Elliptic Laboratories ASA (ELABS) Earnings Call Transcript & Summary

Good morning, and welcome to Elliptic Labs Q2 Results Presentation. My name is Ola Sandstad, CEO. And together with Mathias Norderud, our CFO, I'll present the results for the second quarter. In addition, I will give a deeper review of our work on new growth opportunities and finally go through the outlook. As usual, we will conclude the presentation with a Q&A session. Many have been following Elliptic Labs for a long period and know what we represent. At this time, I would like to start by giving a short recap on what we're all about. Elliptic Labs have been building and deploying AI-based technology for a decade. Our updated vision is really to maximize the value of edge devices by enabling advanced intelligence to be deployed seamlessly at scale. To achieve this, we have employed what might be one of the most skilled groups of AI experts, coupled with embedded software developers in Norway. Our current customers build their products in Asia, so we have people on the ground efficiently managing the project execution with Tier 1 device manufacturers. I believe this position and potential is very strong for a Norwegian tech company. Our mission is to utilize this and bring the value to the market resulting in our commercial success. Our core offering so far has been to provide sensing capabilities to consumer electronics, delivered through our software expertise and use of existing hardware as a source of input. Today, we deliver this to the larger smartphone and laptop vendors of this world. Since Q1 of this year, we've expanded our targets to include new growth opportunities, both in small and big form factors. The hunger for contextual intelligence is real in a space booming with devices that need to adapt and optimize according to the environment and situation it is in. Our embedded AI platform is a key ingredient in this venture. Through the presentation today, we'll touch on where we are and where we are heading with our new offering to scalable growth opportunities. As a software company, we need hardware to run on. So during the last decade, we've been established and benefited from tight integration and collaboration with top-of-the-line hardware and chipset vendors in the consumer electronics space. We interact with a large part of these on a weekly basis. This enables us to go from a paper tiger to a real production-ready solution in weeks and months, not months and years. We know that this position is crucial to achieve success in the market we operate. Our management team was recently completed with the hiring of Linn Gimmestad, joining as Chief People and Flow Officer. This team is strongly motivated and focused on executing on our strategic growth opportunities. We're now a lean AI machine delivering on our strategic initiatives presented earlier this year. This includes further expanding business based on our core offering, adding new growth markets and device types to the mix, and ensuring operational efficiency, and doing this with an organization that's more compact and focused. Q2 was a quarter of high activity. Our research and development teams have been locked on to the priorities set, and a large portion of real-world demonstration kits have been made. These are being used actively in dialogue with selected customer opportunities to get transparent feedback on our value proposition. We've been attending a series of industry and networking events to showcase our latest innovations. Being a well-established player in the ecosystem has enabled us to reactivate some of our existing connections that now can benefit from our new offerings. Let's take a brief look at the recent operational highlights. We continue with our focused execution through a transition year, and we're seeing growth in laptop shipments. We have renewed the smartphone contract with a key customer. Our cost reduction is going according to plan. The new and adjacent verticals are seeing promising progress, and we have received positive validation from chipset and IP vendors on our Edge AI platform offering. Turning to the financial highlights, which Mathias Norderud will cover in more detail shortly. Revenue for the quarter was NOK 13 million, driven by a combination of milestone revenue and some incremental volume revenue. We continue to see strong underlying operational momentum. Laptop shipments grew 33% year-on-year. This is important because growing shipment volumes are what ultimately drive cash generation and incremental royalty revenue as volumes move above the contractual thresholds. We also saw continued growth in our market footprint with the number of smartphone and laptop models launched increasing by 14% year-on-year. We're now delivering growth from a leaner organization. So following the measures implemented earlier this year, we have reduced our annual operating cost base by approximately 15%. While reported revenues reflect the timing and structure of our existing contracts, the underlying indicators are moving in the right direction. Shipments are growing, our installed base is expanding, and our cost base is lower. Looking at shipment volumes, as I just mentioned, laptop momentum remains strong with shipments up 33% year-on-year in Q2. This reflects the contracts won over recent years now translating into devices shipping in the market. We have also significantly improved deployment efficiency. The number of people involved in a laptop delivery project is much lower than just 1 year ago. In smartphones, shipments were down 17% year-on-year, mainly reflecting broader memory and cost constraints. However, our contract mix provides some protection against short-term volume fluctuations. Importantly, we also renewed an agreement with one of our major smartphone customers during the quarter. Model launches remain an indicator of future business development in our core markets. The continued expansion across both smartphone and laptop devices reflects the strength in our products and the relevance of our technology across portfolios and high-volume devices. During the quarter, we saw launches across several of our smartphone customers with new launches from vivo, Transsion, HONOR, and Xiaomi. In the laptop segment, we saw dual sensor configurations in 4 of the new models. Providing insights into the business model and market dynamics is a key goal for us. I'll now hand over to Mathias, who will go through the numbers and provide a deeper dive into some of the financial aspects.

Thank you, Ola, and good morning, everyone. Let's dive into the Q2 financial results. Starting with revenue. Q2 was lower than both the corresponding quarter last year and Q1 this year. This is in line with the communication of revenue mainly being back-end loaded to the second half of this year. Let me focus on what I see as the key question behind these numbers. Why is laptop revenue so low when shipment momentum remains strong? The answer lies in both the structure and the timing of our existing laptop contracts. The contracts driving current volumes largely remain within their minimum commitment thresholds this quarter. These shipments demonstrate continued adoption but generated very limited incremental volume revenue in Q2. The comparison with last year also matters. Q2 last year included revenue from a laptop agreement as well as a higher contribution from incremental volume revenue. This makes the year-on-year decline in laptop revenue particularly pronounced. On smartphones, we did see lower shipment volumes year-on-year, reflecting the market constraints Ola touched on earlier. The contribution from incremental volume revenue was also limited. Smartphones nevertheless accounted for most of the revenue in Q2, primarily due to milestone revenue from the new smartphone agreement entered into during the quarter. As we communicated in Q1, incremental volume revenue for 2026 is expected to remain below 2025 levels, although we expect a higher contribution in the second half of the year. The development so far is, therefore, in line with our previously communicated expectations. The previous slide illustrates the dynamic that we know makes it difficult for outsiders to model future revenue, especially on a quarterly basis. Revenue is significantly lower so far this year despite record-high shipment volumes in laptops and growth in launches in both segments. To understand that apparent disconnect, it helps to separate what is consistent from what varies. Operationally, the process is broadly the same across our customer projects. We deliver software, the customer deploys it, and the market demand ultimately drives shipment volumes. What varies is the commercial structure of the contract. This determines when we recognize revenue and when we collect cash. We broadly distinguish between 3 contract models. The first model, minimum commitment plus IVR, or incremental volume revenue, is particularly important for understanding our current revenue dynamics. It applies to all our active laptop agreements and a meaningful part of our smartphone portfolio. Under this model, the customer commits to pay for an agreed minimum volume regardless of how the product ultimately performs in the market. We generally recognize the value of that commitment when the software is delivered, while cash collection follows reported shipments. This provides downside protection and volume upside, but also a timing difference between initial revenue recognition and cash, illustrated by the revenue and cash profiles on the slide here. IVR is generated once cumulative shipments exceed the agreed minimum commitment thresholds. While shipments remain within the threshold, volume growth does not generate new IVR. This is a dynamic that is particularly strong so far this year. Several active agreements are now approaching the thresholds, supporting our expectation of a higher IVR contribution in the second half of this year. We also have fixed-fee agreements, primarily within smartphones. Here, the contract value is independent of actual shipment volumes. Revenue is generally recognized when the software is delivered, while cash is collected according to an agreed payment schedule. This provides a predictable revenue and cash profile with no additional volume upside if shipments exceed expectations. The third and last model combines upfront cash with IVR. This is less common in our current portfolio. The upfront payment provides an earlier cash contribution, while subsequent revenue and cash collection are more directly linked to the shipments. Okay. So, the key takeaway is that shipments, revenue, and cash are connected, but contract structure and terms can cause them to develop differently in an individual quarter. With the contract structures in mind, the year-on-year decline in revenue of 48% is largely explained by timing effects and a different revenue profile compared with last year. We have already covered the revenue development in detail, so I will focus mainly on the cost side here on the slide. Employee benefit expenses decreased by 39% year-on-year to NOK 11.1 million this quarter. This primarily reflects a lower headcount compared with last year following the cost efficiency measures earlier this year. This has resulted in a structurally leaner operating cost base. Other operating expenses were somewhat higher year-on-year, partially due to approximately NOK 1 million in non-recurring legal and patent-related costs. Overall, operating expenses before depreciation and amortization decreased to NOK 18 million this quarter from NOK 23.9 million last year. The lower cost base did not fully offset the revenue decline, resulting in negative EBITDA of NOK 5.1 million this quarter. So, looking ahead, with a leaner cost base now in place, we expect operating leverage to improve gradually as incremental volume revenue becomes a larger contributor over time. Moving on to cash flow. Cash decreased by approximately NOK 15 million during the quarter, leaving us with a cash position of NOK 59 million at the end of June. Cash flow from operations was negative NOK 8.5 million, an improvement from the previous quarter. The outflow reflected the operational loss this quarter in addition to scheduled payments of holiday pay and Board remuneration as well as payments under severance arrangements recognized in prior periods. These effects were partly offset by a decrease in trade receivables. Please note that the cost measures implemented in Q1 will have the full cash effect from H2 2026. Turning to investment activities. We continue to make selective investments in our core technology and strategic growth opportunities. Going forward, we remain highly focused on operational efficiency and cash flow while continuing to fund the technology and commercial opportunities that we believe are important for future growth. Turning to the balance sheet. The asset mix remains broadly unchanged from last quarter with cash, intangible assets, and trade receivables as the main components. I have already covered cash and our investments in technology, so let me focus briefly on the trade receivables. Trade receivables declined both quarter-on-quarter and year-on-year. Days sales outstanding increased, but this primarily reflects the lower revenue base over the last 12 months rather than any significant change in customer payment patterns. Collections and cash conversion remain a key focus going forward. Overall, the balance sheet remains well-capitalized with a strong equity position and no borrowings, providing financial flexibility to support our ongoing operations and strategic priorities. And with that, I'll turn it over to you, Ola.

Thank you, Mathias. A key focus for this period has been to further develop and validate our strategic growth opportunities. Looking at the adjacent verticals, we're seeing commercial progress with new customer opportunities within wearables. New customer relationships are strategically interesting and represent a new avenue for our company. The use cases center around proximity sensing combined with agentic AI and the general aim of making devices easier and more intuitive to use. Our features are enabled by our flexible and efficient Edge AI platform, which is built for embedded devices with limited compute and power. The customer dialogue is an encouraging proof that a market exists for the company's technology in this new vertical. Within smart glasses, we continue to progress opportunities where our audio-based sensing approach offers a more privacy-friendly alternative to camera-based solutions. This development reinforces our view that the category remains commercially interesting. Smart TV customer demonstrations are proving our technology's ability to detect how many people are near the screen. The commercial track is developing according to plan. During Q2, we continued validating our Edge AI offering and its path towards commercialization. We received positive feedback from chipset and IP vendors and progressed discussions with potential lead customers. It's important to underline that the platform capability is not limited to sensing functionality provided by our company. It can be utilized for any AI-based application that needs to combine logic and inference and run in a capacity-constrained environment. This could easily be applications like sensor fusion, anomaly detection, predictive maintenance, acoustic event detection, health signal analysis, and motor and energy control. We are working from an angle of empowering our hardware partners and their customers, providing an interesting channel and route into new market segments. Now let's take a look at the outlook going forward. So looking ahead, our outlook remains largely unchanged from what we presented in Q1. We remain focused on cost discipline with an approximately 15% reduction in our annualized operating cost base now implemented. The full cash effect of these measures is expected from the second half of '26. Within smartphones and laptops, we expect continued operational momentum through new launches and growing shipment volumes, particularly in laptops. We also expect revenue to improve gradually through the second half, supported by a combination of milestone and incremental volume revenue. For Edge AI in new verticals, progress remains on track. Our ambition is still to reach commercial execution during the second half of '26. And with that, we're ready for the Q&A.

Let's get the system up on stage and take a look at the questions we have. Stay tuned. So we now put our laptops in front of us with the online system for the questions from the Q&A. We have a good list of questions here. We'll try to categorize them somewhat. The first one is from Pernille. "Your revenue is down both quarter-on-quarter and year-on-year. Was that lower than expected? Are you less confident in your '26 total revenue ambitions now given the weak Q2?" Maybe you can take that question, Mathias?

I can try to answer that. So I think we addressed some of these topics also in the presentation regarding H1, the first half of the year, and that the revenue levels are in accordance with expectations for us. For the rest of the year, we haven't put a specific number on the table for what we expect for the rest of the year. But what we anticipate or expect is that we will end up broadly in line with 2025 numbers as previously discussed as well. And that's based on new contracts coming in and also contracts in the pipeline that we signed last year with the revenue recognition in the second half of the year on laptops previously disclosed, and also improvements in launches and growth in shipments that will increase the incremental volume revenue also pointed out in the presentation. So there's always kind of a space there depending on the timing of contracts and so on, but that's what we expect at this point in time.

Good. Further down this one.

The new strategic opportunities are reasonable, but it is difficult to understand the progress since last quarter. Are you still confident in the strategic direction? And can we expect this to meaningfully contribute to revenue in '27?

It's a good question, and it's a very correct question. So yes, we are absolutely confident in the direction we set out in Q1. It's now 6 months down the line. And during that phase, we've done a lot with the organization in terms of reorganizing and focusing teams on what their effort should be used against. We've been out in the market validating this continuously. So instead of sitting in the Oslo office in the black room and just hearing our own voices, we've really been out in the market. So whether that's through industry events, customer meetings, partner negotiations, all these types of things have been ongoing. And during those 6 months now, we've really seen positive answers to a lot of the things that we've pitched and offered and seen as a value proposition. So yes, I absolutely believe in the strategy that we set out and the things we are doing and really plan and hope for things to materialize even further during the second half of this year. When it comes to '27, we've talked about during this presentation today the structures of our contracts. So this will, of course, impact how we see the revenue developing. But it goes without saying that we're a company looking to grow into new markets to get the proper deal and the setup to move forward in the growth phase. So we do expect revenue to materialize in '27 from these new initiatives. But also, of course, the growth in the existing markets that we cover. Good. There's a question here regarding cash. "Your cash flow is improving, but it's still negative. Can you please talk us through how you'll get to a positive cash flow?" And maybe that's for you.

Yes, sure. So the cash position and cash flow going forward is a key item for us on the agenda, definitely. And from my perspective, there are some building blocks to that. We have the outflows that we more or less can control, and we've done some concrete measures on that in Q1 and forward regarding reducing the cost. And we're seeing some of the effect in Q2, but we expect, as previously mentioned in the presentation, the full effect of the cost measures in Q1 in the second half of the year. And that will help us going forward. Adding to that, we have the existing business and existing active contracts that contribute to shipments and payments from customers, and that helps us improve the cash flow as well. So depending on market conditions in the second half of the year and shipments, that will impact us as well. And also, as Ola just talked about, the new initiatives and growing the existing business as well will help us improve the cash flow in the future. But we haven't put a specific timing on that statement yet, but we're focusing on that definitely.

Let's see, further down, scroll a bit here.

Maybe I can have a question for you as well. We're going through all questions.

Questions set out.

Are you more or less confident about the potential from new verticals now than you were in the beginning of the year?