poLight ASA (PLT) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to poLight's fourth quarter presentation. My name is Oyvind Isaksen. I'm the CEO of poLight. Together with me today is Alf Henning Bekkevik, CFO, who will walk through the financial review and support me on the Q&A session. The agenda of today is key events, a brief introduction to poLight for those who are here for the first time, update from the market side, financial review by Alf Henning Bekkevik, outlook statement and Q&A. As you know, you can ask questions through the web interface on the webcast. [Operator Instructions] Okay. Key events. poLight received a purchase -- follow-up purchase order related to the Honeywell EX30 barcode scan engine. There has been a lot of speculation and questions who barcode supplier we are working together with. And I can now happily announce that it is Honeywell, and the product is EX30. Coming back to that. As far as we know, Honeywell have received positive feedback so far from EX30. Still early days of market release, but so far, so good. I would say, generally speaking, there has been a high activity in the company, and we have good progress in most of the customer cases, both on the consumer side, and also in more the professional markets. I'm also happy to say that the visibility for smartphone market breakthrough has increased throughout the quarter. Quickly on poLight. We have developed, and now is shipping to the market, a very unique lens within the area of tunable optics, which is getting more and more, I would say, interest from the market, among them the mobile market. This tunable lens can, by having a voltage supply, change the shape of a lens material and, hence, changing the optical power. This can be used in the smartphone mobile business, barcode area, augmented reality and other markets. We started already in 2005, so it's been a very, very long journey. And we have developed, I would say, specialist expertise in optics, in general, polymers and MEMS and, of course, also over the years, a lot of application knowledge in different market verticals. We do focus a lot on protecting our IP and innovate new IP. We have 13 worldwide patent families. And we have 10 pending applications and we have 3 registered trademarks. The number of people working day and night to make this a success is 29 at the moment. That includes some long-term consultant engagements. I will come back to it later, but we're also looking for expanding the team. We are headquartered in a beautiful city outside Oslo called Horten. And we have offices in Finland, China, France and representation in Taiwan and Korea; distributed, small, efficient company. So the key characteristics of our tunable lens is that it's extremely fast, meaning instant focus, no waiting for focus, instant focus; very compact solution, which is good for many application. It's a constant feel of use, so we don't have any annoying AF pumping when you change focus. And it's basically really, really low power consumption, which is very, very important for, as you can imagine, variable devices and other applications. As mentioned, we have a product we feel, we see a good fit for many, many multiple use and sectors. In the consumer side, we are focusing on, I would say, 3 areas: wearables, being smartwatches as an example; AR/VR glasses; and of course, smartphone. Smartphone is definitely where we have the highest focus at the moment due to defined concrete customer projects. But there are also other applications to come, I'm sure, coming with 5G, IoT, drones application will definitely also be an area of interest for poLight. On the more professional industrial side, I would say barcode, machine vision is by far the most, I would say, active area but also other more like sensor-related -- laser sensor-related application we are involved in. Medical, quite interesting area for us. We are involved already in some cases. I will come back to that. But we do foresee a quite interesting business coming long term from this area. Automotive also been identified, there are so many cameras, in the automotive, both inside and outside in the car. We have particularly looked at the inside cameras monitoring the driver, the back seat. And we do have signs of interest, but at the moment, no concrete activity. Okay. Operational market review. Yes, finally, we are allowed to say that the barcode case we are involved in is related to a well-recognized company called Honeywell. And you can see the picture of the scan engine on the bottom right in this slide. And the black, the left camera has a TLens, actually, in an add-in design concept. So there's one TLens per scan engine. There are other cameras and illumination also included in that scan engine. That scan engine is being sold as the heart of barcode readers. You can see the hand holding a barcode reader, which then typically will have a scan engine mounted in front to read barcode, being 1D or 2D barcode. So what Honeywell is saying in their web page, the Extended FlexRange EX30 2D Scan Engine for warehouse and distribution center operation seamlessly reach barcode from 10 centimeter to 20 meter using the latest technology for a fast auto focus mechanism, supplied by poLight, not said by Honeywell but said by me. So this scan engine is intended, sold as a separate product, for Honeywell to other OEMs building their barcode solution based on this scan engine. So it's the next-generation scan engine to be used by many OEMs. As I mentioned in the key events, the initial market response, as far as we understand, has been good. And it's going to be interesting to see how that relationship with Honeywell develops. Honeywell is obviously one of the major players in this area, and it's an honor to be chosen by such a company for poLight. We also work actively with other key players in the barcode area. But at the moment, and those are progressing and have progressed during the quarter, and we hope that we can get some good news, though, over the years to come in other barcode application. Obviously, having this reference is making a big difference, positioning us for other cases. Augmented reality, AR. As mentioned last time, TLens is considered for next-generation glasses by several players in the market, I would say, significant well-recognized players. AR market is still at an early stage, meaning low volumes and often being -- having application more in the professional market. But we are also involved in cases for which the target market is the consumer side. It's only a matter of time, many believes, before AR will represent a significant volume opportunity for the players in the market. What I mentioned also many times is that poLight, we feel, is well positioned at an early stage. If you compare it to the smartphone world, where there have been AF functions based on more mechanical VCM for many, many years at least in the back camera, we have a situation with the AR that we are coming in at a stage where kind of the, what should I say, reference design has not been locked. So being there at this early stage we see as a key, key parameter for having a successful life in the AR space. So as I said, we are involved both in consumer cases and professional use cases with known -- well-known names. We are -- at the moment and during the quarter, we have been involved in testing and prototyping. And so far, it looks promising. I would say that it's obviously difficult for us to predict when they're going to launch, but I think it's a possibility to have news flow in the end of the year, beginning of next year for the first AR case for poLight. This is potentially the most important consumer case for poLight. It's not going to happen fast when it comes to volumes, but there is very, very promising prediction for this market, so being there early, key. Application for TLens in AR can be 2 different applications. One thing is the camera you can see on the picture on the right, facing the world, either for imaging or for sensing. But there are also -- for laser displayed systems, there are also needs for tuning the lasers so that the user always see the projected message in focus, regardless where the user is focusing. And that tuning of that laser system is also something which is being considered an application for TLens. Smartphone. It's a strong statement, but that's how we feel it today. TLens, in an add-in concept, is a potential game changer. If you look at the camera module drawing on the bottom right, you may remember that one of the challenges we had a few years back was that when the screen size increased, no edges, only full screen, the focus of having a as small hole as possible in the phone, in the screen kind of killed many projects for poLight. What we have done the last year is that we, together with, I would say, a very, very well-recognized camera module supplier, we have developed a new system for which the TLens, it's not on top, but it's inside the lens stack. We're hiding it inside the lens stack so that the nose of the camera becomes very, very small, and hence, the penalty on the screen size is minimized. This design, which is super complex, has opened many doors. And this is why we call it a potential game changer for us and for the selfie camera. One step back. Tunable optics, which we, as poLight, is a part of, that we can change the optical power by tuning a lens, is receiving a lot of interest and increasingly so from the market. And specifically, from many markets, but one of them definitely is smartphone market. Many claims that the old, the VCM solution, for many challenges they are foreseeing coming in the next years, they feel that VCM will have the challenge to handle that problem. And they are more and more looking into alternative, and tunable optics is something which are on their lips on a daily basis. We have been super busy during the quarter with the smartphone project we are running. I would say majority of our team is working on that. So -- and I would say it's a very positive, positive dialogue and activity. We have done extensive testing during the quarter. I would say, so far, so good. It's never without problems. I mentioned before that this is a challenging design when it comes to tolerances and reliability. And improvement areas has been identified. At the moment, we haven't seen show stoppers. And then solutions and improvements are being worked on, both on the component level, the TLens, but also on the system level, which is both the camera side, and the phone side. So actually, there has been built phones, not a small number, which have been going through testing, demonstrations already. That also says something about where we are in the process. It's important to say that it's not a done deal. There are things to be done. There are projects to be sold. But what we see now is that -- yes, is that this shows promising results, this shows very promising interest and so much that I can say that there is market release discussion ongoing with key players in the market, meaning we are discussing more than proof-of-concept, we are discussing when to launch it into which phone. Okay? Here is to sum up, which you have seen before, updated for this quarter. Those who are thinking of making a proof-of-concept project; those who are, at the moment, executing proof-of-concept project, evaluating the technology; those who have completed ongoing, I would say, concrete customer projects which then have a named product in a way; and then design wins. The numbers in brackets is last quarter. And you can see planning PoC has a slight increase by 1 from 8 to 9. Ongoing PoCs increased from 20 to 26. Completed PoC has changed from 20 to 25. Ongoing real project has doubled from 2 to 4. And you can see the distribution. There's 1 consumer. There's 2 industrial. And 1 of the industrial case there is actually an AR case. And then 1 medical case also. And we have, as you know, 3 design wins, we have the barcode from Honeywell, and we have 2 smartwatches. The smartwatch market is still, I would say, impacted a lot by the COVID situation. People or families are staying together. There are less freedom for children to move around, so that kind of secured device has been less of a need in a way. And also the higher specs smartwatches have been sold significantly less compared to what they assumed. And that is the reality still. And we expect that the next releases for smartwatches will potentially more focus on cost down and spec down. This will change over the years. But today, that's the fact. This is not only the watches we are related to, like the Xiaomi and the XUN, but it's also related to all the major players in smartwatch in China. Okay, Alf Henning, would you support me on the financial review?

Sure. Thank you, Oyvind, and good morning to you. So revenue of NOK 1.2 million in the quarter reflects sales of TLens and ASICs for commercial use and sample deliveries for customer development projects. EBITDA loss of NOK 10 million in the quarter compared with NOK 13.7 million last year. The improved EBITDA is mainly explained by less operating expenses of NOK 2 million and the fact that last year, we made a provision of NOK 1.5 million related to severance packages. On the balance sheet. Cash position at year-end was NOK 77.2 million compared with NOK 73.5 million last year or 2019. According to current plan, the cash deposit will fund the company throughout 2021. On the cash flow. We started the quarter with NOK 79.4 million in cash deposits. We used NOK 1.8 million in operating activities compared with NOK 5.9 million last year. We received VAT settlements of NOK 8.2 million in the quarter, explaining the low spending. We used NOK 200,000 in financing activities, ending up with NOK 77.2 million in cash deposits at the year-end. Okay. Thank you.

Thank you, Alf Henning. Last slide, outlook statement before Q&A session. Market opportunities maturing in several market segments. Maybe most important is that the visibility we feel for smartphone market breakthrough has increased. Definitely, still things to be done, but the progress has been significant during the quarter, and we see many interesting cases. Priority in the company has been given to customer integration projects. I would say majority of the resources in the company is about supporting customer -- real customer cases, which is good because it shows interest, but also we are doing a lot of work securing a robust supply chain, which is, obviously, fundamental for our customers. We do also take our long-term view on the business, and we are working on new products concepts based on our established technology platform. They are having less progress because of the above, because we are so focused on supporting, helping customer to integrate our product into the system and solutions. But they are projects, new products are defined, and we are talking to the ecosystem. As one example, we have an MoU signed with one key player, and that is about making a TLens having a big aperture, a slightly different TLens. So there are ongoing long-term activities, but I would say that the priority is clearly giving to supporting customer, to secure, hopefully, design win in the coming quarters. To improve our ability to kind of secure the future with new innovative solution, new development and also to secure that we have capacity in the organization to support for what we foresee today may happen, increased activity, increased number of customer, we have to strengthen our organization. And that is ongoing both on the tech side, but also on the operations side and support side. So -- and this is happening as we speak. As Alf Henning mentioned, the current cash deposits will fund us throughout '21. Okay. Alf Henning, will you join me for Q&A?

Sure.

Okay. Then Alf Henning, if you could support me reading up the questions, and I will do my best to answer. We have been receiving quite a bit many questions from the shareholders upfront of the presentation. I will definitely try to answer them as good as I can. And those which -- if there is something I misunderstand or do not answer correctly to, please do not hesitate to contact me offline.

Are you ready?

I'm ready, Alf.

First one, it was stated several years ago that poLight would take 10% of the mobile market fairly quickly. What does poLight think about this year and time perspective now?

Yes. I think we deserve that question, to be honest. Yes, things have taken longer time, no doubt about it. And that beating we have to take. And I feel that there are 2 main reasons for the time perspective, which has become longer. The one reason is reliability. You may -- those who have followed poLight for some years understand that -- remember that we had issues on passing various tests. One of the, I would say, very difficult tests when we started to work with a customer was the drop test, basically dropping the product down to the -- from 1.5 meters down to the concrete. And that test was done much tougher than we were planning for. And we had to go back to the lab and do a redesign improvement of the structure of the product. That cost us quite a bit of time. Then finally, we came up out of the lab, and we passed the reliability programs at key players in the market. And we started the many proof-of-concept project, including smartphone projects, then everything was about the screen, because we have, all the time, focused so far on the selfie camera. And what happened is that when we were kind of ready with the product, the way the camera modules integrated our products meant that the hole in the screen become quite big, and that hole in the screen, the mechanical or the ID designer of the phones didn't want to have. So they put priority on a big screen with no hole or a small hole as opposed to having a better camera in the front. So we kind of -- if we had been, I would say, a year earlier with that solution, a qualified solution, we were within. Remember, we had 2 projects where we were designed in, and those projects were stopped for other reasons. So that was, in a way, we were too late, and the screen focus overtook the priority of a better camera. Now we have a new situation. Now we have found a way together with this key camera module supplier to design the lens -- the camera, sorry, in such a way that the nose of the camera, which is basically sticking out of the screen or under the screen, is as small as it can get. Even if you've removed the auto focus in that camera, which we are now working on, the nose will not be smaller. So either if you want to have a camera, that's the nose you need to accept, and we are as small as that. So now we have a completely new situation which has taken a lot of time to develop. This development is not something poLight could have done themselves. We were heavily dependent on that, the ecosystem, the OEM and the camera module supplier actually were willing to take the effort. And that's not a small effort to design that lens into the lens stack, and that has happened now. So that, in a way, may be a bad explanation, but that's the explanation of why things have taken longer time than we hoped for. When it comes to market size, yes, we have said 10%. We have said 5%. We have, in a way -- what are we saying on that is that it's not going to take a lot of percentages for poLight's market share, for poLight to be a very successful company.

Okay. After joining barcode, has the interest and attention around the company increased?

Yes. I mean as I mentioned, selling to the barcode industry with a reference in the barcode industry is definitely very positive. As a general statement, I will say, the fact that now we have been designed into 3 commercial products, both consumer side and industrial side, in sum is a platform which is extremely important for scaling up poLight.

Do you have projects that you prioritize less than others that have come a long way?

Yes, I think that when it comes to customer project, definitely, the smartphone cases now -- is giving most of our effort at the moment. That doesn't mean that we do not support other cases because, as you saw from the PoC overview, we have a lot of things happening on other products also. But definitely, I would say smartphone is so key for us that this is given a lot of focus. Meaning, as I said, longer-term projects, important projects, new technology, new products are being -- are suffering due to the fact that we're also busy with supporting customers.

Can we expect the company to become profitable in the near future?

Definition of near future, it will for sure not be profitable this year. On that, we don't want to say so much about forward performance -- forward-looking statements on performance.

How many lenses are there in the scan engine that was launched in 2020?

Yes. There is one lens in the left black camera, and that lens is actually in somehow inside the lens stack, so that one lens.

Can you say something about the strategy? Has this changed?

Obviously, that is always being tuned. But I would say the main strategy is now get volumes. Our product is having a structure. We have being a MEMS fab partner. And having a MEMS fab partner, it means that we need to, sooner or later, to produce volumes because MEMS equals volumes. And that volume is today in smartphone. There is no other markets today which can give you volumes. So that's why we are focusing a lot on smartphone. And this is why we are so happy to see that this add-in design is receiving so much interest. So that is key for us. Then we have said before, and will say again, in addition to that kind of volume market, which today is smartphone, we also need to position ourselves for the volume market consumer side next 10 years. And there, we think that the AR world will be key, and that's why we're also spending a lot of time on those AR cases. In addition to that, we could create a good, I would say, volume. We increased the yield of our product. We will reduced the cost of our products so the profitability will, over time, be significantly improved. Then we are, I would say, cherry-picking other professional use cases, being industrial, barcode, being medical, where we can, in a way, have different smaller volumes but at a significantly higher margin. So we can build -- and they are typically product which will last for, say, 5, even 10 years, steady, steady revenue, high margin, which will kind of be a very strong fundament for the company where the volume cases, like a mobile phone, will last for, say, 6, 9, 12 months, with big volume, die fast, new project. But having those very important peaks, serving volumes, serving cost reduction, we can build a very strong pipeline, diversified pipeline, which will be kind of funding the company in a stable manner. Then we have a strategy to become something else what we are today. That includes new products over and above TLens. There are many potential products we can realize based on our technology components, technology platforms. And those are being defined in a road map, and those are being worked on. So the poLight you see today will definitely be a different poLight in, say, 5 years from now.

Do you have a large-enough capacity for polymer production in Horten alone to meet the demand that is regarded as high volume?

Yes. As you know, polymer is the only thing we basically do ourselves at the moment. So that is the lens material in itself. That polymer material is very scalable when it comes to manufacturing. Like 1 liter of polymer is, whatever, million of lenses. And that polymer, we can produce within kind of hours, days. So we have a nice, small setup in Horten. And basically, I would say that the capacity is unlimited.

After the last quarter, you have built up an inventory to meet orders for adding projects.

Yes, we have already -- before, even last quarter, we have -- through our ST partnership, we have built up, I would say, a significant inventory on wafer level. Wafer level is where the muscles are, where -- this is definitely the longest lead item we use in our product. So that wafer stock is very robust and definitely support what we see coming in this year and next year. Then in addition to that, we have placed a new PO on STMicro which is in the process of being delivered and will start shipping to us throughout this year. So from a wafer perspective, we feel confident. But definitely, as time fly and as new cases are coming, we need to ramp up that capacity and that, there is a plan for.

Isaksen, you have stated if we succeed in our strategy, then this will be one of the biggest Norwegian IT adventures. Do you still stand for it? And how do you think you have succeeded in your strategy so far?

Yes, to start with the last one, I think also we deserve that comment. We haven't delivered. I think that's fair to say. And we just need to take that as, yes, motivation that we will deliver. I definitely think that poLight -- when I joined poLight 6.5 years ago, I really felt that this was one of the most unique cases I ever looked into. And I've been managing different tech companies for many years. This is an extremely interesting technology, and it's many, many application areas. It has application areas, industrial, professional and consumer. So yes, I definitely feel that this can be one of the most exciting companies in Norway. And I will never stop believing that. And I'm building more and more confidence in that statement.

How many test kits have you sent out in the fourth quarter? And how is this compared with previous quarters?

It's been quite high activity when it comes to -- because we are selling -- in a way, you say test kit. Test kit is one quite expensive unit which we sell to different -- some -- in more industrial applications you want to test our product. What we do most, and that we have shipped probably one only in that quarter, but what we have then shipped a lot of is TLens and ASIC drivers for different projects. And then we are talking of several thousands this quarter.

Smart glasses. Does poLight have any products or supplies for camera technology that can provide autofocus very close to an object so that you can solve eye tracking?

We have only scratching a little bit on the eye tracking area. And so we don't have nothing to -- we don't have significant, I would say, things to report on that area. May happen, but at the moment, we do not have any activity in that direction.

If poLight seems to be preferred in the smart glasses project mentioned in the third quarter, at what stage will the collaboration be announced?

Well, we announce design wins. And what the status at the moment is that there are several OEM at different maturity stages. And some of them are potentially approaching design win during this year. But when that happened, they lock the design, they tell poLight, poLight, you are in, and that's the time where we can potentially start announcing. But if you look at the smartwatch, there was a design-in earlier than we announced. We announced that design win and that was basically at the market release. So this is varying from case to case. But from design-in into design win, in that time period, it's the time to announce.

Will poLight benefit from the production facilities? Or any of the projects STMicroelectronics is preparing for the expected increase in production towards smart glasses?

I would like to answer a little bit more general to that question. We have a very tight and strategic relationship to ST. And we are, on a regular basis, giving each other update and talking about cooperation. We are meeting customers together. We're discussing customer cases together, both for existing product but also for new products, which you are mentioning here like AR. We are talking about AR solution with senior management at ST. So in a way, definitely, we benefit of being a part of -- or using ST and ST's ecosystem and capability in general, I would say.

Can you say something about how the work with the MoU project is going?