Smartoptics Group ASA (SMOP) Earnings Call Transcript & Summary

Good morning, and welcome to Smartoptics' financial presentation, financial report for Q2 2026. It's great to be here. It's fantastic times for us. I hope also for you guys. Most of you should now be enjoying some sunshine. I hope you are, and thank you very much for taking the time to spend some time with us this morning. Next slide, please. Not only are we delivering a quarter in which I expect us to grow faster than anyone else in the market, but we are also -- we have also started our journey towards the next goals for Smartoptics for the next big things that we have ahead. And thus, we want to spend a little bit of time in this presentation, in this call to talk about that, to introduce our thinking around the future for the company. But as usual, let's turn to the main happenings in the quarter, and I will leave the details of the numbers, with very few exceptions, to Stefan's part where he will cover those in great detail in a few minutes. We can only conclude that we're continuing to have a fantastic Americas, fantastic U.S.A. stellar performance by Team USA. But since a few quarters, we have been discussing an increased momentum and increased traction, particularly around large accounts in Europe. And this quarter, we're seeing the result of that. So also a fantastic Europe with growth in all subregions and fantastic growth in U.K., Ireland and the Nordics in particular. Our business is increasingly driven by AI and indirect hyperscaler business. And as an example, this is now happening across the globe. So it's in every region we are working with these type of opportunities. As an example, our South African partner, Transmission Co., together with us, are building a network for a hyperscaler in Africa in the quarter. So important momentum there. We can also see that the traction from Q1 is continuing with book-to-bill comfortably over 1 in the quarter, exactly the same scenario as in Q1. Gross margin is a little bit down in the quarter. This is related to one project, one customer in the quarter where we can see that the difference between the lower gross margin in the quarter and a perfectly normal quarter that we've been delivering recently. All of the difference there between the 2 numbers is related to this case. So this is a case that has been restored, that will be restored in Q3 and onwards from a margin perspective, where we are choosing to support our customer in a critical phase where we were undergoing qualification for a number of large applications. And this is a U.S. Tier 2 that is building networks across America. So a very good win and a very good proof point of our large account strategy that is resulting in short term, a little bit lower GM. We have been talking about this for years that we want to have the flexibility and need to have the flexibility to act in the best interest of the company and in particular, our growth journey when we need to, and that's the full story behind it. So no big drama around the gross margin from my perspective. Quite expected, in fact. Yes. So obviously, we are here in Stockholm today from our new super nice main office location and production and so on and so forth. As you all know, we were talking in Q1 about Q2 being a catch-up quarter, of course, catching up towards a normal Q2 performance versus Q1, and we can see that we are way up there in the upper range of what normal seasonality is. So a very, very good performance. And in particular, bearing in mind that we delivered about 11% of the revenue in the first month of the quarter. So the company was effectively shut down from a delivery standpoint for a few weeks. And the team has performed really, really well. So thank you very much, team operations, for your efforts through the quarter. So reminding everyone what have we done? Well, we have moved all of our production facilities, the 2 of them, into one. And going forward, the work to make this even more efficient is going to start and continue for years. But clearly, we're demonstrating in the last 2 months of the quarter that our capability is already at a very, very high level. Right. So revenue and the geographical spread. As I said, fantastic performance in America, and there is no doubt it's a record quarter over there, largely driven by the results of our efforts in the large account strategy over the past several years. We can see now that large parts of our revenue still being fairly broad, but large parts of it is now coming from the accounts that we have been talking about, typically regional Tier 2s and Tier 2s. And similar both data center operators and network provider -- network operators delivering bandwidth to the data centers in the region. So very good America. 10% growth and quite expected that we would see a good EMEA after several quarters of having a very good traction and very good win rate in the larger projects that have been out there for tender and similar. So all good. And as I mentioned earlier, good growth in all subregions, DACH, Eastern Europe, Southern Europe, but stellar performance in the Nordics and U.K., Ireland. APAC is still project dependent as we point out in the headline here, and we can see quite modest growth in APAC. However, what we are seeing in this region, much like the other ones is that the larger data center AI-related projects are popping up in several regions within the APAC territory. And we have developed our partner landscape in the region. We have, of course, developed our product to have a better fit going forward. And we have invested in the region with more people working for and with Smartoptics. So I'm very positive about APAC for 2027 and second half of 2026. Timing is, of course, a little bit uncertain, but I think that we can see a much better performance from the APAC region going forward. So that's very nice to have yet another contributor to our growth. Product mix. As usual, it is the more advanced products that is sold together with our software and service offering that is leading the way. Those of you who have been with us for quite some time probably noticed that we have shuffled around the order in this slide. So -- and we have done that to clearly outline the fact that solutions, software and service belong together nearly to 100%. So fantastic growth. This is important because it's telling us that where we are investing, we are also achieving growth. So that's always comforting. It is a proof point that our product road map, the products we have developed are the right products for the market. The regions and customers and applications that we're going after are the regions and customers and applications where we can see growth. So very, very good proof points. As you all remember, we have, since some time, also put a little bit more focus on our business area optical devices with Björn Andersson leading those activities for us since quite some time now. We have been engaged in really upping the performance of the back end of that business, investing into our software platforms, investing into our production tools, investing into the tools that our customers are using to configure these products for their live environments. And we're seeing that much like the previous 2 quarters, very good growth in business area devices, too. So it's no longer an anchor for the company. It is yet another growth vehicle contributing to the overall revenue. So I'm very pleased with that situation. I will hand over to Stefan to take you through some of the details on the financials.

Thank you, Magnus. The revenue increased 54.6% to a record high $28.9 million compared to $18.7 million last year. As Magnus mentioned, we have had very strong growth in EMEA of 112% and in the Americas of 36%, primarily driven by Business Area Solutions. The gross margin was 46.1% compared to 48.6% in last year and 47.0% year-to-date. The lower gross margin is fully related to the breakthrough deal that Magnus mentioned and follow-on business with this customer is expected to deliver normal margin levels going forward. The underlying gross margin remains stable quarter-over-quarter and the full year 2025 gross margin remains as a good reference for future quarters. We had a record EBITDA of $4.5 million compared to $2.6 million last year, up 1.9% year-on-year. The strong revenue growth increased gross profit by $4.2 million, more than offsetting higher operating expenses. The employee benefit expenses increased 29% to $6.7 million compared to $5.2 million. Main drivers is the organizational growth of 21%, where FTE growth from 132 to 160 people, including the expansion of the U.S. sales organization earlier end of last year. The FX impact is impacting 3% and the annual salary increase and other factors are contributing with a 5% increase. Other operating expenses increased to $2.2 million compared to $1.4 million, reflecting the business growth and organizational expansion. Total operating expenses as in relation to revenue amounted to 31% compared to 35% last year, so an improvement. The EBITDA margin improved to 15.5 percentage points compared to 13.7% last year, and the year-to-date margin increased to 13.8% compared to 11.4%. If we exclude nonrecurring costs relating to the relocation of the production, in Q1, the year-to-date EBITDA margin was 14.7%, a difference of 0.9 percentage points. The profitability is improved despite continued investments to support the future growth. The EBIT margin improved to 12.5% compared to 9.8% last year. And the year-to-date, the margin increased to 10.5% compared to 7.3%. Excluding nonrecurring, the EBIT margin year-to-date was 11.4%. The operating cash flow amounted to positive $0.9 million compared to negative $0.5 million last year. Positive operating cash flow despite a $2.2 million increase in working capital driven by the higher sales and deliberate inventory buildup to support the future growth. The balance -- the equity ratio was 42% compared with 53% a year ago and 56% at the end of the first quarter. And the decrease is mainly explained by the recognition of the new Stockholm office lease under IFRS 16, which increased total assets without a corresponding increase in equity. So total assets increased to $66.6 million compared to $49.9 million last year, and that's mainly reflected by the Stockholm office lease addition and as well as inventories and trade receivables that increased in line with the continued growth of the business. The increase in asset was financed mainly by corresponding lease liability to the Stockholm office as well as higher trade payables, reflecting the higher level of business activity. Despite the dividend paid out during the quarter, total equity increased to $27.9 million, supported by continued profitable operations. Cash ended at $2.1 million compared to $3.1 million last year. We have available credit facilities of $7.6 million, equivalent to NOK 75 million. We have a high focus on cash, included continued management of trade receivables. The working capital increased to $16.8 million compared to $15.7 million last year and up from $14.6 million last quarter. The inventory increased to $21.3 million compared to $16.8 million last year and up from $18.4 million last quarter. And the increase versus last year is mainly driven by longer component lead times and a deliberate strategy to maintain higher inventory levels to secure product availability and support the future sales growth. Inventory quality remains high with a very limited inventory risk. Trade receivables increased to a record high $26.4 million compared to $19.8 million. This is, of course, then reflecting the higher level of sales. We have had a back-end loaded quarter with more than half of the quarterly revenue invoiced during the final month of the quarter. We have had normal collections and no increased credit risk. The trade payables increased to $12.7 million compared to $7.7 million last year and up from $5.7 million last quarter. We have had higher inventory purchase towards the quarter end and the accounts payable mainly consists of suppliers with 60 days payment terms. Net other short-term liabilities increased to $18.2 million from $13.2 million last year. And the largest item is deferred revenue that increased to $13.3 million compared to $10.7 million. Then we also have the tax liabilities that increased to $2 million, reflecting the higher taxable profit level. Thank you, and back to Magnus.

Thank you. We will now leave Q2 behind and start looking forward into the future and give you a taste of the new financial aspirations and the new strategic choices that has been worked out through the first half of this year. The material here is short and sweet, I hope. And I'm expecting that we will continue to talk about this now for over the foreseeable future and clarify more and more the material and how we're progressing against that. So the first thing to note is that the ever-growing demand for bandwidth is continuing to drive our business. Our business is -- the growth, the underlying growth is broad-based. But of course, it's impossible to overlook the fact that recent CapEx investments in AI and AI data centers is coming on top of this as an additional driver. Reminding people that building an AI data center on a corn field in any Tier 2 market is pretty useless unless you can connect it to the bigger cluster and to its users. So the technologies that we are working with are absolutely instrumental to make this work. It is, of course, a privilege for us who have been dealing with optical technologies for a longer period to see a second wave of really changing the behavior of the human kind going forward, maybe big words, but that's, in fact, what's happening. Smartoptics has, over the years, systematically and strategically been working to develop our product offering, hardware, software and support services to address more and more applications with the purpose to broaden the addressable market for the company. We have always viewed ourselves as a metro optical networking player leaving the long-haul market to others to deal with. But we have since some years, started to move into that long-haul market, and we have done it with pretty large steps, now building really high-capacity networks, terabits of bandwidth over thousands of kilometers. It is no longer true to say that we are a pure metro play. This journey will continue. So adding a substantial and fast-growing market on to our list of opportunities is, of course, a great way for us to scale the addressable market. So why can we do that now? And why is it a suitable timing for us to do that now? I would like to point out a few facts. Number one, the way Smartoptics has developed. We have built a product offering that is highly suitable for some of these applications, these longer haul, higher capacity, not for all yet. But in terms of suitability, one should understand that, of course, you can build the whole Internet and all AI infrastructure using only Smartoptics products. But on the peak and most advanced applications, we would probably not be cost effective today. The journey we have ahead of us is to become a very cost-effective and technically capable alternative also for some of those more advanced applications. We can do that today because if we look at the longer haul market, traditionally, who has been building those type of networks, if we go way back a long time, you would see that there were a handful of selected Tier 1s who were building those type of networks, as an example, AT&T in America. Those are organizations that come with a large set of requirements, a very, very big backpack of legacy equipment that needs to be supported and so on and so forth. That is not true anymore. Of course, the hyperscalers have been building long-haul networks for many years. And we're now seeing new players coming in to support the hyperscalers and to support the build-out of AI infrastructure. So a lot of new network operators, new challengers are building these type of networks. We're seeing neo-scalers building fairly long-haul networks to support their business model, et cetera. So the market has changed, and we believe strongly that, that market is a market that's highly suitable for a company like Smartoptics, not only our products, but also our role as a challenger in the market and the cost efficiency that we can bring to the table. The other thing that has happened over and above the market changing is, of course, that technology has evolved. So in the past, you have nearly been forced to deal with a high degree of vertical integration to address this market space. And we see now that the merchant technology that we use in our transponders and muxponders are becoming very, very capable and indeed becoming the go-to choice for many organizations, making also our products technically more suitable for going after the larger and more advanced opportunities. This will not come without an effort from Smartoptics. So we are going to move into an investment phase that we have already started since some time back. So we have some investment areas that are incremental to what we are already doing. So it's not a revolution. It's an evolution of the product offering. And those 3 investment areas are simply to build AI-ready optical networks to deal with interconnected clusters or scale across as we say in our -- in the market lingo that we are using. So basically, when you outgrow one AI data center, you need to build a new one and you need to connect them together. So that's what we're talking about. In order to do that, we need to improve our products and develop a few new alterations of our products to support longer reach and higher capacity networks. And those products are now on the drawing board, and we have a way forward that we believe in very much. Some of it being, of course, not suitable to share to the open market yet, but it will be announced and released down the line. The third area of investments where we are getting exceptionally good feedback from our customers on the work that we have already done is in the software space, Agentic AI, software and automation, where we've had the luxury not only to have the right team in place to do this, but also to have the right timing to develop new software platforms where we can utilize everything that's available to us through modern software development which is, of course, more difficult to do if you have a huge legacy to deal with while developing your products. As I said, we're getting very good feedback from our customers. We believe that we are ahead of competition broadly. And we believe that some of the ideas that we are bringing to the table are unique and very, very beneficial for our customers. So stepping into a new era of growth is the ambition. And we will, as we have always done in Smartoptics, plan, execute, measure, change the plan as needed, execute and measure again. systematically invest into our products, systematically invest into scaling our organization to also utilize new technologies to enhance our operations and to become a much more efficient company overall. When we measure ourselves against competition and peers, we can see that already today, Smartoptics is producing a higher revenue per full-time employee than most other organizations. And we want to continue to scale that in order to outperform the market in yet another way. So that's something to study going forward, how we're performing against those metrics. And that's something that I expect us to talk a little bit more about down the line. And when we are there, lead and really become a top 3 vendor in the target markets in North America and EMEA and increasingly APAC, that is the ambition. So of course, scenario planning is everything, and we've been doing a lot of that in the spring here to give us a solid road map forward, also a financial road map that we believe in that we think that we can execute on. And when we do that, we're seeing a number of scenarios, and we, therefore, provide you with a range in terms of revenue potential, the USD 300 million to USD 400 million being the next target for the company and of course, to achieve a CAGR of over 25% going forward. We are very committed to profitable growth as we have been over the years. And we're now starting our journey towards EBIT margins above 16%. Having said that, I think it's important to look at the road map that we have ahead of us. I think that the EBIT margin target that we are talking about here, it's something that we're striving against and that we are absolutely targeting, and we're absolutely seeing an upside to those numbers when we do our modeling. But it's something that we want to talk about for the second half of the planning period. My focus and the team's focus is now going to be on revenue and revenue growth and the investments that we need to do to achieve that. So only keeping one eye on the long-term EBIT target for now and coming back to that in a while. So this is it, full throttle ahead. We have a just do it attitude in the company, and we will move forward. With that, I would like to hand over to Per to look at questions.

Yes. We will start for analysts on the call. First up is Christoffer Wang Bjørnsen from DNB Carnegie.

Congrats on the great quarter. I just want to start out with the issues you mentioned in the first couple of weeks of the quarter where you essentially said that you were for backup purposes shut down when it comes to deliveries. I think does that kind of imply that if you had moved more effectively over to the new site, your revenues would be more into the $30s million. I guess you've said in the past that you shouldn't expect near-term quarters to go towards the $60s million. But given that you kind of -- you are supply constrained rather than demand constrained and you have a decent book-to-bill well above 1 that like the underlying output as an indicator for second half is quarters in the $30s million rather than in the $20s million? Or are there particular component supply issues that makes it difficult to kind of enter into the $30s million in the second half quarters? That's my first question.

Yes. Thank you, Christoffer. So as you know, we are not providing near-term quarterly guidance, and I will, of course, not do that here either. What I can say is that clearly, our growth will not be limited by our own capability in the second half of the year. Production is fully up and running. And as Stefan mentioned, we delivered about half of our revenue in the last month of the quarter. So no problem there. The remaining risk in this market is, of course, the component shortages that we see out there. That is something we've been talking about for a while. It's something that we need to continuously work with and -- we have very, very strong partnerships, and we get very, very good support from our component suppliers today, actually delivering better than expected. So our hope is, of course, that they will continue to do so, promise one thing and deliver more. We have certainly done our homework doing revenue planning for Q3, Q4, Q1 and Q2 now, scaling our inbound component purchases, et cetera. So yes.

But just then backwards looking, are we correct to understand that like you had 2 weeks of potentially 0 output and that revenues would be in the $30s million if you kind of didn't have those transitional hiccups at the beginning of the quarter?

Well, we're talking theory here. I don't know what it would have been if we had not had those 2 weeks. But clearly, we're delivering half of our revenue in the last month. And of course, the revenue could have been much higher if we had had the -- well, similar performance through the quarter. But it was 3 weeks. And I think a good data point is the fact that we delivered about 11% of our revenue in the first month. So really not a lot.

Okay. Great. And then just moving on to the long-term targets. Can you just like -- you have good visibility on like the market forecast and so on. But can you help us understand a bit like what kind of visibility you have on the, let's say, the '27, the '28, the '29, I guess there's not really a good degree of backlog backing that up, but maybe more visibility on projects you expect or stuff you're already planning to bid on just like beyond the market forecast from Cignal AI, what kind of gives you confidence that there is business out there for you to lift revenues as materially as you're kind of now indicating. That would be helpful.

Absolutely. So the pipeline of projects that we are working with is considerably higher than it has been in the past. Of course, we have a very close dialogue with our customers around projects that are to materialize in 2027 and beyond. We are, of course, guiding our customers to be -- to give us the visibility, as much visibility as they can because that's the only thing that's jointly going to help us through any upcoming supply problems that we can see. We're seeing some of the larger competitors we have in the market now guiding that they are -- they have basically filled their order books for the year and beyond, which means that choosing Smartoptics because we are the nimble player in the market who can deliver quickly is going to continue for a considerable time. And last but not least, of course, the traction we have in our large account strategy and of course, the amazing opportunities that we have ahead of us in relation to that is also giving us a lot of confidence. It's a journey. You need to get through all of the steps that you need to get through. But in general, I would say that what you have seen of the large account strategy so far that has been driving our growth, the opportunities we are working on now are bigger rather than anything else. So yes. So we have data points that give us confidence.

All right. And then just finally, more on the investment side. You mentioned more focus on revenues than earnings near term, which is I think it's great. But just I think you added a lot of people during the quarter, now at 160 FTEs, which is a record number of adds both sequentially and year-over-year as far as we can tell. Is this kind of a new ramp, which puts you at the number of people that you like -- you targeted for the year? Or will this new pace of hiring continue in the next couple of quarters? And then as an add-on to that, like 13 new people quarter-over-quarter, like what areas are you primarily hiring in right now? Just to get the sense of your pace of investment going forward...

So the 160 is a little bit inflated. As you know, we moved production and those are still counted as FTEs. So we have 10-ish people that will be removed in the second half. So it's not that dramatic. We have 5 minutes left before we need to close this call to get on to the next one.

I suggest we go to the next analyst, which is Markus Heiberg from SEB.

So the first one from me is on the new addressable market here moving from $5 billion to $6 billion market to $11 billion to $12 billion roughly. So how much of your revenues are currently in these new segments? And how do you see that portion of revenues for Smartoptics moving over the coming quarters and years?

I can say that it will increase. We are not measuring that. We do not really have that visibility in our ERP systems. So unfortunately, I don't have the data. It's gradually growing and it's bigger and longer distance all the time, so growing for sure. And we are still reporting all of our numbers into the metro regional segment.

Yes. So it's fair to assume that you have meaningful revenues in those new segments already?

Yes.

That's good. And then last one for me to get through the queue here. So on the gross margin and maybe in relation to EBIT margin and phasing over the coming quarters, it sounded like it was a one-off to some extent or one large account explaining the lower gross margin this quarter, but that could happen, I guess, also in the future. So how should we think about the coming quarters in relation to gross margin and also the phasing towards your EBIT margin target?

So I think on the gross margin, 2025 is a pretty good reference going forward and -- which is just below 48%. We -- you are absolutely right that from time to time, we may choose to be a little bit more aggressive on a particular deal or account that can happen in the future, too. And I think the second part, the phasing to EBITDA was -- do we have an answer on that? Not really, no.

The second...