WISeKey International Holding AG (WIHN) Earnings Call Transcript & Summary

Greetings, ladies and gentlemen, and welcome to the WISeKey International First Half 2021 Financial Results Earnings Conference Call. As a reminder, this conference call contains forward-looking statements. Such statements involve certain known and unknown risks, uncertainties and other factors, which could cause the actual results, financial condition, performance or achievements of WISeKey International Holding Ltd to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. WISeKey International Holding Ltd is providing this communication as of this date and does not undertake to update any forward-looking statements contained herein as a result of new information, future events or otherwise. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to introduce Carlos Moreira, Founder and Chief Executive Officer of WISeKey. Mr. Moreira, please go ahead.

Hello, everybody. I would like to welcome you to the WISeKey earnings conference call to summarize the activities during the first 6 months of 2021. As you have been seen in the announcement made yesterday, the company has performed in growth mode since the beginning of the year, which has announced a growth of 24% on the year-to-year revenue with a total of $9.9 million. This growth has been mainly due to the increased demand on IoT products. As you know, WISeKey integrates cybersecurity, semiconductors into an IoT solution, which is pretty unique into the market. And also a new revenue stream from AI activities brought to the company by acquiring a controlling interesting in arago, which is one of the leading AI companies in Europe and arago automation software is already installing a large amount of customers, increasing the performances of that automation process. So that, combined with the IoT growth, it has reflected in a 24% growth for the company. The company has been also on an operating loss of $11.2 million in the first 6 months of the year, which is a comparison to the $7.3 million of last year. It is an increase, but mainly due to the fact that we are refinancing the integration of the arago technology and operations into WISeKey. It has been a major restructuring in arago. Arago requires some serious integration and restructuring. Also, we have reduced the G&A in terms of operating expenses in arago, and we have integrated the sales organization. So our sales force now is able to sell arago technology worldwide. The cash situation of the company is pretty healthy still, where we announced a $38.6 million in cash and cash equivalents. And the situation in terms of the 6 months operations have also increased substantially. We had a very extended organization now with headquarters in Germany, France and Switzerland and 2 operations that they are currently increasing in terms of manpower in the United States and in Saudi Arabia. In Saudi Arabia, WISeKey has a joint venture with the Juffali Group, and that joint venture is also expanding now into other countries in the region. In terms of the operations, WISeKey has been very active in innovation, as you could see, reflected in the different upsides on the stock value on WISeKey during the first quarter of the year. We had a substantial increase in the volume of shares traded on the NASDAQ and the Swiss Stock Exchange and also on the price of those shares. The announcement of WISeKey entering into non-fungible token technology by developing the WISe.Art platform created a very strong interest in the company as we are the only cybersecurity company listed on the NASDAQ that is now able to offer a non-fungible token platform, allowing companies to basically trade their NFTs in our platform in total security and with a level of verification and provenance certification, which is unprecedented, into the market. This new revenue will start to be visible during the second half of the year and in particular next year. WISeKey is sitting in something like $250 million pipeline of IOT, cybersecurity, AI and now NFT revenue over the next 5 years. And this will be highly incremented by the fact that with the WISe.Art platform, WISeKey has now a B2C channel as well. Previously, WISeKey was mainly a B2B company, selling to enterprises. And now with the WISe.Art, we can also reach directly in consumers. WISe.Art makes money by charging a transactional fee, which is 5% on the price of the NFT. Obviously, the fact that we are targeting very high-end NFTs WISeKey has concluded successfully several NFTs during the beginning of the year. So we obviously expect with the incremental volume and numbers of NFT that they are going to be performing on the platform, we will be able to substantially increase revenue and reach profitability with the further expansion of the marketplace. The -- another important aspect, more concerns to revenue performance is that WISeKey has also developed a cryptocurrency with the name TrusteCoin, which has been announced and will be launched in H2 that allows traders to acquire TrusteCoin as a way to enter into the WISe.Art platform and conduct transaction, not only in a secure way, but also on an authenticated way as inclusive of a very strong KYC process, know-your-customer process, which is equivalent to where financial institutions, banks and others will do in order to let their clients to their platforms. So that will allow philanthropy NFTs, international organizations NFT, United Nations NFT to be executed as we can provide full trustability on who is behind the currency. And that process will be essential for high-end NFT transaction as obviously we are trying to avoid NFT to be used for money laundering or illegal operation in anonymous wallet, bitcoin or cryptocurrency wallets. The NFT process can also be done through a white label, so that means that WISeKey is working with several companies, and they would like to embed all technology, all platform into their website. So imagine a major brand or a museum or a gallery that they would like to do their own NFTs, but they will not want to develop the platform. So WISeKey provides the platform as a license agreement, and the platform will be used for conducting a branded NFT-secure by WISeKey and where WISeKey will maintain a commission, a percentage of all NFT treated in that white-label platform. So that obviously opens the possibility of WISeKey to enter into many new sectors like sports, like fashion, like museum, like art, as the cooperation between the platform and strategic partners will be done in a way that they don't see us as a competition, but rather as a technology excellency and provision of a unique platform. The -- another growth area for the end of the year and WISeKey has announced that we are expecting further growth during 2021 as we expect to be around $20 million -- $20 million to $22 million revenue, which basically represents around 40% growth in comparisons to 2020. It's actually generated by the strong demand of IoT products. So as we know, the -- this segment could even expand further if we didn't have the logistic issues generated by COVID in getting those microchips into the market due to the -- some of the fabs have been working in slow motion and not able to deploy and to provide microchips on time. So despite that shortness of microchips and semiconductor into the market, we are managing to grow very fast in that sector. The demand of IoT is incremented by the fact that WISeKey is one of the only companies in the market that is able to insert a cryptographic identity into the microchip, what we call, a Root of Trust, which is unique to the company. And that is an essential requirement to provide, what we call, a birth certificate for an object. So every object, drones, connected cars, home appliances, they need to have a strong identity in order to secure it and the data they send from that identity all the way to our cloud is authenticated and comes from the authorized object. That data has also a premium value, and this is where arago HIRO artificial intelligence automation algorithm comes into play as we are now able to analyze this data and make the data meaningful for companies as they can, by analyzing the data, improve their performance with all their objects. [indiscernible] with AI, which is the third leg of the revenue generation and strategy of the company, although it's still small, we are talking about $5 million in revenues on AI, it is very much subject to automation performances. So that means that companies that are using HIRO are increasing the automation ratio. And as they get better and more optimized, they can start to generate more revenue. So obviously, the AI, as we all know, companies have unpredictable revenue. It's not yet a technology that is mainstream, but obviously, it's essential for the Fourth Industrial Revolution. So for the time being, we are still investing into arago, but we'll expect very soon that arago will become a major contributor to the WISeKey platform revenue technology. The good news is that we have rose 57.5% year-to-year revenue in Europe. So Europe is growing fast. And one of the reasons is that industrial -- Industry 4.0 or Fourth Industrial Revolution is emerging strongly in Europe, and that has created an important growth. And even in the United States, where our presence is still not very large, we managed to grow by 9.5%. That shows that the growth in the United States, as soon as the pickups, could match the growth of Europe. So although the company is still burning cash as reflected in the losses, a lot of that cash is being used to make the acquisition of arago and also to optimize the arago operations. So the good news is that WISeKey has now a total new platform that was not there last year. And it's not yet reflected if we really compare the evolution of the stock in the current value of WISeKey. WISeKey is still trading a slow multiples between 5x and 6x revenue multiple. We believe that we can trade much higher than that, and we will do our best to make it happen next year as our competitors are all trading around 20x and sometimes even 50x multiples on revenue. So we believe the fact that the market sees us as an European company, which we are, it's handicapping us, and the company is actually working with several banks and investment banks to roadshow the company in the United States so further awareness is gained in the U.S. market on WISeKey and its unique platform. So with that, I would like now to give the floor to Peter Ward, our CFO. He will walk you through the full financial disclosures of the first 6 months of the year. And I thank you very much for your attention, and we look forward to continue briefing you into the performances of the company during the following meetings. Thank you very much.

Yes. Good morning and good afternoon, wherever you may be listening. I'm Steve Ward, CFO of WISeKey. I will add a bit more flavor to what Carlos has already covered. And then we'll go into question and answer session. So as Carlos mentioned, we have an increase of revenues of $1.9 million through the first 6 months of this year compared to last year, up to $9.9 million, which is 24%. It was attributable to some of the growth coming from the semiconductor business and maybe from the -- we see that in the second quarter starting to pick up because, clearly, we are constrained with the supply of the semiconductors. We do not manufacture them ourselves. We design. And due to the shortages we have had some issues in supplying the demand of the customers. We currently now have customer demand, which is actually going out to the second and third quarter of 2022. And normally, we would have been able to supply those products in -- for most of them inside of 2021, but they are noncancelable orders that we have from the customers. Also with regard to the increase in prices, as it come through from the semiconductor manufacturers, we've been able, in many cases, hope to move that price increase into the customer as well. So the company itself is not suffering. It's a timing issue more than anything else. It's not something in absolute terms from the price movements. The other movement increase in the revenue, of course, is the acquisition of arago, which we did in -- from the 1st of February this year. And that -- we acquired 51% of that company. So we are able to consolidate the revenues, and that does add to the increase in revenues in the first half of the year. So we have -- since the beginning of the year, we have actually had some increases in new clients from the microchip business. It's been a little bit difficult to actually supply in quantity because of the difficulty of updating the chips from the manufacturers. The revenue by the region. Again, it's a little bit skewed with the arago revenue, which is mainly European-based, so we -- where we increased from just under $3 million in the first 6 months of 2020 to just under $4.7 million in 2021. So moving from 37% of our revenues up to 47%. The U.S. revenues actually increased by $400,000 from $4.3 million to $4.7 million, but the percentage of overall revenue actually dropped from 54% to 47%. But as I said, the actual revenue itself was an increase. And Asia Pacific is around about 5%. And then we have Latin America, which stayed around 1% of the business. So then on the operating income side, the loss actually increased by $3.9 million to $11.2 million, which as Carlos mentioned, is for the first 6 months as compared to $7.3 million in the first 6 months of 2020. And that was essentially due to the consolidation of arago which added to the group's cost base. Up to now, we've invested $11.2 million into arago, which includes the expenses required to reduce some of the operational costs and also to streamline some of its processes as well as the acquisition part. The integration is ongoing, and we are focusing on that now for -- now to the end of the year. So it will be additional costs, we would expect coming in that. So with regard to the loss, the net loss is $6.1 million, which actually decreased by $2.8 million compared to the loss of $8.9 million in the first half of 2020. This is due to the -- principally due to the acquisition of the controlling interest in arago and the nonrecurring nonoperating income of $7.3 million from the reevaluation of the convertible loan that was part of the consideration. It's sort of a technical accounting, but that's something that we need to do from a U.S. GAAP point of view. So we actually reduced the loss by, obviously, $2.8 million. Arago's loss for the 5 months to June was $3.3 million. With regard to share capital, we have 72.7 million shares being issued, which is up 52% from the end of last year's December 31 when we had 47.6%. And the -- basically the B shares [indiscernible]. We have outstanding 60.8 million shares compared to 42.8 million at the end of December last year. Trader shares have increased from 4.7 million up to just under 12 million. So we are able to continue a financing, which -- what we've done up to now with the negotiating new facilities with L1 Capital and also Anson Investments. So again, as Carlos mentioned, we had $38.6 million cash at the end of June compared to $17.4 million at the end of June last year. We've used the -- the reason actually for building up that cash reserve is to restructure arago, which will require some additional funds, the development of the WISe.Art NFT platform. We continue to make investments in R&D. We invested just over $2 million -- $2.1 million in R&D. And then we have the growth initiatives into AIoT, which is a combination of the product groups, but partially with new microchip design. And again, of course, there's potential M&A activity that we are always interested in doing. That is all I have at the moment. And so I think we can sort of open the floor to questions, should you wish. Thank you very much.

[Operator Instructions] If there are no questions at this time. I'll turn the floor back over for any further closing comments.

No, just very happy to be on the opportunity to present the company again. And Carlos is also very happy. He's actually on a plane at the moment. So it's very difficult for him to actually be available. Things changed with the travel sequence in Rome due to a strike. So things are delayed. But he's very happy always to talk. Thank you very much, indeed.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.

Thank you very much.