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

Hello, everyone, and welcome to Asetek's Fourth Quarter 2024 and Full Year 2024 Earnings Call. Please note that this call is being recorded. [Operator Instructions] I'd now like to hand the call over to Peter Madsen, CFO. You may now begin.

Thank you, Eli, and thank you, everybody, for attending our Q4 and annual 2024 earnings call. The Board met yesterday and discussed the business and, of course, the reporting that we are about to give you now and that we affirmed the approval of the reporting this morning, so we are good to go. I'm Peter Madsen, I'm the CFO. I have here with me, a somewhat impacted by influenza or flu, Andre Sloth Eriksen, our Founder and CEO. Good morning.

Good morning.

And we will be doing the presentation. And as the operator said, then there will be a verbal Q&A that you can participate in or you can type in your questions on your monitor in the app, and then we'll see them right here. It's up -- certainly up to you to decide how to do that. We will proceed. There's a legal disclaimer. We will not go through it now, but you should read it, it is important. Andre, over to you.

Yes. Thank you. So diving right into Q4 of '24, our SimSports revenue grew 86% to a record $4.2 million on the back of the launch of our Invicta Steering Wheel and a few new distribution agreements that we published. Q4 liquid cooling revenue of $11.1 million, which was the highest quarter of the year. Q4 group level gross margin at just shy of 42% and the full year group revenue of $52.5 million and EBITDA breakeven in line with what we guided. We completed the rights issue in January '25 to strengthen our financial position and enable our continued investments in SimSports. For the full year of '24, we pretty much landed on our adjusted guidance or expectations with the full year group revenue in line of the adjusted guidance with an EBITDA margin of 1% in the lower end of the range, but nevertheless, a liquid cooling revenue of $42.8 million versus the guidance of $42 million to $44 million and a gross margin of 45%. And the SimSports growth was on track as well with a $9.6 million revenue and a gross margin of 25%. Diving into the liquid cooling segment, still a good and profitable business that it's been for quite a while. But also it's evident that the volatility is still there and will probably continue as well. But you can see the quarters here. We had 9 new liquid cooling products start shipping in the last quarter in Q4. We have 7 new products estimated to start shipping here in the first quarter of '25. We are currently shipping to more than 20 different OEMs. And we just -- we just announced an agreement with a Tier 1 PC manufacturer for multiple products, with more than 100,000 units expected this year. So as of right now, we are supplying 3 of the top 5 PC manufacturers globally. In the short term, and as we communicated during the fundraising, the focus, of course, is to stabilize the revenue in the short term. And we did end '24 with the highest quarter. We have seen declining volumes from 2 major customers because of dual sourcing, and yes, as previously communicated. However, I think it's important to note that all of our other 18 customers were actually growing in the same period of time. So that's at least partially offset it and this is also reflected in the '25 segment revenue expectation. We think there are several factors that are supporting a profitable and long-term growth. And I can just as well say it now, I'll also come back to it, that as communicated during the fundraising, we do expect '25 to be pretty flat because that's just the inertia in the system when selling to these big OEMs that even though we do get new customers, right now, we don't recognize any revenue until '26. But this is what we're in right now is the first major post-COVID upgrade cycle where actually more or less all the vendors, they release new CPUs and new GPUs simultaneously. We have launched our mid-market offering and thereby expanded the addressable market and, of course, also the potential customer base. With the restructuring of the team, we have also, I would say, increased the focus. So all in all, I believe we are positioned for renewed growth from '26 and beyond. Diving into the SimSports segment. We had a strong end to the year with a revenue of $4.2 million versus $2.2 million in the same quarter last year or the year before. We launched our highest-end steering wheel to date as well as 2 new distribution agreements. Our gross margin was 29%. Needless to say, in the fourth quarter of the year, you have Christmas, you have Black Friday, you have Cyber Monday. So of course, that's affected in terms of discounts and thereby on the gross margin. But of course, it's also still a scale-up business and the world out there has not exactly become easier right now. So that's also reflected in the numbers. But at least, I think it's good to see that the margins were calling off again from Q3 despite it's a holiday season. We are planning and it's going according to plan to launch the mass market product line and the console support for Xbox in the second half of the year. We have seen a moderate demand in the start of '25 which we believe reflects the high year-end, the year-end activity and the fact that we have had no major product releases in Q1, and we can see it's kind of an industry-wide thing right now that Q1 has been somewhat to the slow side. As I just alluded to, we are set to launch and start selling also in the second half of the year, a competitive mass market product line. And that does not mean what we're selling today is not competitive. What it means is that it's targeting a completely different market, where what we sell today is targeting enthusiasts and really high end. Just to give you an idea, the steering wheel on the picture has a cost of $1,500. So very high-end stuff, where what we are releasing later in the year, it's completely different, the price level. We are, as planned, investing heavily in our brand building, the development of new sales channel and retail access, of course. You need to have a mass market product to have a mass market channel, but no product sells themselves. So of course, as soon and simultaneously and in parallel, we are, of course, looking at establishing a retail outlet, new sales channels like Amazon and in general, increasing our brand. We are expecting a gradual revenue increase towards year-end and, of course, into '26 and beyond as well. And other than the product line itself, it's, of course, also supported by the expanded distribution. Just giving you a feel for the console market. So according to our data, Newzoo, as you can see, there are roughly 60 million racing game players, what's called lifetime players, meaning that they are at some point doing sim racing. And as of right now, PC gamers represent 16%. So that's what we are targeting today. So the reminder is actually people playing on consoles. And as you can see, Xbox here is actually the largest with 47% of the market. So that's, of course, something we have high expectations and hopes for. So I'm sorry if I sound a little bit off, that's because I am a little bit off on account of flu. But over to you, Peter, for the financial guidance.

Actually, if you can do the financial guidance.

Yes, I can, of course. So for the year, the revenue expected in the range of $52 million to $58 million. And that's, of course, a pretty wide spread, you can say. But that does reflect the business we are in. And of course, that -- on the sim side, it's not irrelevant whether we are ready to sell the new products in August, for example, or whether it's in October, that time will tell. We expect an adjusted EBITDA margin of 3% to 5%. And on the liquid cooling side, between $40 million and $43 million with gross margins expected between 40% and 45%. And on the sim side, revenue expected in the range of $12 million to $15 million and the gross margin in the range of 30% to 35%. And with that, over to you, Peter.

Yes. Thank you. Financials. Starting out by looking at the revenue distribution over the last few years since 2020 and then up until now, by quarter. So you can see the volatility and change in revenue is not new to us. It's been in our history for a long time. Starting out on the left-hand side coming out on the tail end of COVID, which was a strong period. And then 1, 2, 3 years after that 2023 was also a strong year. So that means that when we are comparing '24 numbers with '23 numbers, then, of course, this is a difficult comparison by nature. Looking at the 3 quarters, the first 3 quarters of 2024, they were all in the level of $12 million, $13 million. And then as Andre also said, Q4 was actually a relatively strong quarter, at least in comparison with the first 3 quarters of '24. And we made $15.4 million in total of revenue in '24, which was -- and the increase driven primarily by the SimSports segment. Looking at the income statement as a whole. Starting from the top, working my way down. Revenue in Q4, $15.4 million and, as I said before, Q4 was a stronger quarter, meaning we can see that by -- it was 7% lower than the same quarter in 2023, whereas on the year -- full year basis, the revenue for the full year was 37% down, at $52 million versus $76 million the year before. I'll come back to the gross margins in a little bit more detail later. However, on the aggregate level, gross margins in the quarter was 42%, which compares to the full year 2024 gross margin of also 42%, but it is lower than the 47% and 45% we saw a year before. The ASPs on the liquid cooling side are relatively stable. That's not where the decline of gross margin comes from. It's more a matter of us selling more in the SimSports business segment. Operating expenses, it was a relatively expensive quarter, $7.5 million versus $6.8 million in the same quarter last year, driven by a few different factors. We relocated the company in Q4 and set up this new business we have -- location we have here primarily in Q4. We've raised money. And we also -- as we have told you before, we laid off people during 2024 and we had some severance payments that needed to be paid out in Q4, so all of that drives up the OpEx in the quarter. Looking at the total annual OpEx and of course, it's the $13.8 million that draws the attention. And that is the noncash, I would call it a one-off charge in Q3, which was related to an impairment write-off that we had to take in that quarter. I know I'm not sure on EBITDA here, but let me just mention it anyway. We had a positive EBITDA of $560,000 in Q4 versus $2.2 million of positive EBITDA in the same quarter last year, but however, it is a positive EBITDA in the quarter. And for the year, we had [ round to 0 ] $271,000 of positive EBITDA for 2024. And this is adjusted EBITDA, what we adjust for here is the share compensation amount and the special items, for example, the $14 million of special items for the full year 2024. That takes us to the operating income, which is a loss in Q4 of $1 million versus an income -- positive income in the same quarter last year and a loss of $19.2 million for the full year versus an income of $9.4 million for the full year 2023. What other is there to mention here? Foreign exchange is a very large income in Q4. And if you have followed us over time, then you will know that depending on the dollar/Danish krone exchange rate, then that goes up and down. And at that point, at the end of the year, the dollar was very high compared to the Danish krone and that gave us an income, and that is because our mortgage loans or our building financing is denominated in Danish krone, whereas we are reporting and making our books in U.S. dollars and thereby, there is a fluctuation. On January 1, we changed the functional currency of the parent company to Danish krone, which corresponds to the denomination of the loans, meaning we should not see these very large fluctuations in the future. All in all, income before tax for the quarter, $526,000 versus a small loss actually in the same quarter last year. And for the year, $18.2 million in the negative versus $8.5 million in the positive for the year before. The only other thing I would mention here is the tax cost expense. For the full year, you can see there's a $5.7 million charge for the full year. And that is because just like we had to do an impairment loss write-off in Q3, which was driven by -- if you look -- if we took a look at our future incomes, future cash flows, then we had a problem sustaining our assets. And that's, of course, when the business contracts and the future contracts, then we have to reevaluate all these matters. And then also took us down to the deferred tax, line item on the balance sheet, we had difficulties defending that we had at $3-point-something million tax assets on the books. So we wrote that off in Q3, and that is the major impact of the tax charge here. Changing to the gross margins. I promised a comment on that. We -- you will see that the overall level is 42% for the quarter, which is a little lower than we have normally seen over time, but it is, however, much better than the 35.9% that we saw in Q3. The dip to 35.9% in Q3 was driven by a quality issue that has been fixed afterwards. And then you would ask, why is -- Q4, why is that not back up at, so to speak, normal levels. And that is because the segment change -- we have -- simply by percentage, we have sold more in the SimSports than we normally typically do. And that means that we sold 27-odd percent of our revenue in the SimSports business in Q4, which is 73% going to liquid cooling. And as the gross margin in SimSports is just inherently lower at this point than it is in liquid cooling business, then, of course, it drives down the overall average. Changing focus to the balance sheet and the numbers here, obviously, are from December 31, 2024, meaning that is before we received the $10 million, $10.5 million net proceeds from the rights issue that came in and the transaction was closed very, very early January 2025. But at year-end, we had $3.3 million in the bank. That's stable compared to what we had at Q3, pretty much we had a free cash flow positive of $1 million in Q4. Of course, that is coming from the positive EBITDA that I just told you about, that's about half of it. And then we had positive development in our working capital, especially our inventories were lower in Q4 than they were in Q3. So those things together add up to a positive free cash flow. On the right-hand side of the balance sheet, equity, 52% is quite solid. The other thing that draws the attention here is our building loans with $20 million, which is a bank loan, it is on long term. It matures in -- after the Q1 2028. It has a long-term repayment profile, and you could say it's paying down as if it was a mortgage until 2028 when it [ builds up ]. It's on Danish CIBOR 3 rates, plus 2.5%. I think we have 5.2% in total interest rate at this point. It is on our agenda to pursue and to change this bank loan to a real mortgage. But it's not an easy task though, because, of course, the banks they are looking at our activity last year and this year also. And it is just easier to come through with the real mortgage loan, if we have a more solid, more positive P&L to show. I think that was the end of this. And then over to you, Andre, for a summary and outlook.

Yes, as communicated previously in last year, we do expect a somewhat flat to 10% growth this year. We, of course, intend to build on the commercial progress and execute on the growth plan that's supported by the strength and financial position we came in and then, of course, position the liquid cooling business for further growth from '26 and beyond targeting a wider market and more customers.

Very good. That was the presentation, and then we change the focus -- shift the focus to the Q&A, and we will hand over the microphone to the operator. I don't know if there's anyone participating via phone, but let's see.

[Operator Instructions] Seeing that there is no raised hands for any questions, I'd now like to hand back over to the management for the written Q&A session.

Yes. And we can read the questions here. Andre, will you start simply from the above?

It's about our collaboration with Lenovo back in 2017 and whether that's still going on. So we are not entitled to talk about our customers. But what I can say in general is that we are talking to everyone. There's nobody that we are not engaged in dialogues with. Then it says, approximately what percentage of our liquid cooling products are sold in the U.S. market and how does Asetek anticipate being impacted by potential tariffs? It's a super complex question to answer, of course, because as we all know, the tariff situation is changing by the hour. We are not selling anything in the U.S., but we have customers who are. Well, we have a little bit of revenue from SI system integrators. But in general, our big OEMs are taking deliveries in different places. For example, we have a big customer who's taking delivery in Mexico. And as we all know, one day, there is a tariff and the next day, there is not. So it's -- it's, of course, very difficult to navigate. Some of the mitigations that we do, do is that we have a manufacturing of liquid cooling in Malaysia. Also I think right now we do 35% of our manufacturing in Malaysia, and it's something that we are determining in close contact with our customers, of course. For sure, the situation is far from ideal. And it's not as easy just to swap production to Malaysia, as you would think, partly because most of the components are actually coming in from China anyway. So there's added shipment -- there's added shipment cost. The union and the labor flexibility in Malaysia is far from as friendly as in China. So it's not that easy to navigate. But of course, we try to do our best while this is going on, but it seems as most of the press somehow do not understand or has forgotten that it's not 10% -- plus 10% tariffs in China because there was already 25% that we are dealing with. So the effective tariff out of China is actually 45%. So it's significant. Then we have a question about the prospectus under the paragraph of public takeovers in conjunction with the equity raise in December. Asetek writes that the company is in a preliminary dialogue with a third party concerning a potential cooperation regarding the liquid cooling business. It's not really something I can elaborate further on other than saying that if and when anything should ever materialize, it is, of course, something that we are bound by law to communicate to you guys.

Then there's a question, which goes to me. I would imagine no 2 segment information. I think we are looking at the annual report here, what kind of costs are included in the non-allocating of operating expenses? And that is exactly the expenses that cannot be reasonably be allocated to the 2 segments. It's insurances, management salaries, running of the building, et cetera, things that cannot be allocated reasonably to. And a further question also from the same gentleman here, capitalized development cost, which of the 2 segments does that mainly pertain to or relate to? That goes up and down a little bit. Capitalized development cost, as the word alludes to, relates to the -- yes, the development cost, sorry [ to point ], of course, it does. And depending on where we are in product state and in each segment, then this may shift from between the 2 segments. During 2024 early, we had some large liquid cooling projects that we finalized and there were significant capitalization on that. Towards the end of 2024, it was more over in the SimSports department that we capitalized. Overall, for the year 2024, it's an -- almost an even balance between the 2 segments. However, in the latter part, it's probably 2/3 to SimSports and 1/3 to liquid cooling. Further question, investments after finalizing HQ will go down. Can you elaborate on cash conversion on free cash flow in 2025? Free cash flow 2025 will be around 0, I believe. Yes, we have seized the investments in the building. And we are seeing a positive, however, minor positive EBITDA in 2025. Further questions, what are the covenants related to the bank loans? There is a -- there are 3 covenants, 3, I think we actually state those in the annual report also. One is related to solidity on the balance sheet, equity versus the balance and one is related to our reporting to the bank that has to be done on a segment basis. And the last one is related to a minimum cash holdings throughout the period. And then over to you, Andre, on #8 here.

Yes. How much of an impact would you estimate to make with the new sim racing series line? That's a difficult question to answer because I don't know what -- how we measure. But for sure, you could say that what we're doing today is only high end, even our lowest cost products today are high end, all by design, where now what we are coming with is a mainstream and much lower priced gaming equipment. So of course, we expect it to make a significant difference. That's why we're doing it. But it's not something that's going to happen overnight because we -- as I said before, no products are selling themselves. It's a brand-new task to establish new sales channels and distribution channels. And that's, of course, what we are working on and working with. But for sure, it's something that we have high hopes for. Yes. Then is, how is the mass market in liquid cooling, you talked about a year ago, coming? That's going well. We have several customers who adopted it, and we have more to come. So we are happy about that. Is data center dead in an Asetek context? Yes, it is for now at least.

Defense situation?

Yes. I don't see the defense situation is something that impacts us in any way.

Very good. I'm just refreshing and there seems to be -- going once, going twice, there are no further questions. So that means that this concludes the webcast. Keep in mind that you can always submit your questions to us to the [email protected]. With that, thank you for your interest in Asetek.

Thank you.

Thank you for attending today's call. You may now disconnect. Goodbye.