Gapwaves AB (publ) (GAPWB) Earnings Call Transcript & Summary

Hello, and welcome to today's webcast with Gapwaves. The CEO, Jonas Ehinger, will present the Q4 report for 2024. After the presentation, there will be a Q&A. [Operator Instructions]. And with that said, I hand over the word to you, Jonas.

Thank you, Martin, and thank you, everyone, for joining this webcast for the Gapwaves Q4 report for 2024. I'm really happy to be here to present this today. It's a very exciting period in Gapwaves, and we're moving forward in our scale-up journey, which I think the Q4 report illustrates quite well. Before we come to the Q4 summary, a short summary that I will present, I just want to highlight some of the things that we will touch base on in this presentation. Again, we will discuss the strong market potential that we see for Gapwaves and the technology shift in some of our markets right now and also the approach and the business model we have with our customers and how we can bring value not only from a technology point of view, but also adding value and becoming a strategic partner for our customers in their high-volume phase in supplying and producing high volumes for our customers, especially in automotive. Also, I will show the pipeline, if you want, for ongoing work, customer work and the planned production starts for some of these contracts. And importantly, we'll also discuss briefly how we approach the market and why the current market situation and uncertainty regarding import tariffs and duties, et cetera, is actually emphasizing the advantages of our business model. So just a short recap, Gapwaves is a technology company based in Gothenburg, founded based upon extensive research at Chalmers Technical University. We provide waveguide solutions for millimeter-wave applications. Our primary application right now is antenna products, especially for automotive, but also for telecom applications. Our main focus and the main momentum that we see right now is within the automotive space. And that concerns or involves developing and providing antennas for automotive radar sensors. Wireless communications, such as telecom applications as well as satellite communication are interesting areas with a lot of potential opportunity for us, commercially speaking, but they are sometime down the road. But we're engaged in numerous projects, research projects, which we have communicated also. Gapwaves is a Tier 2 supplier. So we provide the antenna component or antenna solution to our customers. A radar sensor cannot operate without an antenna. So it's a key component, and we provide a full solution, not only the technology but also the actual product and managing the high-volume production when it comes to automotive. We have a fairly extensive customer list today, and we're working diligently to expand that. Going into our fourth quarter for 2024. 2024 has been a very good year for Gapwaves. Also, Q4 has continued in the same way as the previous 3 quarters of the year. Our net sales were SEK 17.6 million, which is more than 160% growth versus the same quarter the previous year. The result has also improved. EBITDA was improved by 48% to minus SEK 7.8 million versus the same period previous year. So for the full year, we're looking at a very strong growth versus 2023, 140% up year-on-year, and also a strong improvement in terms of EBITDA. And obviously, strong top-line growth contributes to improved results. Obviously, the top-line growth is driven by more customers, more customer contracts, expanding scopes within those contracts, and customers progressing forward. The earnings side is improved from top line, of course, but also because we are at a cost level across the company where we can manage current customer engagements, and we also have the capacity to bring on -- onboard more customers. If you isolate just development revenue, we see a very strong growth, more than 100% up versus the previous year, but production equipment is an integral part of our business. As we move closer towards production, the capacity to produce the antenna products that we have developed must be set up. And so we will also continue to see production equipment as part of our revenue. A short comment on the cash flow in Q4. It's impacted by a buildup in account receivables from our customers. And that's natural when you have very strong growth, you obviously have account receivables, and there's a time difference between invoicing and before they are paid. But obviously, they will be paid and they will -- when they are being paid also contributes significantly to our net cash flow in the following quarter, for instance. So highlighting some of the events in Q4 that we have also been able to communicate. The big event and the big progress was really entering into the supply agreement with Valeo. Valeo and Gapwaves collaboration started in Q1 2023 and has resulted after a fairly short period, 1.5 years in a large supply agreement that will contribute a lot to Gapwaves starting this year, but also in the coming years as production ramps up and scales up to very high volumes. We were also very happy about the opening and inauguration of our pilot line next to our headquarters here in Gothenburg. The pilot line is key to us in terms of being able to accomplish certification, IATF certification in the automotive industry, but also to satisfy the need we have for production of prototypes, which is growing, and also for customers outside the automotive with smaller volumes. Those customers' products can be produced in our pilot line or flexible pilot line facility here in Gothenburg. Also in December, we could communicate that we have brought on board a new automotive Tier 1 customer from North America. We're very excited about that. And then obviously, with our long-term customer, Smartmicro, which has been able to win a contract in the automotive space with an OEM, which we understand is from North America. We were able to close a contract with Smartmicro to supply an antenna that we had already developed since earlier for Smartmicro. Ramp-up for that antenna production here in Gothenburg will start during this year and will be followed by additional volumes in the following years. So looking at the pipeline, which I think is very important to always have top of mind because this is really a good, solid illustration of how Gapwaves is growing and how we will continue to grow. Entering into the production phase, SOP is really the key information on this slide. As you can see, we entered into production for quite a few antennas and customers last year exactly according to plan. And we also have a solid pipeline in the years to come, including Valeo already this year, but also other customers in the following few years. Having said that, I also want to emphasize that in addition to what you see on this slide, of course, there is a number of ongoing customer discussions or discussions with prospects and in some cases, even negotiations that may lead to additional names being put on this list with additional antenna products going into production. And we're very focused on expanding this list and continue to build the base for the company going forward. I also would like to emphasize Gapwaves' business model because today, with uncertainty on import duties and tariffs between countries and regions, we feel that our business model where we have an outsourced model or contract production partners in different parts of the world will be a very strong advantage going forward. In addition, it's also a capital-light model, meaning we contract partners that already have factories and infrastructure, and they get access to our recipe, the antennas that we have developed, but also the production and testing methods that are essential in their production. And in some cases, they also buy these equipment from us, as you've seen in the communication early this year and also in previous years. So we think this is a competitive advantage with this model where Gapwaves is developing the full recipe in-house and in our facilities, and then we replicate it with certified and very capable partners around the world in China, in Asia, in Europe and also North America and possibly the U.S. will be a target. Right now, we have it set up in China and Europe is in the works. So we're progressing there as well. I just want to remind also about the market potential. We all see the news about challenges in the automotive industry. We're not seeing the same picture from within Gapwaves. We see increased interest in Gapwaves solutions in the automotive radar segment. We believe this is driven by legal requirements on active safety functions or driver assistance functions in cars coming into effect in more and more markets and getting closer in time. And in combination with the technical requirements about radar sensors and what frequencies they can operate in and also what performance the radar sensors need to have, this creates a perfect combination for waveguide technology and for Gapwaves. And we've been able to capture this momentum. And we also see that this momentum is continuing for us. But we are certainly aware of the challenges and the uncertainty and keep a very close eye on the market, obviously. Finally, also, the consumers seem to be more expecting and more demanding about the safety functions and the autonomous functions of cars. So we still foresee a very strong growth for radar sensors for the rest of the decade, exceeding 25% or more per year, but also an even stronger growth in high-resolution or high-performance radar sensors, which plays perfectly into Gapwaves. Finally, a few words on Sensrad. Sensrad is progressing. They have strong growth, and they've also been able to complete the product and supply product. They have announced an agreement with a major player in the ITS segment in China, setting up traffic monitoring and traffic direction solutions in Chinese cities. The pipeline for Sensrad is looking quite good. There are several very well-renowned global industry companies that have bought Sensrad's product in evaluation numbers, meaning it could be 1 or 10 units. They're evaluating a very powerful Sensrad radar sensor for integration into their systems for industrial applications like vehicles within farming or mining or other similar types of vehicles. This is a very good solution and off-the-shelf solution for these customers. So they don't have to develop the hardware themselves. And already today, Sensrad's radar sensor is the most capable commercially available radar sensor on the market. And of course, it's -- inside, there is a Gapwaves antenna. And finally, summarizing, Gapwaves is in a growth phase and a scale-up phase. We see very strong market potential. We see growing and positive interest also from the automotive industry in spite of challenges. We see also the value of Gapwaves' business model where we are not only a technology provider or a consultancy firm. We provide a full antenna solution from technology to design, to industrialization, and to large-volume production for our customers and their antenna needs. Also, I want to emphasize that already within a few years, Gapwaves has been able to capture and enter into partnership with very large industry leaders in the automotive space. You see some of the names here. Obviously, as I indicated before, it's a priority for Gapwaves to continue to expand this list. We're already at a significant share of the market in terms of who we work with, and we expect that to continue to grow during the year. And very importantly, as a last statement and comment, I want to emphasize the importance of Gapwaves going into production for Valeo during this year. The production will commence here in Gothenburg, and then it will be replicated for the high-volume setting with our production partner in China during next year. This is a key event and a key milestone for Gapwaves in our continued growth and expansion. Thank you. And I think we'll be able to cover some questions also.

Thank you so much for the presentation, Jonas. And as you mentioned, we will carry on now with some questions we have received. The first one is, I wonder if you could elaborate about the order book and backlog Gapwaves has at the moment. We know Gapwaves is ramping up to some extent in '25. It could be interesting to hear if the backlog is under control in what order and how different projects with customers overlapping, personal status, et cetera.

That was a long question. But we'll start with the last part. We're totally in control of the backlog. So we're not running into any limitations in supplying customers with the product that they are asking. Now we're at relatively low volumes so far, but it will grow dramatically during the year. In terms of the order book, it's growing. I will not be able to disclose any specific numbers, but it's growing similarly as you have seen the revenue growth during 2024. So it's a very good base for continued growth for Gapwaves.

The next one is how many radar sensors has Sensrad delivered to Tianyi during Q3 and Q4?

I don't think Sensrad wants me to disclose that number, but it's more than a pilot series or typical pilot volumes. So it's a fairly significant volume given that they're starting the rollout in just the shift between Q3 and Q4. But we should not disclose the exact number.

Could you give us an update about HELLA's Gen 7 and the date for mass production? Also, can you give us an overview of the benefits to sell the whole antenna compared to earlier license incomes per antenna?

Yes, that's also several questions. But an update on the next generation for HELLA is that development work is still ongoing. It's nearing conclusion. And so we're moving nicely along, according to the plan and HELLA's expectations. Right now, HELLA's Generation 6 is being produced and rolled out and production was initiated in terms of the antenna 1 year ago. Can you repeat the other part of your question? There were several questions there.

Yes, of course. Also, can you give us an overview of the benefit to sell the whole antenna compared to the earlier license income per antenna?

Yes. Obviously, licensing -- a license is only a small -- very small portion of the price for a complete antenna product. So the upscaling opportunity and the growth opportunity, providing the complete solution and also adding value to putting that antenna into production and then overseeing and being the supplier of the antenna in high volumes, that gives a very large leverage compared to just having licenses. Also with licensing, there is a limit because licensing pretty much assumes patents and patents have limited lifetimes, et cetera, and they can, in some cases, be circumvented. If we develop much stronger know-how in terms of industrialization and production, materials and machinery that are needed to produce these antennas in a very cost-effective manner, that's a stronger position than just relying on patents and licenses in addition to, obviously, the commercial side where the price point for a complete antenna product is much, much higher than just a license for the same antenna.

Accounts receivable during Q4 was approximately SEK 40 million. How much of these account receivables relate to licenses to HELLA during the quarter? And the second question, can the entire increase compared to the previous year be explained by HELLA or is there some other explanation?

During the fourth quarter, the licensing revenue is not significant. So it's mostly related to partially production equipment but mostly related to project revenue, development revenue and supplying prototypes -- producing and supplying prototypes. And the other part was -- the other part of the question, Martin?

Yes, of course. It was, can the entire increase compared to the previous year be explained by HELLA or is there some other explanation?

No, it's not only HELLA. We've added more customers, and communicated that. So quite a bit more customers have been added, and those projects have started. You've seen the development with Valeo and others that we've been able to communicate. So it's not only related to HELLA.

How is Gapwaves' position in the mobility segment positive trend?

We're well positioned in the mobility segment. And one reason is that in mobility segment, often a very high performance is needed from radar sensors, maximum resolution, maximum range, et cetera. And that means that Gapwave's solution is a perfect fit for that, which we have demonstrated with Sensrad, for instance, but also with Smartmicro, Bosch, and others that have gone for this so-called imaging radar type of sensor because that puts very high requirements on the antenna as well, obviously. So we're well positioned. And we're also happy to see positive developments in the segment. For instance, if you follow the news, you can see what Waymo is doing in their commercial rollout. They've now expanded internationally to Japan, among else. And also others like Aurora in freight and trucking are making quite significant commercial advancements also. But we know from our dialogues with this market segment that they're all looking to enhance and improve the capabilities of the sensors in their product solutions. So we're quite positive when it comes to this segment.

How much of the SEK 90 million in Smartmicro agreement is expected to come in during 2025?

Yes. Ramp-up, this is automotive-related. So that means that there is a ramp-up. Production is commencing now in the first part of 2025. And then there will be a ramp-up. And since it's automotive, it also means that it's not only about the antenna component or the antenna product that we supply, but there is also a complete sensor that needs to be put together and produced, and the supply chain related to that. And then the sensor needs to be certified since it's automotive and tested according to the industry standards and the industry requirements. So these ramp-ups in automotive are fairly long. I would expect just the ramp-up phase to be around 2 years, in some cases, even more depending on the volumes. So this sales revenue that we expect from this antenna alone with Smartmicro is across several years.

Is everything going according to plan with Valeo and Veoneer?

The short answer is yes. It's progressing according to plan with Valeo, which is, as I mentioned in my presentation, a very important priority for Gapwaves, but things are progressing according to plan and as agreed with Valeo. When it comes to Veoneer, that's a licensing agreement right now, but we have close dialogue. And to our understanding, Veoneer is progressing according to time lines and plans that have been indicated to us before.

And will you receive compensation from Bosch for breaking the agreement? And if so, when and approximately how much?

We're still in discussions with Bosch about the conclusion of the project, which was the basis for the contract and then Bosch terminated because they canceled their own product and didn't need antennas for it, obviously. So we're still discussing how to wrap up that project together with Bosch in the best way. So I'll have to come back to that once it's finalized.

Looking a little bit at the financial situation, do you think you will need to raise more money this year? And if so, will it be through loans or issuance?

We're looking -- as I've said before, we're looking at several different opportunities, both concerning capital or share market. But right now, our operations are running in a very positive trend, and there is no immediate need right now. We're exploring other opportunities related to investments in scaling up for the contracts that we win and entering into together with our customers.

Regarding HELLA Generation 2, when do you expect volume production?

Like I mentioned before, I think the question refers to the HELLA generation that we're working on right now. It's still in the development phase. The development has not concluded. But I think we're looking at -- could be '27 or '28. That's my guess, though.

There have been some questions about [ Satcom ] and your collaboration with Satcube since earlier. How is it going?

We're well connected with Satcube because they're actually in the same building. So we have frequent contact with them. We've also done previous research projects together with Satcube and Chalmers and others. So I think we're very close with the right industry players there. And we are also looking at that market for the future. However, an absolute requirement is that satellite applications or telecom applications are moving into higher millimeter wave frequencies. Before that happens, they will not really employ waveguide technology from Gapwaves or anyone else.

The defense also needs more satellites and drones. Are you involved in any collaborations there?

Not right now. But of course, an antenna could be used for different applications, but we don't have any direct collaboration. The commercial aspect for Gapwaves is not really clear in those fields. But obviously, it would be a customer of ours that could be active in that area, not directly with the Gapwaves as we understand it right now because we only provide one component and to build a radar sensor for a drone or some kind of a detection system, you need a complete product system.

When do you expect production with Frencken to start with Valeo? Is it during H2 2025 or 2026?

It's planned for 2026, the high-volume phase. Until then, we will be producing with the Gapwaves pilot facility here in Gothenburg during the first part of the ramp-up.

Moving on to the last question here. When do you expect to be profitable?

We don't give those forecasts. But as you can see from 2024 and also in Q4, we're definitely moving in the right direction.

Thank you so much for the presentation, Jonas, and for answering our questions, and thank you all for tuning in. I wish you a pleasant weekend when it starts.

Thank you so much, Martin. Thank you, [ Finwire ].