Elliptic Laboratories ASA (ELABS) Earnings Call Transcript & Summary

Hello, everyone. Thank you for coming for all of you that are -- made it down here to Carnegie, really appreciate it. For everyone that has tuned in online, welcome. And we are looking forward to do a great presentation. We have lots of news, as I assume most of you have already seen. Today, I am here presenting together with Ola Sandstad, our VP of Product. And then also with me here today is Lars Holmoy, our CFO and Investor Relations. So, we'll jump straight into it. I'll give a brief overview with some nice video demos and so forth. Then after Oliver and I will have a panel discussion. And then all the way to the end, we will see if this magic truly works, Ole, no pressure. No pressure. All right. Okay. So, I know most of you know what we're doing. For those that are brand new, we here in Elliptic Labs, we have a platform that we redefine user experience with AI. So, our mission is to build a leading AI software platform to deliver user experience, making every device smarter, greener and more human friendly. And how are we doing this? Well, we use -- we have 100% software. We do not have any hardware, 100% software. We are leveraging any type of physical sensor that is on a device today to create new user experience. And some of this user experience, we are going to talk about, and we're going to show, and we're going to describe the value and the response in the market of some of these user experience. In particular today, we're going to touch upon our AI Virtual Seamless Sensor. We are already in the market with proximity sensor -- virtual proximity sensor for the smartphone market, turning off and on a display in the phone call. We're also in the market with a human presence sensor, turning off on a display when you sit in front of it on the laptop. But this virtual seamless answer is a -- it's a whole new set of new magic. And we are super excited about it to share lots of news around that today. All right. So, I mentioned that we're already in the smartphone market. We are deployed currently in over 500 million devices. So, we have demonstrated that we can truly deliver our platform at scale. We are working with many, many Chinese smartphone manufacturers in China. We've been doing that for 8 years now. We've been out in the market with the smartphones. So, we continue working with these manufacturers, continue deploying the AI Virtual Seamless Sensor, the proximity sensor, and we have launched over 137 models to date. So, keep scaling. We're also rapidly scaling in the laptop market. So combined, we are close to 170 models in the market. We keep scaling in the laptop market. And this is important that we now have been able to use our underlying technology from the smartphone market and moved it over to new verticals. So first, with proximity, then with human presence and now we have leveraged the underlying technology to deliver whole new functionality that I'm ecstatic to talk to you guys about today. So let's talk a little bit about our big laptop customers. This is an example of one contract for those that follow us closely, this is Lenovo. And we started out with 1 contract on one model. And quickly, as they had deployed, launched, demonstrated that, yes, this is actually working, they added on a second contract for more and more models. And then over time, as we've been working with them, we have then also, as you know, recent announcement, announced a new product, the Virtual Seamless Sensor. And this is what we are truly excited about. All right. So let's talk a little bit about what's happening in the PC/laptop market. As you all may recall, during COVID, everybody ran out and they bought a lot of laptops and accessories, et cetera. And we had a significant growth in that market. Then right in '23, there was a big drop. And if you look at this graph, you can see even all the way in '28, it's still would not catch up to where the laptop market was in 2022. So, what does this mean? Well, if you pay attention to the green graph here, you see that laptops that is powered by AI functionalities, that will be the significant growth. So, that goes from like 10% all the way up to 70% according to Gartner. And this is very important for the OEMs because how they laptop OEMs, how are they going to grow? There are 2 ways, okay? Either they can increase the price. So, what do you think is the likelihood that these laptop manufacturers actually can increase the price? Personally, I think it's pretty low. I don't know about you guys. We also know that the chipset manufacturers, some of the components they're putting into the laptop, that price will increase. So, what's going to happen? They can't really increase the price. The cost most likely for them to build this laptop is going to increase. So, they're going to be squeezed on the margin. So, how are they going to grow? Well, they have to focus on winning some of the AI market, and this is why, one of the important reasons why companies like Lenovo is working very closely with Elliptic Labs. So, this is important to make a note of. All right. So we, in Elliptic, we have been -- obviously, I know many of your investors have been here with us for a long time, over a decade some of you. And in this period, we have been building a leadership in the whole ecosystem. We're working with lots of, of course, smartphone and laptop manufacturers, but more so, which is important is that we've been working with the chipset manufacturers that are driving the power within these laptops and smartphone manufacturers. And the way we run, we embed our software into the chipset. This has not been an easy task. It's actually quite a high barrier to enter this market. We spent a decade doing this. This is important. You want to create. When you're solving a problem in the market, it is actually advantage that it is difficult. You just want to make sure it's not so difficult that you're not able to solve it. But this is important. So for other companies that are coming behind, it is not an easy task to sort of walk in and do the same. Even for Lenovo themselves, for example, they're not able to do what we're doing. So, this is important. And then, of course, in the core, we have our AI Virtual Smart Sensor platform. We started building our own neural network back in 2015. We have tremendous expertise in this whole ecosystem. So, all the way from the chipset, all the way from the operating system to the application, and really truly also understand the magic behind machine learning in AI. This is important. And then now we are leveraging this underlying technology to do a set of new capabilities. So let's take a look. This is Lenovo's recent announcement that they did at IFA Berlin, where we are in the core of a very critical, important feature for them to create true interoperability between devices. So let's take a look at their advertising. [Presentation]

Lenovo's. All right. So we together with Lenovo, and one of the things when we started out with Lenovo for this particular product was that we had a strong focus or together, we were like, how do we create this interoperability? Because let's face it, most of you are sitting with an Apple device, a lot of you, and then you have a Mac and you have this really tight ecosystem within Apple. One of the things that we've been really focusing with Lenovo is to figure out like how do we -- how can we position them to try to break up this ecosystem from Apple? Like one, how do they lock in, make their own ecosystem against the other competition in the market? But how can they interact with this device? How are they going to do it? Because it is important to have an ability to seamlessly interact, particularly with this iPhone. And it's not random that my phone is matching my jacket, of course, but this is important. Because over 80% of young people under 21 in the U.S. has an iPhone. So if you don't have a good use case and interoperability with the iPhone, it's very easy for them to lose market share. And what they're saying is like once you go Mac, you never come back and that is a problem. So, we've been working really, really hard to come out with a big statement to make sure that we can truly create this interoperability. And as you see here from the demo, again, they're showing the demo over and over with an iPhone, even though they have their own phone, Motorola, but it is so important that they can have this interoperability with the iPhone. So let's see after the launch. There was lots and lots and lots of press. We also have been working with Lenovo for months. They've been working for months also traveling around in the U.S. and Europe, presenting this technology, this easy tap to connect so you can share pictures between device-to-device with a really focus on, can they get this attention when somebody comes, a user come to the store and they're going to buy a laptop? Can they have a feature that can draw the user to their product, in particular, like something against Apple? And so I got goosebumps when I saw this type of announcement that Smart Share is an Air killer. This is exactly what they were trying to focus on and this is just the beginning. We started out with one application, but we can do so much more. So the response of the market, not just in the market, as we've been working and having discussions with Lenovo, as their sales team and their sales leaders have gone to these huge retail stores and retail change in the U.S., they get so positive response for this capability. Finally, a feature that can make the user lean towards Lenovo. So, this is super, super exciting for us. So, obviously, we have a strong relationship with Lenovo. And they graciously also -- not graciously, of course, they did put together a joint marketing video. We shot this video about a month ago at their U.S. headquarters in North Carolina and it's myself, together with their leader for marketing. So let's take a look. [Presentation]

All right. We're looking forward to future collaboration. So do we, of course. So future collaboration. So, what else can we do? Lots more. We have showed some videos here, and what they launched with was the interoperability between the smartphone, both Android and iOS. So Apple and everybody else, and a laptop. But that's just the beginning. We can also do lots of interoperability between like mouse and keyboard and display and whatnot, basically tie their whole ecosystem. And the beauty here is that for a company like Lenovo, what they can do, they have some options. Their option is do we want to tighten the ecosystem within Lenovo only? Plus Apple? They can do so. Or do they want to do Lenovo ecosystem, tighten that ecosystem, Apple and then everybody else. So basically, if you're going to do anything with Lenovo, it simply just works. So here's another example of what we can do. This is a simple wireless peering. So, live demo at our office. Just sitting in pair mode, little tap, boom, instant visual feedback. Do you want to connect? Yes, I do. Click. Voila, done. So, there are lots of these other capabilities that we are already having discussions with Lenovo and working with them. So, super exciting. All right. So where are we at? Okay. We started out at Phase 1, replacing physical hardware sensor with software only, already in the market, both in the laptop, also in the smartphone, and we will continue to do so. We're not going to leave that behind. We're going to continue selling that. Then in this phase, this is a device interoperability. This is what happens when you start working with the ecosystem and these customers over time, they look for new opportunities, new capabilities that we are able to do and deliver. And we have full expertise in the whole full stack as I mentioned in the beginning. We understand the chipset. We are under the hood and good Norwegian word, [Foreign Language], with all of these partners that we are working with. So, we understand the processor. We understand the OS. We understand application layer, and we have deep expertise also in AI. All our engineers are machine learning experts. That's how we operate, and we have done that for a decade. So that means we can continue moving further up in the full stack. So right now in the Phase 2, we are talking about contextual awareness, what's happening around the device and between the devices. The next level, as we're talking to and working with these large enterprises, we can move further up in a contextual intelligence. Those use cases are also many, but we were following the same process as we did here. First, we closed the contract and then we talk about the use cases and we're not going to steal the thunder away from the customer like for Lenovo. We're not going to tell the market about what we're doing before they go out and do a big splash like they did here. And this is exactly how we're going to keep working with the market further up in the next phase. But of course, the Phase 2, the device interoperability has a huge opportunity, not just for Lenovo but also for the other ones. So, this is a really big milestone for us to have this big launch that we did at IFA. So very exciting. All right. So it's important to note that it's not that we're creating something completely new that we're moving away from our core sort of business model. We are building on top of our core platform. We're adding on more and more puzzles so we can create more capabilities. So with our platform, we will continue to evolve. It's a powerful foundation, also backed up by the strong IP of several 100 patents. This is very important. And we will continue to leverage this AI capabilities, so we can really shape the future together with our partners and our customer. So this, for us, was a big milestone. We will keep expanding, but it's literally just the beginning. So, really looking forward to shape the future with connected devices and beyond. All right. Thank you. So the next one, we will have a panel discussion between Oliver and myself. So, maybe could I have some more water? I'll have some of that. All right. Sure. Yes. Well, I guess I'll just then expose them.

Thank you very much, Laila, for giving me this opportunity to dig a bit deeper. For you who don't know me, my name is Oliver Pisani. I'm an Equity Analyst, and I follow Elliptic Labs here at Carnegie. And of course -- I, of course, wanted to dig a bit more into the seamless sensor that you're talking about. And I don't know if you can answer this first question, but would you be able to give us sort of the layman's overview of how you deploy this -- what technologies you use to deploy this new tap sensor? What you can say? Only what you can say?

Yes. I can say that we use, in layman terms, we use -- each laptop has close to 30 sensors. So, I'm not going to say which sensor we're using, but we are using a set of many sensors to basically create a virtual -- a software sensor on the side of the display. That's how easy I can explain it. The beauty is it only needs to reside on the laptop itself. It doesn't have to be on the phone. It can be on both. It doesn't have to. So, we show the mice clearly, then it's only on the display. So, I can say also we use a lot of machine learning, a lot of training to make sure that we accurately are detecting that app. Lenovo decided that they wanted the tap to occur on the display. They also wanted to have the tap. I'll sort of maybe walk over to your laptop just like that. You can just do like this casually, like you didn't have to be like very specific, but just like sort of kind of cool, like that easy. So for that, we have to use a lot of machine learning to make sure it's trained properly because you want to make sure that when you do like this, it doesn't happen or like this, you don't want it to happen. You only want it like this. So, that is a combination of sophisticated machine learning and really understanding the different sensors output.

So would you say that sort of ultrasound capabilities are still the key here? Or would you say that you moved more to general sensor fusion machine learning?

General sensor fusion machine learning. So, we're not so dependent on ultrasound. I just want to reiterate also that when we did the tap, that was a choice of Lenovo. They decided they wanted to do tap because they thought that was really good also for marketing. Generally, you get the sound, and then you get the visual and then you get the instant visual feedback. But we could, for example, just use the distance. So, I could say, if I walk here and I did like this, it pops up. They could. But that was not their choice. Their choice, they wanted to do like that. So we're not -- we're more focused on sensor fusion or what is called on the fancy term, multimodality and machine learning than pure ultrasound, which is good.

Yes. Feels like the company is evolving more and more into that direction. But also interesting, you mentioned that you only need to be in the laptop essentially, but here they've chosen them to deploy with a separate app, a third-party app that you have to download for its work.

Yes. So strategically, Lenovo decided to launch initially with Intel as a partner and use their app. However, some of the demos that we are showing, we can use Spotify, we can use any type of app. I mean, obviously, there needs to be an app on the phone and on the laptop, but Elliptic Labs' technology can only reside on the laptop. Strategically, Lenovo decided to use Intel. They have a strong partnership. So, that was their decision. So, we decided that then we have to work with Intel, of course. So, that was a choice. But we are not limited to the Intel app at all. For picture sharing, you can use lots of other apps if you want to, or video sharing, music sharing. Teams, if you're on a conference call, you'll walk and if you want to -- you're on a conference call on your laptop, you just want to tap, switch over on your headphones and your phone, you can do that and then you can go back again, no problem. So it is truly heterogeneous. So it's heterogeneous.

And I mean, it sounds like we're just waiting for more upselling to happen, then this is just one quite simple use case in the sense that you're just sharing pictures, but there should be like 10s of other use cases.

Yes, it should be. So, obviously, once again, I'm not going to steal away the thunder from any of our companies that we're working with, but yes, we have already showed a few demos here and we will show some other demos. So, obviously, for us, it's whatever application they want that is up to companies like Lenovo. And there's different ways we can implement it and so forth. So once again, we are sort of working closely with the various laptop manufacturers and see how they want to deploy and what they want to focus on because it's not just about the feature, but they're very, very -- they have a very strong focus on advertising. It's clearly -- I mean, you see all the advertising doing, all the press that they're doing. It's very, very important for them to get that attention because it's hard to -- there's so many small features on the laptop. So for them, it's also very, very important that they can really have something that a user would notice. And then that's the first part because they have to make sure that they're buying the laptop. And then when they bought the laptop, they want to make sure that now you're sucked into that ecosystem and you're coming back for more.

Yes. That makes sense. And I think sort of previously, you've often compared your functionality to a specific hardware functionality. Now it seems that you're moving more towards adding additional capabilities that a single hardware sensor wouldn't necessarily bring. So, does that sort of change your pricing power in some sense?

Yes.

Perhaps you can't talk about Lenovo, but in general.

Yes, for sure. So initially, when you are replacing a physical hardware sensor, you are bound by the price of the hardware sensor. And then in general, we have been saying that we're going a little bit below the hardware sensor. For this, we have actually increased the price to create true interoperability. And one of the discussions points that we're having is when we're discussing, for example, because now they're positioning against Apple and each other. So we're saying, well, how much do you think that Apple is investing in their ecosystem, their interoperability? Of course, I'm not saying that we are -- right now, we crushed Apple. That's not what I'm saying. But it's the beginning. And if Apple is spending like billions of dollars, the price point here should naturally be higher. So, that's what we have seen so far for the companies that we are talking to.

Yes. Very clear.

And then you're going to do your guess to figure out how much it is, do your analysis.

I'll try. And I was also -- but I was also -- sort of just wanted to clarify that sort of you're not in some sense bound to Lenovo now. You're still open for business with all the other OEMs that may be out there and may feel that they would need to follow.

Yes. Absolutely. So it's not that we do an exclusivity with Lenovo. There's only one way to really lock us down. I mean, everything is negotiable for the right price, but we're not bound with Lenovo. So, we are fully free to operate with the rest of the market as well.

Yes. That's very good to hear. And then I wanted to move sort of and look a bit more forward. I think you're now moving into PC, obviously, but you're very strong historically in the smartphone segment where you're just doing this simple hardware replacement. Shouldn't there be much more you can do with respect to this Edge AI sort of contextual intelligence directly towards the smartphone segment?

Yes. We are also talking to the smartphone players. However, we see, candidly speaking, that if you reside on the laptop, you get a better price point. Also it's important for us to sort of diversify, just to be candid here, geographically. The PC manufacturers are located in the U.S. versus the smartphone just in China. So, there are 2 things like the price point and also where they're residing. The third piece is that the laptop manufacturers has a huge ecosystem of accessory that we can play nicely with as well. So, that is the reason for the focus on the laptop market. So, we see that for us as a better business model. But it's not that we're ignoring the smartphone market and not talking to them about that. We are. But I think that the case is quite strong with the laptop, and then have to have interoperability into the iPhone in particular.

Yes. And I suppose you have plenty to do in the PC space?

Yes. We are quite busy. So....

Yes. Are there any other sort of verticals that you would be looking towards, I mean, in the long horizon?

Yes. Right now, of course, we have focus in the smartphone and the laptop and then with the accessories. As we're moving up in the full software stack, because to sort of simplify it, if you move, for example -- okay, let's look at Lenovo. Lenovo has 70,000 employees. It's a $60 billion company. So, they have lots of internal needs that we can solve just as an organization, not necessarily living on the laptop. So, these are also things that we can look at. If you come in and create a solution for the internal organization, then you can take those type of products and move over to a more enterprise level as well. So, I'm not talking about very short term here, just to be clear, but it's definitely different opportunities that we can move into over time. And these are also things that Lenovo has come to us, as they are trying to be more and more focused around AI. Let's face it, the Windows PC, no offense and no insulting of any of my customers, but what are they? They are a Microsoft distributor normally, and then they're a hardware distributor. So if they are going to not lose market share over time and have a survival strategy, they have to start thinking differently. And we certainly see that behavior. And AI is, I mean, it's like the opportunity to do so.

Does it go the other way with the AI PCs as well that now sort of that we get NPUs in every PC, that can also enable Elliptic to sort of develop more advanced features and do more?

Yes. Just to be clear, for this solution that we're delivering now with the Virtual Tap Sensor and the Virtual Seamless Sensor, we do not need NPUs or stronger processor. Once again, we are very, very focused on running small footprint and not taking up much space on the processor. However, of course, we are talking with the customer for other opportunities as we get access to more power. So absolutely, that is -- it creates an opportunity, but it's not necessary here in the short term.

Yes. Very clear. I think we're still on time. Good. Yes. And then sort of moving to a couple of general business questions. I mean, you showed one slide here where you're still showing the other laptop OEMs that you have announced contracts with, but nothing has happened for what, a year and 1.5? So, have those contracts gone cold or?

No.

What do you expect for those?

I can't really give the time line, but I do expect us to launch with other laptop manufacturers as well. Period.

Yes. With human presence detection? That's...

I didn't say it was for presence detection.

Okay. But those contracts were specifically for....

Yes. But it doesn't really -- yes, I know.

Okay. Fair enough. So, there may be further developments.

Yes.

Very good. And with respect to the rollout that you're now doing with Lenovo, I think you mentioned recently somewhere that you're now in 60 models.

Yes, over 60.

Over 60 models. And there's more?

We have signed contract for over 60 models. We have launched with over 30. And then we said on the seamless that we sign with additional 6-plus models and then, of course, we will announce more as they are signing.

Yes. And that means that you will be getting more recurring revenue or volume revenue as we go into '25 as well?

Yes. For sure. Yes. So it would keep expanding as well as we get also minimum commit, of course, that we have talked about in regards to our model.

Yes. Of course. That's very good. If you -- I think you mentioned it, but I think you've had a bit of a headwind from the market that both the smartphone and the PC market have been through inventory corrections and they're now -- at least headline numbers indicate positive growth. Did you see that in your discussions? And sort of my impression was that a lot of these companies did restructurings internally and there was a lot of mess in the negotiations and so on. So, do you see a clearer business?

Yes. We definitely see a change. I mean, we saw a lot of headwind where we were in the middle of negotiation and everything stopped and then mass layoffs. Also in the beginning of the year, we have seen some layoffs in Dell, et cetera. And the restructure now -- it seems like the dust is landing, and that -- also that the customers are now able to forecast a little bit more consistently because that has been the hard part, too. Like it's hard to commit if they can't really forecast. They don't really know what they're going to sell. So, we have seen that, that they have more control. But they've definitely also been cutting costs for sure in regards to the staff. But I think it ballooned completely during COVID. They hired so many people, and now they're sort of cleaning house a little bit. Also talking about using AI to do like transformation and be more effective within the organization. But yes -- so we see this. I'm not going to be like, say, that it's exploding because you saw the numbers, that it's going to be like steadily growth, but they have more control now of the forecast. And then also we're sort of in a refresh cycle. We also talk a lot about AI that people want them get new laptops and so forth. So overall positive.

Very clear. I think that was the key question from my part. If we have -- I think we're still on time.

Yes. Very good. Okay.

Then I want to say thank you for giving me the opportunity, and thank you to the audience for both online and here in the room for listening to the discussion.

All right. Very good. Thank you very much.