer who missed -- caused the miss. Is it a postponement of orders? Or will they come back, blah, blah, blah...

It's impossible to say. In the world we are living in right now, it's not like people are buying a computer one day and then, 6 months later, if they -- it's still not arrived. It's we cannot say.

Sure. Operationally, are you negatively impacted by the recent lockdowns in China?

Yes. Very much so.

Yes. That was a simple question and a simple answer. Again, "You mentioned that one of your biggest customers within G&E had a 60-day [ percent ] miss. Do you see that, that is a one-off? Or is -- and/or will the customer come back to the normal volume or not in the short to medium term?" And that's -- I suppose that's the same answer like...

Keep in mind that it will be the same as asking me if Danfoss will come back to their normal business in case it was not. We have no way of telling. What I can say, what we have done on our side is that in our internal forecast, which is of course separate from the guidance, we have cut it down heavily, just to be on the conservative side, meaning that from our perspective, for us to meet our guidance, we would have to rely on others. So if everything came back, it would be a bonus.

Sure, but there's -- there are no structurally changes anywhere that's saying that they should not come back.

No. I think everybody in this call understands what's going out -- on out in the world now. If not, then please watch the news. And then we cannot speak on behalf of our customers. We don't know why they are not shipping. We don't know why they cannot cope with the shipping prices. I mean it's impossible. And yes.

Yes. It's a frustrating situation indeed. Going to the SimSports business. "Remind us. How is -- how big is the TAM, total addressable market, for your sim race business if the product rate is completed?"

We don't know what it is. What we do know is we have one competitor that is around EUR 100 million. And then our earlier assessment have been that some of the rest is the same. It's important to say that this does not include Logitech and Thrustmaster level of products because that's not where we want to play.

Very good. Changing gear again: "I assume you're using boat for shipping components today. Have you looked into flight transport for key components that are missing?"

Yes, of course. We are looking into everything that can move.

And we are not only using boat shipping today...

No. We are using everything...

It's the mix that we can actually get our hands on.

After the war, unfortunately, train is no longer an option either because it goes through Russia, but we also use that.

Yes. And that...

Wait, there's one more.

Can you read that? "Will it be -- will there still be a third pedal option? Or is the Forte the lowest grade?"

No.

No, no. There will be a third line as well. We have, of course, focused on the highest end first and then the mid one. I can't really say when it will happen, but it will not be anytime soon because the focus right now is on completing the full -- more or less, full, let's say, product program to have an ecosystem. So next in line is the steering wheels and the wheelbases. And then after that, it's the rig and the seats and that stuff. But I think one important thing is pricing is not carved in stone yet on the Forte. But as it looks right now, it will ship at $499. If you compare that to the competition, it's a pretty aggressive price.

And that concludes the questions. One comment from me: We have changed the reporting format this time. That was decided late last year, at some point. So we don't release a full-grown financial report at the end of Q1 and at the end of Q3. However, keep in mind that we have -- on our website, there is a database of -- yes, of data, financial data, that you can download and model with. If you -- being a professional or an investor, if you feel there's something number-wise that we need to develop more on, then feel free to send me your suggestions. We will evaluate and develop that online tool to some -- to the extent that we are comfortable. With that, we are closing down this earnings call. Thank you for your interest in Asetek.

Thank you.

Ladies and gentlemen, the conference has now concluded and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.