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

Good day, everyone, and welcome to Redeye. Today, we'll be hosting a live quarterly presentation with Gapwaves. As many of you know, today was a busy reporting day. So it will be interesting to hear what Gapwaves CEO, Jonas has to say about the report. My name is Erik Rolander, and I'll be moderating this session instead of our regular analyst, Rasmus Jacobsson. As Redeye is the financial adviser in Gapwaves ongoing rights issue, we have post event coverage. Hence, Rasmus will not be here today, so it will be me. So with that, we'll start with the presentation from Jonas, and then we'll head on to a Q&A session. I'll be glad to take any questions you have online in the form. You can fill them in and send them over and we'll try to include them. And with that, I'll hand over the word for you, Jonas, to start your company presentation.

Thank you, Erik. Good to be here, and thank you for hosting our third quarter summary that I will present in a few minutes and also an update on where the company stands right now in our journey. We really want to spend time also with the questions that have been submitted. And if you haven't submitted any questions yet, please do so. So Erik and I can discuss them during this call. So first and foremost, the Gapwaves is in a very positive situation right now. We are in an intensive scale-up period and phase, and we're well positioned to continue this growth going forward. Reason -- primary reason is that we're in a strong market. Our products are being needed and are implemented in an accelerated fashion in the automotive industry, but also in other market segments. The automotive industry is driven by regulation and customer needs. So there are legal requirements as well as technical regulation, stipulating better antenna solutions, for instance, in the case of Gapwaves. So fundamentally, we're working in a growing market, and we're creating a new market segment also within that market. Our technology is unique. We're very well protected in terms of IP portfolio. We're looking at now more than 45 patent families in all the major markets in the world. And more importantly, and this is really something that I want to stress continue, and I have been stressing that for quite some time. But we have commenced into high-volume production, and that started in Q1 2024. In Q2, we started another large-scale, large volume production of antennas for Valeo, a prominent customer of ours. And this has ramped up during the quarter also. I'll get back to that. Our business model is also unique in this industry. So we can be both flexible and asset-light, meaning we're not tying up capital in production sites and physical premises, et cetera. And our customers, they pay for product development also, which takes down the risk. So Gapwaves has a very strong position and very strong opportunity to continue the scale up and growth going forward. So some highlights on the Q3 report. I'm sure we will spend quite some time during this call discussing different aspects of Gapwaves, but especially the Q3 report that was released earlier this morning. So the main focus for the company in this quarter and during this year is ramp-up and production ramp-up. Automotive industry is a high requirement type of industry and high-quality industry also. So it's very important that a company can move from lab and technology into something which can be produced in the real world, in a cost-effective manner, but maintaining very high quality. And I'm really happy to see that we continue this achievement also in the quarter. So far, more than 0.5 million antennas have been produced using Gapwaves' technology. And we see volumes are increasing rapidly, both with Valeo and HELLA. And we're also setting up our next production step, which is high-volume capacity localized in China for Valeo. And that will be a main focus going forward. And again, this underlines our flexible production model with contracted production with selected and certified partners. So looking briefly at the numbers. In short, sales increased and continue to increase, especially year-to-date. Our result level EBITDA was impacted by start-up costs. There's always extraordinary costs as you commence into new production, new antenna. In this case, it has also been accelerating faster than planned. So we have had to use extra capacity, extra additional suppliers and manpower and also source material in extraordinary ways to maintain our deliveries to the customer, Valeo in this case. But if we look at sales for the quarter, it's SEK 20.4 million, which is up from around 11% from last year. So far in the year, we also show very strong growth accumulated at SEK 67 million versus SEK 49 million -- almost SEK 49 million last year. And as I mentioned, the EBITDA for the third quarter are impacted by costs to -- related to the start of production in our Gothenburg facility for Valeo and the acceleration of volumes have meant extraordinary costs related to that in these very large contracts and long-term contracts, the start-up cost is -- the start-up period is characterized by extraordinary costs before you reach higher volumes and reach the profitability and margins that are part of the contracted volumes and agreement with the customer. So we also had some increased accruals during the quarter, which affected the EBITDA and this varies by quarter. It depends also, in some cases, on bonus programs and share price, et cetera. And the share price has developed quite strong recently. So we had to accrue for that also in the quarter. Looking at the full year, we're solid in terms of improving both result levels but also cash flow. And Q2 ended with a lot of account receivables with customers -- invoices to customers. But this has improved quite a bit during Q3. So cash flow during the quarter was quite positive compared to previous year same period and same for the full year in terms of cash flow. I should also mention that the backdrop for the company is still quite positive. So the market climate for automotive is challenging for car manufacturers, at least some car manufacturers and some of the Tier 1s. But the underlying market trends, and that's really important to remember when we look at an isolated short period like a quarter that the underlying trends are still there, they have not changed. They're still fundamentally positive for Gapwaves going forward. Also something that has generated quite a bit of interest during the quarter was, of course, the news that we were able to release that the first car being delivered to Swedish customers and used on Swedish roads, the Mercedes-Benz, the new Mercedes-Benz CLA which has 4 radar sensors from HELLA, all with our antennas inside. And that has generated quite a bit of news in media, not only in business media. And this was a milestone for Gapwaves that finally, after several years of knowing that this will happen in 2025 as production started last year with the antenna and then production started late last year of the radar sensors and the cars production started in May this year. And finally, a couple of weeks ago, these cars were starting -- were being delivered to Swedish customers. Also in our associated company, Sensrad, we see continued momentum, especially on the -- in the off-road segment like for military vehicles that are fully autonomous and operating autonomously in off-road situations where there is no GPS or any telecommunications. So the cars -- the vehicles are fully autonomous using Sensrad radar sensors and other technology. And as you also know, Erik, we announced a rights issue and financing of the company. This is a forward-looking financing. So this is to support our scale up and accelerating our growth going forward. So it targets both increasing our supply chain capabilities and production capacity but it also importantly allows us to broaden the customer base, adding new customers in the automotive or vehicle segment as well as targeting customers in other segments, industrial applications or even telecom that we're seeing some interest in now and other applications. We're also working on new generations or new evolution of our technology to ensure that in the future, we will continue to be in a very strong competitive position and add value to our customers, of course, while maintaining strong margins and strong pace ahead of our competition. So our business model, which we have talked about before, a short recap here, though. We don't develop products on speculation. Customers are involved in every step, and they pay also for every step. So they pay for the design and development. They also pay us for the industrialization, taking a defined antenna product into production, setting up production capabilities and capacity as well as designing and developing parts of the production equipment. And then we oversee production, and we manage production in different types of volumes for our customers. Typically, in the automotive industry, the start of production SOP is a very important date. And so far, with these customers in the green bars that you can see in the slide, have not really changed. So we're pretty confident. And once start of production has happened, we're -- we have good visibility on volumes going forward and especially the time line of those volumes. So that's why we are also talking about emphasizing the long-term growth and how important it is to add these customers and get to start of production because after that, we can -- we have very good predictability on volumes, et cetera, going forward. So there are customers that have not reached start of production yet, and we're working with them to develop -- finalize development of products. There's also other customers, not only in automotive, but also outside automotive that we're working on, which are not displayed here, obviously. So turning over to our model. I want to again emphasize the strength of our business model where we don't build our own physical factories that we locate in a specific location and then are tied or locked down into that lockdown and limited into a specific location. But we can source different partners in different regions of the world, so we can meet the requirements, and those requirements are increasing in terms of localizing supply for our customers. So customers -- our customers, if they have Chinese car manufacturers as their customers, they want a supply chain, which is China-based. If they target European or U.S.-based car manufacturers, they want to localize the supply chains in those markets. And we are prepared European supply chain in the same way as we already have in China. And we're also targeting the U.S. and North American markets for the same approach. Combined with that, we have our flex line in Gothenburg, where we can commence the initial phase of production, just like we have done with Valeo during the quarter. Very quick recap on the market outlook. As I mentioned in the beginning of this presentation, we have very strong market drivers. This is not a nice-to-have product, the antennas key in the radar sensors and the radar sensors are required to accomplish the functionality of active safety that are -- that is legally required. And there's also technical requirements shifting the performance of shifting radar sensors from lower frequencies to higher frequencies. And this creates a perfect opportunity for Gapwaves with our unique antenna technology to satisfy those needs. And that's why the industry is predicting a growth of the number of radar sensors in the market at around 25% growth per year for the rest of the decade. And in some segments, the growth will be even faster for more advanced radar sensors. We often get questions on volumes and pricing of antennas. So we want to highlight this again that one leading Tier 1 customer like HELLA or Valeo represent a very big commercial opportunity for Gapwaves. For instance, for corner radars, we're looking at one such product is probably going to be bought in the volume range of 100 million to 150 million units over the product's life cycle and a more advanced imaging radar in the car, there we're looking at 5 million to 10 million over the life cycle, but at a much higher price. For the corner radar, which is a high-volume segment, we're looking at the antenna price of typically EUR 1 to EUR 2 each, whereas in the imaging radar segment, we're looking at EUR 20 to EUR 30 each. And as a comparison, outside automotive for imaging radar antennas, we're looking at maybe another 3 or 4x higher pricing because volumes are much lower in other segments. But on the other hand, prices are much higher and also margins, of course. Okay. So I'm going to wrap up this presentation, so we can go into the Q&A session and have a more in-depth discussion of our third quarter and the company in general. So in summary, Gapwaves continues to be very well positioned and well along on its growth path. So we're seeing good growth for the year. We have commenced production for our customers. The market is strong for us also looking ahead. We feel that we're very well positioned with our technology and also in terms of patent protection. A very important benchmark for our customers is to see that we are able to produce our antennas in very high volumes, but also in automotive grade quality, which is probably the toughest quality requirement of any industry. And then with -- in combination with our business model, we're very well positioned because we can be flexible and tailor production and supply chains to our customers' need without tying up a lot of capital in organic production facilities, for instance. So that summarize the short presentation that -- of our Q3. And again, we want to encourage you to send in or submit questions. So Erik has a lot of material to work with, so we can discuss the different aspects of our Q3 report on the company in more detail. Thank you.

Thank you for that, Jonas. I have quite a few questions myself, and we've already catch up a few from the web. So I think there will be no shortage of subject to discuss. But if we start sort of in the same line that you had your report and presentation with the financials. Could you just elaborate a bit on the mix between product sales and more development-related income in the quarter? Sort of what was the main drivers? And is there anything you want to highlight on that?

Yes. Obviously, each quarter is influenced quite a bit by the product mix. And a natural type of sale that we have is production equipment. And in this quarter, it was fairly high. So roughly half the revenue was related to production equipment and such equipment has lower margins than design services or development projects for our customers. So that has quite a bit of an influence. And like I mentioned in the presentation, in combination with starting up the production for Valeo and also a much higher demand during that -- those first few months of production for Valeo. So we've been working very hard and diligently to meet those demands. And that means that we have to source material in other ways than originally planned, et cetera. So typically, when you commence into production, there is always a higher cost situation before you ramp up in volumes and you start to get the right pricing for material, et cetera. But 2 main components. So the product mix leaning towards the sale of production equipment, but also the combination with start-up costs for the production on the Valeo contract.

And we got one question sort of related on that. You described the company as asset-light and now we know the sort of the difference between that and having a start-up cost. But could you just sort of explain the difference when you say asset-light sort of model compared to having a bump sort of cost-wise in the beginning of a project?

Yes. Asset-light means that we don't have to buy land and build a factory and employ a lot of factory staff and get permits, et cetera. So we use existing infrastructure of that type with our contract partners like Frencken in Asia, for instance. Otherwise, it will be a very cumbersome and very expensive or a capital binding type of process. So -- but running costs or cost of goods sold, production costs, et cetera, as we start up a new production of a new product for a new customer is pretty much the natural, I would say.

And if we look on sort of the long-term contracts you have, one could sort of think that the automotive makers historically has been squeezing the sub-suppliers quite a bit on margins and such, leaving them exposed to price increases, inflation and whatnot. How are your contracts sort of structured in a way that make sure you have healthy margins sort of all along a platform life?

Yes, there's various aspects to that. Certainly, we have been able to secure certain margins and certain volume guarantees, but also certain pricing tied to volumes. So for instance, if volume scenarios are not being met, the pricing is automatically adjusted upwards to protect our margins. There's also minimum volumes guaranteed in our contracts. And then obviously, in terms of raw material, which is an important cost driver, we normally -- and I think it's standard also that there is some raw material indexing in the agreement. So for instance, if copper or plastic material would increase in price, we don't really suffer for that because it's being transferred to the customer through the contract.

And a follow-up question on that as well from the audience was, I'm guessing you don't have one answer to this, but sort of you said the various price points of the antennas and radars. What are sort of the profit margins for you, would you say? Or is that sort of very different depending on what type of radar?

Yes, it's different. But as a rule of thumb for more advanced antennas like imaging radar, we have higher margins. The antennas are more complex and generate -- they're also smaller volumes. So we are able to have a higher margin. For the volume segment, corner radars and the antennas there, margins are lower. On the other hand, volumes are much higher, as you saw on the slide. And outside automotive, we're looking at, again, higher volumes because it's outside automotive, meaning smaller volumes and typically more complex antennas also. So the value in each antenna is higher and thus, we can have higher margins there.

Sounds fair. If we go to the Valeo deal and the ramp-up sort of what milestones do you think you will be able to communicate to the market? And what should sort of we be on the lookout for to make sure that it's going on sort of track, both in your terms of expectation as well as sort of what the market is sort of looking for?

Yes. The first milestone that was really important was the start of production, which already happened. And now the next one is really the commencement or the startup of production for the high-volume line for Valeo in China during next year. And that's also why we're setting up and selling the production equipment. It's a rather complicated production line or high capacity advanced is the word I'm looking for, advanced production line that we're setting up in China. So that's really a main focus for the Valeo now, and they will need that because they're looking at -- they're requesting very high volumes in the years to come.

And you touched about Frencken a bit. Is there anything more you want to sort of add on that sort of topic? Or is it -- like you said, it's according to plan and you'll communicate further as we hit those few milestones?

In terms of Frencken, we have a very close relationship. And as you can see, I mean, Frencken buy production equipment from us. That means that they're investing in partnership with Gapwaves. They're also investing to build and develop and make available capacity for our production for our customers. So we have a very, very close relationship with Frencken, especially with a focus in China and Asia.

And you mentioned that you might even look for further production sites in North America, for instance, one of you were sent in the question of where location-wise, and I'm guessing you don't have the answer for that yet, but sort of what are your thoughts on what are key aspects of sort of where to put or who to partner with in such a deal?

Yes. Also a good question. In Europe, we have identified a supply chain, and it has been qualified and certified for production of our antennas. So we're ready to go there as soon as we have a customer, of course, that want European-based supply chain and production. Now we had thoughts originally about North America, like setting up a supply chain in Mexico with factories, et cetera, and with external partners. Like everyone else, I think that has been revised somewhat. So now we're targeting U.S. mainland to make sure that we don't end up in a difficult tariff situation. But with the tariffs, it's changing almost weekly still, and the geopolitics are also quite fluid. So we're working on different candidates for the North American market. But we're pretty confident that with Europe, we're able to move forward quickly should a customer request that.

And I'm guessing you're sort of in the same position as your partners in this going to the auto manufacturers. It's not sort of you that needs to solve this supply chain on your own. It's then selling the antenna that also has to sort of help you in managing this as a package.

Yes. I mean we're in the same boat as our customers. So we work together. And there is a good degree of transparency in the dialogues we have with the customers in terms of geographic location, et cetera. But it is an advantage for Gapwaves compared to some of our competitors that are organically tied into one specific location or factory in one country, meaning they're restricted to that region or will get penalized in terms of tariffs, et cetera, targeting other markets.

And sort of -- if you connect that to sort of your commercial pipeline that you outlined, in what sort of phase is this question sort of first addressed? And when does it get sort of really intense? And can you sort of -- can you fail towards the end of the process if you don't have your supply line sort of checked and crossed from the customer's point of view?

The question is on the table already from very early on in the beginning. But typically, it gets materialized into firm contractual discussions during the second phase once the antenna has been designed and verified and the design has been frozen, and the industrialization phase starts. But already from day 1, it is a topic on the table. And we're in all the discussions we have, we've been able to satisfy the requirements early on from customers because of our flexible model. So we're not tied into only Europe or only China, for instance.

Good answer. And a bunch of questions in your pipeline, but I think you outlined that in the presentation quite good. So I suggest everybody sort of flip back to that if they want to check it further. But one more question on the Valeo deal. When you sort of enter one of those projects or programs, do you typically -- you said there is a ramp-up, of course, but do you get sort of the full volume from that program? Or is it shared between 1 or 2 or 3 suppliers where sort of you alternate between the 100% possible volume?

Typically, so far and our experience and our understanding of prospective discussions that we are having right now is that the selection of one partner and one antenna supplier in our case, happens fairly early on. And it's -- and I guess the reason is it's too expensive for a customer to maintain 2 different suppliers with all the documentation certification, et cetera, and different part numbers, safety stock and what have you. All of those are cost drivers. So far, what we've understand -- understood so far in the industry from both us and our contracts, but also other competitors, contracts, et cetera, is that it's single source once you move forward into the industrialization and commence into production.

Sounds promising. And if you connect that sort of to the more -- it's been a few years that -- sort of the platform thinking in the industry has been sort of the main way to go. Do you see this as more of an opportunity? Or is it more of a risk moment for you going forward?

No, it's definitely an opportunity. Once you're kind of in on the hardware side of a platform, you can be pretty confident that, that will continue going forward during that platform. And in the case of Valeo and Volkswagen, et cetera, which was communicated in April this year, Volkswagen decided to upgrade their MQB car platform with more advanced ADAS functionality and sourcing radars from Valeo, for instance. So once you're in on a platform, it's the same for the car manufacturers. It's too expensive to have too many variants on, say, ADAS systems in those cars on that platform. And that's why we are also pretty confident about, for instance, Mercedes using these radar sensors, not only in the CLA model, but also other models that belong to the same platform.

And I'm curious, how do you work sort of ongoing with that? It's a bit of an early question, of course, I guess, but still for you not having sort of sit there at discussion in a few years with Mercedes saying, hey, we're evaluating this other supplier. They're better than you in XYZ and you're sitting on the other side. So how is that work sort of both, I guess, planned and sort of already in progress?

Yes, it's being planned and outlined and defined several years in advance. And our customer is obviously not Mercedes, it's HELLA in this case, and HELLA is targeting other car manufacturers than Mercedes, I would assume. We have some visibility into which car manufacturers that are being targeted. But once we move into production, then we have more visibility on which cars and car manufacturers that will utilize a certain radar sensor with our antenna inside. So again, like I mentioned during my presentation, once start of production happens, then we have good predictability and understanding of volumes and time lines for such volumes and the ramp-up, et cetera, going forward.

Good answer. And you spoke a bit about HELLA. We got one sort of parentis question. You had a Board member, or he still is a Board member from HELLA, and he chose to sort of not be up for the next term. Can you just give us a bit of description of sort of the reasoning behind this? I know it's not your call, but you probably have more insights than the rest of us.

Yes. Certainly, it's a natural step. HELLA invested in Gapwaves in 2021. We were new then to automotive, certainly with a contract -- licensing contract with Veoneer, but not really any contract work. And now since 2021, Gapwaves has developed a lot, and we're not only working with HELLA. We're working with several of HELLA's peers or competitors. And the company has moved forward quite a bit. And for HELLA, it's natural to change its engagement with the company. And you also must understand that certainly in a Board, you have access to a lot of information about the company's customers and specifics of contracts, time lines, car manufacturers, et cetera. All of that is sensitive information. And it's difficult for a Board member to not participate in having all that information and still supporting the Board and the company in certain decisions. So obviously, it creates a fairly significant risk of conflict of interest. And HELLA is now taking a step back and will continue to focus on being a large shareholder. But I agree with HELLA's conclusion that the conflict of -- the risk for conflict of interest is big, and it's also too difficult to participate in the company development since you're not allowed to take part of competitor information, which we have to discuss in the Board. So I think this is a natural step. It's good for HELLA, but it's also positive for Gapwaves. Obviously, HELLA's competitors, our customers have also asked questions. Okay, you have HELLA in the Board now. How will that work if we enter into this contract with you, for instance. So there's always been these discussions, which have slowed things down, and I think this will be a positive going forward with a new setup where HELLA remains as validating and large shareholder, and they've been able to support us quite a bit over the last few years to get us to the point where we are today.

Perfect. And seems like there no drama behind it.

No drama.

If we look more towards back to the market, you described it quite a bit, but sort of the perhaps misconception of premium cars versus cheaper EVs and sort of the inclusions on different aspects of your antennas in them. Sort of how would you describe the market outlook sort of in general? You read the newspapers and perhaps the picture is not fully comparable to what you're seeing from your part of sort of your exposure?

Yes. It's important to look beyond some of the headlines about specific car manufacturers or car models. Like we point out in our presentations, the fundamentals of a growing market are there, and they have not changed regardless of which car manufacturer you're looking at. And for us, we see a positive development in the market because this type of advanced ADAS functionality is now being spread to volume cars. And for instance, Valeo is targeting volume brands and volume car platforms, whereas others previously like Bosch and to some extent, Continental and others have targeted premium cars only. Premium cars, that's very good, but volumes are typically small. So it's very important to work with the Tier 1s that target the volume manufacturers and volume car platforms. So for us, it's fundamentally positive. And like I normally point out, we're agnostic to which car manufacturer that will implement these because if they want to sell cars in the European market, for instance, or North America, they have to -- all of them have to comply with the legal and technical requirements of that market. So it may be Chinese or Korean or Japanese or American. They have to have the same technology and functionality as specified by the requirements of the market. So if a car manufacturer doesn't sell certain cars, a number of cars, then another manufacturer will sell that. And they still have to have the same functionality and technology inside to comply with their requirements.

Sort of -- if you translate this to sort of corner radar imaging sort of your different segments, where do you see the most growth coming from, if I were to suggest -- I mean, looking at your pipeline, you sort of have the answer short term. But if you sort of look a bit beyond, where do you see your -- and then now I'm thinking both in terms of sensors or products and also in terms of sort of revenue given the vast price difference?

Yes. In terms of revenue, over the coming years, the company will shift from engineering type of revenue to product sales revenue as volumes ramp up. And in terms of the segments, obviously, right now, ADAS functionality is done with more basic radar sensors and majority of the volume of radar sensors going into passenger cars are more of the corner radar segment. But we will see the imaging or higher resolution segment grow in the future. It will grow faster than the general market growth for radar sensors. And so that's something we expect, and it will be driven by requirements for improved ADAS functionality. We're currently at maybe -- in some cases, we're at Level 2, but the market will move to Level 3 and possibly Level 4 also. And that requires more advanced radar sensors, but also more radar sensors on the car. So we'll see that segment develop in the coming years.

Perfect. Interesting. I have 2 more segments we need to make sure we address. So let's get a few and start where you sort of ended your presentation with the ongoing rights issue. If you could just reiterate sort of not the term, but what you're going to use the money for and sort of where your top priority will be after sort of this has been concluded?

Top priority is to expand the business with more customers and more contracts and to expand our capabilities in that sense. So having more customers means also that we need to have a capability to increase production, both to start production internally and then outsource it or contract it with our production partners. And then obviously, we're also being vigilant about our competitive position. And that means that we have to move forward in terms of implementing new technology and new improvements that we already have, but they have to also be industrialized and ready for production to make sure that we stay well ahead of competition and can continue bringing more customers on board while also having good margins.

Good. And one question related to this was there are no subscription undertakings or guarantee commitments in the rights issue. Can you sort of elaborate the reasoning from the owners, the Board and yourself regarding this choice?

Yes. In general, Gapwaves has developed quite a lot in the last few years. And we also see that continuing over the coming years. And it's natural to shift from very much a private or private individual ownership structure into a more professional and ownership also with financial investors as large owners. And I think this is one of the reasons that not only is the company developing, but also the ownership structure needs to develop so it can support the company going forward. We're looking at significant growth in the coming years and significant commercial opportunities also. And not only -- the company needs to be able to capture this and prepare for it, but we also need an ownership structure that prepares for it. So I know that the main owner is very responsible and very loyal with the company and that they are also thinking along these lines that it's natural that the ownership structure of a company develop as a company also changes rapidly.

Perfect. Thank you for that, Jonas. And I think as time is almost up. So thank you so much. We have a few questions that we didn't have time for. We'll see if we can include those in some sort of interview going forward. But thank you and good luck with the rights issue and the future development of the company.

Thank you very much.