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

Hello, and thank you for standing by. My name is Mark, and I will be your conference operator today. At this time, I would like to welcome everyone to the Asetek Q3 2025 Earnings Call. [Operator Instructions] Now I would like to turn the call over to Peter Madsen, CFO of Asetek. Please go ahead.

Thanks, Mark, and thank you, and welcome, everybody, to this Q3 2024 (sic) [ 2025] Asetek earnings call. My name is Peter Madsen. I'm the CFO. I have here next to me our CEO and Founder, Andre Eriksen. Hello?

Hello. Good afternoon.

Good afternoon. So our Board met last night and discussed and transacted the earnings release, which we then sent out last night. We will go through a series of slides here. When I slide through here, we can see that on Slide 2, there's a disclaimer for forward-looking statements, et cetera. We urge you to read those at your leisure. With that, I'll hand over the microphone to Andre.

Yes. So let's dive into the quarter that we just passed, some gives and takes. Year-to-date revenue of just shy of $31 million and adjusted EBITDA of minus $0.7 million versus $37.1 million and $0.3 million same quarter last year. As most of you have realized by now, we signed a major agreement with a global customer for high-end liquid cooling with a minimum committed revenue of $35 million over the first 2-year term of the contract. We saw SimSports revenue of $1.3 million, stable versus Q2 and in line with expectations as the tariff situation continue to impact us and impair us, of course. We adjusted our group revenue for the year to roughly $41 million with an adjusted EBITDA margin of a negative 3% to 5%. One thing worth noting here is that the dollar actually decreased 10% over the year. And since we have our OpEx in Danish kroner, I would say the most part of this negative EBITDA margin is actually related to the dollar value. In return, we did increase our midterm liquid cooling segment revenue ambitions quite significantly. Talking a little bit about the new agreement, the reason why it's actually a little bit elasticity in the number is because it's actually a committed volume. And then with an ASP, of course, it turns into a revenue, but that's why it's estimate. But it's a long-term agreement for our high-end solutions based on the Ingrid platform. And we are, in this case, supplying both the liquid cool itself, the plastic cap, the heat exchange, the fans, retail packaging and all of that. That means in return that we get a higher ASP, but of course, also at reduced gross margins is simply due to the fact that we can, of course, not charge, for example, 45% gross margin on a paper box that's a commodity. And although we make a little margin on it, it, of course, drags down the overall margin. We expect to begin shipping end Q2, start Q3 next year and Q4 for the next products. We have 2 products. The customer is a globally leading provider of high-quality components and accessories is one of our earlier customers. So it's a welcome back. And we do expect this customer to reclaim the top-tier position within our portfolio. So as I just alluded to in the beginning, the minimum volume commitment is estimated to a $35 million during the first 2-year term. And of course, since the customer has committed to this, then my expectation is that they are actually being conservative, at least I would when I would -- if I were to commit to volumes with one of our suppliers. So revenue may very well be higher. Our guidance, of course, reflects the near-term challenges that we are facing. We have -- and it's just the nature of OEM business. We have a couple of customers who reduced their short-term forecast. And yes, there's nothing major in that. Of course, it's always irritating when it's in this direction, but that's how it is to be an OEM supplier. So because of that, we have revised our guidance. I don't want to repeat it once more. I just read it up. But we do expect, as we've said for a long time now, that growth will remain and come back in '26. And therefore, we have raised our midterm ambitions to $65 million, where we previously had $50 million. And we aim to consistently achieve an adjusted EBITDA margin of more than 25%, which is consistent with what we've said before. I would actually like to go to Slide 8. So the current status on the business, the liquid cooling business, that is that we are right now supplying 3 of the top 5 PC manufacturers globally. We had 3 new coolers started shipping in the third quarter, and we have 7 new products that's estimated to start shipping in the quarter that we're just entering. We focus still on the high end and the mid-market, and we also have a value version of the Ingrid technology platform more for the mainstream market that will be ready in Q4, also with revenue impact from '26. We always knew that going into '25, it would be a hard year. And I would like to take your attention to the right side of this slide. So what I mean by that is that we had a couple of customers who went to dual sourcing. And the impact of that, as you can see on the left side of the graph, is that we lost perhaps 200,000, 250,000, 300,000 units to these customers, but we actually have been able to grow new customers and existing customers almost the same. So at this point in time, we have shipped shy of 20,000 units. We have actually been able to fully compensate for the loss. It has been too much to also grow on top of that, but I'm actually quite happy that we've been able to offset that. The ASPs, if and when they are lower, it doesn't really say much about the actual price of the product. Of course, it says something about the price. But what I mean by this is it's not price erosion, it's simply due to what the customer wants in terms of extra utilities, et cetera, shipped with the product. I believe we have a strong support behind our '26 growth expectation. Of course, we have a committed customer contract. We have focused really hard this year on growing existing customers. And we have a full launch of the mid-market and also low-end products later this quarter. And I have to say that the main reason we have now seen just this year, 2 customers come back is that there is an increased recognition of our quality. It's not just a price game. It is really also down to the quality and the services we provide. Moving into the sim side, simulator side of the business. Of course, the big headline here is still the tariff situation that is actually handicapping us quite a bit. And as I said on earlier calls, this year, it has meant at least 50% of our revenue has gone because of that directly. And of course, our U.S. resellers, they remain cautious because of the situation. And like us, they are also awaiting clarity for the tariffs. The focus on mid-end product right now from the consumer is still above that of high-end products, I would say. On the amazon.com sales, we actually still see a very nice growth. We are not really investing in that channel of our business. So it's actually nice to see that it's growing anyway. And I would say our direct sales in our own web shop is actually progressing quite nicely, and it's actually a little bit ahead of our internal forecast. We are seeing a gross margin in the quarter of 17%. I will not read too much into that because, obviously, to service the U.S. market, we had built inventory ahead of 2025. And instead of sitting on that inventory, we are, of course, doing some sales we just did. And of course, we will do that on Black Friday, et cetera, to get rid of that inventory and convert it into cash. And of course, doing these types of sale will impact the margin. We launched our Initium back at Gamescom in August and presented it to the, let's say, sim racing world here in October in Cologne and Dortmund, respectively, and I would say it's been a very nice welcome both by the media and end users that do recognize it as a new leading offering from a perceived strong brand with great products and we are seeing strong interest from our potential new channel partners and the channel partners we also did land. And of course, our focus now is to convert it into real business. And to begin with, we had built modest volumes, of course, because we needed to see that production would run as expected. But also because of the relatively high inventories, we were not that keen on going flat out. But the initial volume actually sold out immediately. And we, of course, started up production again immediately too, but we do have almost 3 months of time shipping from China and around the world. So we will see product landing in our docks late this year, early next year. And on the Xbox console support, there is also progress we are actually playing on the Xbox internally now. So it's -- we are almost there. And then the next thing there is in the process is we need the official stamp of approval from Microsoft or Xbox. And when we have that, we are able to start selling. With that, I will leave the bat to Peter to talk more about the numbers.

Yes. Thank you. And if we look at the -- at this quarter, with revenues of $9.8 million, then you will see that it's a relatively low quarter. Revenue-wise, it is on par with Q1, sorry, of this year, and it's a little bit lower than the comparison quarter last year, Q3 2024. If we look at the profit & loss statement, starting from above and then I'll try and work my way through, you will see that revenues at $9.8 million versus $12.2 million last year, that's down by approximately 19%. And for the year as a whole, we are at $31 million versus $37 million roughly last year. That's 17% down roughly. And that has to do with partly a reduction in the numbers of products sold, especially on the liquid cooling side. Liquid cooling is almost 90% of the business. So of course, that takes the lion part of -- makes up the lion part of the profit & loss. We were 4% down in the numbers of quantities sold. That means that something else must have shifted, and that is the ASP, the average sales price, which has been down from $54.4 last year to $50 this year. So on the surface, that's 8 points -- percentage points. Keep in mind, though, that as Andre also alluded to, that a change in ASP in our case does not necessarily equate into lower gross margins. It is more likely, and that's also the case here, a shift in product mix. Gross profits, $4.1 million for the quarter versus $4.4 million last year. That's 42 points this year and 36 last year. So that's up quite significantly. We'll come back to that. And for the year as a total, we are at 44 percentage points for this year and 42 last year. I'll come back to that a little bit. OpEx, total operating expenses at $6.1 million versus a whopping $20 million last year. I can touch a little bit on the special items from past year. But if I take the liberty of excluding them just for analysis right now, then it's $6.1 million this quarter versus $6.2 million same quarter last year and $18.5 million for the full year so far this year versus $19.9 million in the same period last year. And that is a reduction, and we're happy to report for a reduction. We have also promised a reduction. For the quarter, it's 3% down. And for year-to-date, it's 7% down. And that is primarily at least on the surface driven by personnel cost. Personnel cost is a very large part of our OpEx, and that has also come down by the same 3% and 7%, as I just mentioned. However, we are in a quarter or in a time here where the dollar/Danish kroner exchange rate has changed quite significantly. The dollar has come down, meaning that the kroner has been more expensive. And we are talking about 10%, 11% in FX currency delta at this point in time versus the same point in time last year. So in addition to the actual savings in personnel costs, et cetera, you should also add -- I don't have a specific number, but you should add a significant factor in for the changed exchange rate price here. Operating income for the quarter, $2 million in the negative versus $15.6 million last year and $5 million for the year so far versus $18 million last year. Foreign exchange rates, as I just mentioned, the dollar versus Danish kroner has changed quite significantly. We are at, what, $6.4 or $6.45 at this point versus above $7 last year or earlier in the year. But it has been relatively stable for a period of time, meaning that there is almost no foreign exchange loss or gain for the quarter and a relatively modest amount for the full year so far. That means that the income before tax is negative $2.2 million versus negative $17 million last year, and for the year, $6.3 million in the negative versus $18.7 million in the negative. Just a comment on the special item on the OpEx from that year. It is an impairment write-down based on -- and that's a long -- could be a long technical explanation, but I'll spare you for that. It was related to the relatively low stock price last year compared to our book to equity, and that meant that we needed to write down about $14 million on the assets, plus actually $4 million of deferred tax assets. So a significant write-down last year, which, of course, we don't have a similar write-down this year. A brief comment on the gross margins. Yes, they have gone up to 42 points at this point for this quarter compared to the 36 we saw last year. But last year, in addition to the impairment loss that I just reported about, then we had a supply chain issue that we recognized and booked in Q3. So it's a relatively easy comparison this year where we compare 42 this year compared to 36 last year. However, if we look at the most recent numbers, then you can see it's gone down just over the last quarter here from 45-ish to 42-ish and that is primarily driven by our liquid cooling business where the gross margin is down from 45.5% to 43.2%, so a couple of points. And that is driven by the product mix changes that Andre also alluded to. Changing focus to the balance sheet, focusing right in on the cash balance. We have just shy of $2.8 million in the bank. That is a reduction since earlier quarters, and it is impacted by an increase in working capital significantly or specifically around inventories where we're preparing for Black Friday and Christmas and year-end, et cetera, where we have to scale up working capital. The cash balance is in compliance with our loan covenants. The loan covenants are reduced when we enter into 2026. As Andre also talked about 2026, the beginning of is sort of planned to be a turnaround time for the business until we get the new larger customer up and running at some point early next year. And of course, that comes with a requirement for working capital when we close -- when we move into that expansion of the business. On the liability side of things, we have an interesting bearing debt of $20.5 million related to the HQ. It matures in 2028 and it is on mortgage-like terms. It's technically on a mortgage, but it's on mortgage-like terms. And we are paying Danish CIBOR 3 plus 2.45%, meaning 4.5% roughly as an interest on that loan. With that, I'll hand over and turn the microphone again to Andre for a summary and outlook.

Yes. So something I did not touch upon, but I would like to do here is that the discussions related to a potential strategic transaction is still going on. Other than that, I've got nothing to say about it. Our revenue this year remain impacted by the near-term market challenges, specifically related to the U.S. import tariffs, of course. We did launch our new product line successfully so far. And liquid cooling business is set for growth from '26 and beyond with new and returning customers targeting a wider market.

Perfect. Thanks, Andre. And with that, we will move into a summary question-and-answer section. And we are taking questions via the web app. You should have the opportunity to type in your questions on your screen somewhere and hit sent, and then we'll get them over here. And we can see that some have already understood that. So why don't we just start from the top and work our way down here. Question number one, at which profitability requirement is your building -- sorry, I'm just translating from Danish to English as we go ahead, which profitability requirement is your building recognized? And what's the status on refinancing over to mortgage? On the first part of that question, technically, classification-wise, the building is classified as a domicile, which means that we are taking it up at book value. And then if you're wondering how come that the building is then written down, which it was last year in Q3 by $14 million roughly, that is back to the impairment test loss that we saw or recognized last year. It had actually nothing to do with the building. We are not recognizing that building at market value. We just had to write down a significant amount of dollars. And the -- how should I say, the obvious place to write down anything on our balance sheet was the building. So that's why the building was written down. And so far goes the refinancing over to mortgage. It's an ongoing process. It's relatively slow. I have to admit, it has to do with the fact that the mortgage companies, they are looking at our profitability, which has been under pressure, yes. But as we see that changing in 2026, we also -- we hope and foresee a change in the -- moving forward in the mortgage plans. Andre, can you take the next one?

Yes. So what's driving the new Ingrid OEM interest and how different is it from competition? And is it possible to reclaim some of the lost dual sourcing volumes with time? So starting from the back, that's exactly what happened with the new order that was getting back or reclaiming revenue. In terms of how different it is from competition, I think that's too simplified because one thing is the product, yes. But I think what our customers are also realizing is the quality. One thing is the cost of a product, but the total cost if the quality is bad, it doesn't really come down to product cost. And I think we are significantly ahead on all parameters being a quality or being it actually product performance. And I also think we are somehow competitive from a cost perspective.

Yes. Very good. Next question, why do you not hedge U.S. dollars versus Danish kroner? And of course, that's a very obvious question to ask since the dollar has come down and thus, the Danish kroner has come up. It's a 2-way street, though. If it goes the other way, then our eagerness to hedge would not have been so great. There is some natural hedging in the fact that we are selling some products in both Danish kroner and euro. But true, it's -- we don't -- we've never done hedging. That has been a business decision. Hedging also comes with a cost as a premium. And if I go here, what are your cash flow expectations in 2026 based on expected liquid cooling growth? And how are you considering financing currently with cash on hand dropping in Q3? We're not going to comment at this point on -- or guide for that matter on cash flow expectations. We've never done that, and I don't foresee us doing that. We are in contact with our banks. They also, as we see a brighter future in 2026 and what we've seen in 2026. And our Board, I can also assure that they are on top of this manner. Why is it so that the cash on hand -- cash and cash equivalent for paying a period of $3.2 million for Q3 when it was $7.2 billion at the end of Q2? It seems like $4 million has disappeared from the company cash balance. Yes, you can say that. And that is, of course, a combination of the profit/loss, being a loss at this point and then our inventories being relatively high and other working capital being relatively high in preparation for the year-end. I can tell you that we have, and Andre also actually said something about that, we have launched a campaign on SimSports as we always do, and maybe we've been a little bit more busy doing this year on inventory cleanout, et cetera. So we are seeing progress there. Andre?

Are the sales discussion for liquid cooling and/or data centers still ongoing? I guess that refers to what I just said that, yes, the discussions are still ongoing.

Very good. And you get the pleasure of answering the #7 here?

One is management still enjoying its job. And if so, what keeps you motivated? And two, what can be done to further enhance shareholder value in the mid and long term? So I'm not enjoying my job every day. But I guess I am most of the days, and I can guarantee you if I'm no longer I am, I will no longer be here. That's for sure. What can be done to further enhance shareholder value? I think in the midterm, we need now to execute on the new contract we have got and get back to the growth that we always -- always that we used to have. And then hopefully, shareholders and new investors will also recognize that. In terms of the long term, I would say that, as you all know, we invested $100 million into the data center space. Someday, it would be nice to see if we could get something back from that investment. And I would say that AI, of course, is harder than ever. We just don't have the resources to go after it right now.

Very good. One more question on cash flows, which I think we have given answers to. However, it also asks here we anticipate raising additional capital? And the answer to that is that there are no such plans at this point. We are looking into 2026. And I think we share that vision with both the Boards and the people around us that is looking more -- much more profitable than what we see today. And with a profitable bottom line, if you take a look at our balance sheet, then you will see -- I think you will realize that there's actually room for working capital financing in another measure than what we're doing today. Can I ask you to take #9, Andre?

Yes. So -- and all of these calls, we get all kind of brilliant idea of what to do with the property. And I would just say with all respect, of course, we have been down all avenues. It's not like we never thought about a sale and leaseback or never thought about a mortgage. So thanks for the advice. But we are looking into all the possible venues.

And then there's finally here, there's a technical question on a balance amount. I'll certainly look into that and update if there should be anything to update. I have learned that I can hit a refresh button. And I have done that a couple of times. That means that we are concluding this webcast, and we thank you for your interest in Asetek.

Thank you.

This concludes today's call. You may now disconnect.