Napatech A/S (NAPAO.OL) Earnings Call Transcript & Summary

Hello, everyone, and welcome to the Napatech Q3 2025 IMS. My name is Nadia, and I'll be coordinating the call today. [Operator Instructions] I will now hand over to your host, Lars Boilesen, CEO, to begin. Lars, please go ahead.

Good morning. I'm Lars Boilesen, CEO of Napatech. I'm pleased to welcome you all to the Napatech's presentation for the third quarter of 2025. Joining me today is our Chief Financial Officer, Heine Thorsgaard. Our third quarter 2025 report was released earlier this morning on the Oslo Stock Exchange and is also available on the Napatech website. For your information, a recording of this webcast will be available later today. Slide 2, please. There will be a question-and-answer session following the presentation. During and after the prepared remarks, you may submit via text on the webcast page or we can take your questions on the phone. If you would like to ask a question, please follow the instruction on this slide. Slide 3, please. Please note that this presentation contains forward-looking statements that are subject to risks and uncertainties. Our actual results may differ from those discussed in forward-looking statements. Slide 4, please. Today's agenda will cover 4 areas. First, we will provide a business status for the third quarter of 2025 with focus on the major news items that capture the notable progress by Napatech towards achieving our goals to transform our business. Next, we will provide a market update that shares information about the opportunity ahead of Napatech. We will then shine a spotlight on some of the most recently announced wins and how those will positively impact our business in the future. We will then provide detailed summary of our third quarter financial results. Finally, we will then conclude with a question-and-answer session open to the attendees of today's call. Slide 5, please. We have made considerable strides in meeting important milepost of our strategic plan that strengthen our position as an early leader in the new and evolving mass market for our programmable network interface cards or NICs. This includes both strong improvements in our core business and making measurable progress toward our design win goals that underpins our growth aspiration to deliver 16,000 to 80,000 units a year when those designs reach peak production. This has progressed according to plan. And as we compare our position to just 1 year ago today, we found ourselves in a much stronger position. Slide 6, please. I'm excited to share our third quarter results for 2025, a quarter that exceeded our expectations on many fronts. Revenue came in, in Q3 at $6.3 million, up 25% year-on-year, 31% growth compared to last quarter in 2025. Gross margin was stable at 70%. Staff and other external cost was DKK 35 million compared to DKK 43 million same quarter last year, year-on-year, a decrease of cost of 23%. EBITDA is improving, minus DKK 6 million in the quarter, this is an improvement of DKK 11.5 million compared to last year. Net cash flow was slightly positive, equal to an improvement of DKK 22.5 million compared to Q3 2024. It's encouraging to see that revenue continued to go up and costs continue to go down. It was a good quarter for our existing packet capture business. Beyond the numbers, we are making great strides with our strategic accounts, including our previously announced Tier 1 server vendor and an emerging AI inferencing vendor, d-Matrix. As for later, since last we met, many of you have seen numerous industry and financial press and analyst reports about the launch of the d-Matrix JetStream AI networking interface card. Our partnership with d-Matrix and the server company remains strong, and our developments are progressing well with our deliverables on track. Further, we are working with both companies on new and expanding projects. In summary, Q3 2025 was a quarter of strong growth, operational discipline and strategic progress. We are entering the final stretch of the year with confidence, a robust pipeline and a clear path to sustained value creation. Slide 7, please. In this next section, I would like to share an update on our market and how it is positively being impacted by artificial intelligence. Artificial intelligence is not just the buzz in the present, it is the future. And it is exploding in many of the segments we serve from network infrastructure, storage, cybersecurity and more. AI begins inside of one processor in one server, but it only achieves its goal while working among an array of processors tied together across a neural network, connected at very high speed over secure links with ultra-low latency that are highly dynamic and able to evolve quickly. These are networks that think. You will come to see in the next section why Napatech's networking cards co-created with market maker Intel-Altera are the efficient solution to power these new networks. Slide 8, please. There is no shortage of application services within the mass market data centers driving the demand for advanced NICs. They include high-volume designs for cloud and artificial intelligence. It also includes business-critical applications like cybersecurity and financial services. And it includes advanced network infrastructure like 5G mobile infrastructure. Slide 9, please. These megatrends create the opportunity for Napatech. As shown in this inside-the-box view of a server, Napatech's advanced NICs play a crucial role in modern data center server designs. Our product provides the access from the outside world to the CPU and GPU resources that deliver the AI, cloud, mobile, security, finance and other critical services. Our advanced NICs ensure these servers can deliver those services at the optimal mix of price, performance, space and power for the data center operator. Slide 10, please. Modern data centers replaced the basic server network card with an advanced programmable network card. Napatech advanced programmable NICs bring 3 important improvements to the data center and servers. First, they improve the performance of the CPUs by offloading and accelerating the networking, security, storage and other burdensome tasks from the CPU to the advanced NICs. This significantly increases the performance of the server and those tasks, while at the same time, returning the CPU resources to the core function of AI, cloud and mobile services. Second, the advanced NIC is fully programmable, enable the data center to reconfigure itself as often as needed to respond to changes in technologies, new applications, new services, unforeseen problems and new cybersecurity threats. Third, the increased networking performance improves CPU capacity, dramatically reduces power, space and cooling requirements and enabling the data center to expand as needed to meet the new demands. Slide 11, please. Advanced network cards are widely used today by the largest data center operators, known as hyperscale cloud operators. They were the first to deploy AI, cloud and other advanced services and ran into these issues. Lacking merchant solution, they deployed massive software and hardware engineering resources to build their own advanced NICs and deployed more than 12 million units last year. It is important to note that Intel-Altera helped to make this market and is deployed in nearly all the largest data centers globally. Today, as large enterprises, telco operators, neoclouds and Tier 2 regional cloud providers accelerate the adoption of AI workloads and cloud-native infrastructure, they are facing the same networking challenges as the top hyperscale cloud operators. Unfortunately, these next wave users must solve the same problems without having hyperscaler level hardware and software engineering resources. This creates the urgent demand for immersion-based product and solution to fill the gap. As the primary provider of solutions to hyperscale operators, Intel-Altera has partnered with Napatech to deliver immersion solution for the mass market. Based on Intel-Altera's proven winning hardware and software design that is widely deployed in the largest early adopter hyperscale networks, Napatech is uniquely positioned to deliver the turnkey production-grade complete solution to the IT buyers in the mass market. Slide 12, please. A unique aspect behind Napatech's business model is an innovative go-to-market plan that lowers our operating expenses and increases the scalability of our business. Napatech and Intel-Altera have partnered to deliver advanced NICs to the mass market. This partnership brings 4 valuable points to Napatech. The first is increased volume. While Napatech has been building NICs for nearly 20 years, our solution have historical target critical for smaller niche applications with lower growth. This resulted in a stable business that drove around 5,000 cards per year. The Intel-Altera hardware and software design for the hyperscalers is now also addressing the mass market outside the hyperscalers. The application and services addressable by their enhanced design now enable Napatech to target a new set of customers and use cases that are at the transformational scale, often requiring 1,000, 5,000, 10,000, 25,000 or 50,000 cards per data center per year. Second, we can scale our reach beyond what we could have on our own, limited by size, geographic and cost. As a part of our partnership, Intel-Altera does significant portion of the sales, marketing, market creation and business development, bringing Napatech into opportunities who have already embraced the solution and are looking to Napatech to fulfill their demand. Third, because of Intel-Altera's desire to strategically develop the mass market based on their hyperscale success, they have granted Napatech access to the largest CPU and FPGA technologies, creating an incredible first-mover advantage ahead of other companies looking to enter this rapidly emerging market. And finally, the partnership requires frequent engineering collaboration throughout the joint product developments. We gain high confidence technical guidance from Intel-Altera, proven hardware and software solutions that significantly derisk our product road map and engineering designs. Slide 13, please. In a clear sign of our shared strategy and commitment to mutual success, we are pleased to have recently announced our latest product to target this emerging market. The Napatech F3076X is a 400-gigabit data processing unit, a DPU that aims to ignite the next wave artificial intelligence and cloud infrastructure. The product was jointly funded and defined by Intel-Altera, Napatech and a Tier 1 global server manufacturer. And it is in the hands of multiple high-volume prospects and design wins. Slide 14, please. While this unique partnership with Altera has been 2 years in the making, the products and solutions have largely only been in development over the past year. In this next section, I would like to share with you both updates and news related to just a few examples of the success and potential we see from our new solutions. Slide 15, please. As we look at the totality of our business, 2 bright spots emerge. We continue to expand our total pipeline in both the number of opportunities and the total value of those opportunities. Both are far beyond any Napatech historical metrics. They continue to expand each month and are anchored primarily in our new products and solutions created in partnership with Altera. Also, as we have seen lately, our core business on packet capture has improved. We're starting to see a real and good pipeline on existing products in our portfolio, particularly in areas such as fintech and cybersecurity have been notably strong in the last few months. Slide 16, please. Recently, d-Matrix completed the public launch of its new product, JetStream, including Napatech. We remain excited about the potential from this design win. d-Matrix is the creator of Corsair, the world's most efficient artificial intelligence computing platform used for inferencing in data centers. Inferencing is the cornerstone of artificial intelligence. It transforms the knowledge from train models to create prediction, decisions and insights that are practical and beneficial in real-world applications. There are several things that underpin our excitement about this design. It is in the very hot space of artificial intelligence. It is a strong validation of everything we are doing in our partnership with Altera. It is a mixed solution for AI infrastructure in the AI data center back-end network. And as such, it is an extremely high-volume deployment. It also is the same product we deliver earlier to Napatech's announced Tier 1 server manufacturer. This d-Matrix product design included a master supply agreement with 5 years of product availability, volume commitments and an NRE fee for the work related to the software to power the solution. We're actively pursuing the increasing list of companies looking for AI infrastructure solution, and this is a great example of our investment strategy of building a winning solution and leveraging that investment across additional customers with similar requirements. Slide 17, please. Our work with the Tier 1 server manufacturer continues to go after plan. We have met on-time delivery for all hardware deliverables according to their and the Altera specification. The design is anchored in an innovative hardware platform that includes a SmartNIC that includes the ability to add an optional CPU, turning it into a data processing unit or DPU. We offer the DPU in 2 configurations optimized for servers of different sizes. These hardware programs was developed by Napatech Engineering at an incredible pace, and we met each critical milepost ahead of schedule, exceeding expectation of all parties. As the hardware projects matured earlier this year, the teams began the parallel work on many key software requirements around network storage and security offload and acceleration. This will allow development of the customer solution for their use cases to begin on the hardware throughout 2025 and beyond. We're happy to report exceptional progress so far, resulting in stunning benchmark for each of those demonstrated today. The deliberate products are now being tested at 5 different divisions within the Tier 1 server manufacturer. This includes several interesting high-volume use cases within AI and cloud storage, data content reduction, cloud tenant services and finally, 5G mobile infrastructure and more. Slide 18, please. As I wrap up the business section of today's reporting, I would like to invite you to come to Napatech's at one of these great events throughout the remainder of 2025. If you happen to be in one of these great cities during one of these events, we will love for the chance to meet you in person and talk to one of our experts on hand. Slide 19, please. The last few slides of our update today provide more details on the financial results for our third quarter. I would like to ask our CFO, Heine Thorsgaard, to provide this update.

Thank you, and good morning. Let me walk you through our Q3 and year-to-date financial performance, discuss our cash flow and liquidity position and provide a short update on our ongoing initiatives to optimize net working capital. I'll also provide some perspective on our progress as we head into the final quarter of the year. But let's start with our consolidated income statement for the third quarter and year-to-date. Next slide, please. Napatech delivered robust top-line growth in the third quarter. Revenue in U.S. dollars increased by 25% compared to the same quarter last year and by 31% sequential from Q2. In DKK, revenue was up 18% year-over-year. And for the year-to-date, revenue in U.S. dollars is up 26% versus 2024. We are seeing healthy order intake across our core markets and our sales pipeline remains solid. And as the sequential acceleration in revenue also reflects, we see a clear improvement in our traditional market segments. Our gross margin for Q3 was 70.5%, representing a 3.6 basis point improvement over Q2. We continue to prioritize high-value solutions, which support both our margin profile and long-term market differentiation. Q3 EBITDA was negative DKK 6.1 million. While still negative, this represents a significant improvement of DKK 11.5 million compared to the same quarter last year. The narrowing of our EBITDA loss is driven by both revenue growth and our ongoing efforts to control costs. Looking at the year-to-date figures, we see a consistent pattern of improvement across all key financial metrics. Revenue growth, margin expansion and the reduction in EBITDA losses all point to a business that is moving steadily towards sustainable profitability. We remain focused on executing our strategy, driving operational leverage and positioning Napatech for long-term value creation. With that, let's review our cash flow and liquidity position. Next slide, please. In the third quarter, our net cash flow from operating activities was at a break-even level. This is a substantial improvement compared to the negative DKK 22.5 million in Q3 last year. Our net working capital at the end of Q3 was DKK 91.2 million. Free cash flows from the quarter was negative DKK 1.7 million, which is DKK 24.3 million better than the same period last year. We ended the quarter with DKK 117.7 million in cash and cash equivalents. Looking at the year-to-date numbers, our cash flow metrics show consistent improvement. We've reduced cash outflows and strengthened our balance sheet which positions us well to manage near-term uncertainties and pursue strategic initiatives. Next slide, please. Let me also provide a short update on our net working capital initiatives. Throughout 2025, we have taken targeted actions to reduce our net working capital. These actions are designed to free up cash and improve operational efficiency. Napatech's main initiatives to improve net working capital are focused: on reducing inventory levels and optimizing the planning of future product production; on negotiating better payment terms with key suppliers and current vendors and current customers; and on optimizing payment terms and sourcing model for new high-volume agreements. During 2025, we've been consuming the excess components in our supply chain resulting from sourcing decisions made in 2022 when our supply chain was still impacted by the effects of the COVID-19 pandemic. This is completed now, and we are starting to accelerate the depletion of our own inventory. As a result, we are expecting significant improvements in our net working capital in the coming quarters. Back to you, Lars.

Thank you, Heine. The guiding remains unchanged. We expect Q4 will continue the good trend we have seen since late Q2, and it will secure that we end up within the guided revenue range with continued stable high gross margins. This ends our recorded presentation. Thank you for listening. We will now go to the live Q&A session.

[Operator Instructions] The first audio question goes to Christoffer Bjornsen of DNB Carnegie.

Just wondering the guidance for the full year reiterated it kind of implies that there will be a material acceleration in the year-over-year and sequential growth in Q4. So just wondering if you could help us understand if this is just simply due to the kind of the core or kind of, say, legacy business catching up or normalizing or if you've kind of baked in some initial momentum with these new data center-oriented customers in that expectation for Q4?

This is -- thanks for your question. What we are saying on guidance is that -- I mean, in general, we don't like to guide because it's very hard. It's very easy to guide on our packet capture business, but very difficult to guide honestly. So we only guide because it's a requirement from the Danish legalization in Denmark, the Danish law. So what we are saying is that we expect packet capture to maintain its good momentum it has now. We expect on non-Netscout, which is our biggest client, and it's very predictable because they place order like 6 months ahead. So on non-Netscout, we expect 20%, 25% growth from Q3. So that's really good momentum. On Netscout, it might be lower. So we need to have a better quarter in Q4 than Q3, and that's what we are expecting despite Netscout will be smaller. So this will bring us within the range, and that's what we are saying. So we are not expecting -- when it comes to the more strategic deals, this will be '26 and '27. So this is -- we expect that good momentum on packet capture will continue in Q4, and this will bring us into the guiding range and maintaining strong gross margins.

That's super encouraging. And then into that, just you don't want to guide for next year, but given the kind of the sequential improvement in the business and the fact that you have some customers that are a headwind this year, is it fair to assume that there's no really any reasons why '26 shouldn't be a decent growth year for the packet capture business or the legacy business or what do you want to call it?