Good afternoon and welcome to the EnSilica PLC final results investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submitted anytime via the Q&A tab situated in the right-hand corner of your screen. Just click Q&A, scroll to the bottom, type your question and press send. The company may not be in a position to answer every question received during the meeting itself. However, the company review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, we'd like to submit the following poll. I'd now like to hand you over to Matthew Wethey, CFO, Ian Lankshear, CEO, and Mark Hodgkins, Executive Chairman. Good afternoon.
Good afternoon.
Good afternoon, everybody. Welcome to our presentation on the 2022 EnSilica financial results. My name is Mark Hodgkins. I've been with EnSilica since May 2016. I'm a chartered accountant, formerly with Grant Thornton and Ernst & Young. I've worked in business for the last 25 years outside of the profession and most recently as CFO of AIM-listed Trackwise Designs PLC. On my right is Ian Lankshear, CEO.
Thanks, Mark. I'm an electronics engineer by training. I started my career at one of the great British companies, Plessey. It was actually Siemens Plessey Radar, and then moved into semiconductors in 1996, working for Hitachi and then Nokia, developing ASICs. In 2001, I left Nokia to co-found EnSilica, and I've led the company since then. I'll hand over to Matthew.
Hi, I'm Matthew Wethey, CFO of EnSilica. I'm one of three chartered accountants on the board and have held senior finance roles at a number of blue-chip companies in a range of sectors, including Unipart and British American Tobacco. For 11 years before I joined EnSilica, I was CFO and group secretary at PV Crystalox Solar plc, a main market-listed supplier of silicon wafers for solar cells. Ian, now to Mark.
Thank you.
I'm just gonna start off by giving you a sort of quick overview of EnSilica before we get onto the results proper. We believe at EnSilica that we would like to be the premier application for specific chip making in Europe. We believe we have got a good foothold in this market already. We've been designing and supplying customized chips for about 20 years now. We've got a global client base, experienced management team, and 130 employees across five locations worldwide. We've addressed four high-growth markets, and those markets are automotive, industrial, healthcare, wearables, and satellite communications. We believe we're positioned to capitalize on the big opportunity for ASICs in the semiconductor space. We're experts in complex mixed-signal chip supply, which is a proven model to scale and has delivered returns in the past.
Right. Thanks, Mark. I'm very pleased to update you on our strong operational progress since IPO in May where we raised just over GBP 6 million. Part of this progress is we've strengthened our global sales pipeline, resulting in building a sales pipeline of over GBP 350 million. We'll provide more details on that later in the presentation. An automotive ASIC we designed is now in volume production with 700,000 chips sold, and 2.7 million chips in our forecast for the next twelve months. We've also expanded the scope of our agreement with our global satellite communications customer. This is a majority-funded NRE and associated royalty income when the constellation is launched.
Building on our previous success in recruiting and integrating design teams, we added a Bristol-based team. Along with the team, we acquired design flow IP used for advanced node system-on-a-chip SoC implementation. Lastly, but not least, we've won a design contract worth over GBP 30 million with a major industrial OEM. Again, I'll cover most of these in more detail later. This is a reflection, you know, our revenue, as you can see from the numbers, our revenue is up and also our operating profits are up and I need to thank our talented team who've worked hard to deliver such positive results. We work under what's commonly called the fabless semiconductor model. In this model, we manage the process from design, manufacturing, packaging, and logistics.
We outsource some of the elements, such as wafer fabrication to companies like TSMC and GlobalFoundries and packaging to companies like ASE in Taiwan. We also have test and qualification partners to support these elements of the work. The fabless model for mixed-signal chip companies is a proven model for growth and profitability and used by companies like Nordic Semiconductor, Dialog, Wolfson, and Cambridge Silicon Radio. The sales cycle usually takes 6-12 months, and that's phases 1-3 here. Phase threee is a funded development of a specification, where we agree the specification of the chip with customer. The first chip is usually available within 12-18 months from the start of the design phase.
Depending on the market, it will take 2-5 years from the design start to full-scale production. It then generates predictable revenue for several years, even decades for some industries. For 15 years, we did purely consultancy, which is steps 1-8 shown here, which is around designing the chip. In 2016, we started to focus on turnkey design and supply, adding steps 9 and 10. We now have all the relevant skills in place, and we have chips in production now. The market for semiconductors was estimated to be $600 billion last year and set to be $1 trillion by the end of the decade, and there's no sign of this abating. Custom chips are used by all leading OEMs to differentiate their products.
These, you know, these OEMs include companies like Siemens, Square, Continental, Apple, Google, Microsoft, to name just but a few using custom chips. EnSilica has expertise and key IP in addressing a number of the highest growth markets in the semiconductor sector, the first being automotive. The automotive market's driven by the growth in the EV and new safety features greatly increasing the semiconductor content of each car. We already have three automotive tier ones as customers, and we have others in the sales pipeline, as you'll see later. The other sector is the industrial sector. It's another key area where the use of semiconductors is going up. This is driven from what you may have heard called industrial IoT or Industry 4.0, the Fourth Industrial Revolution.
Yeah, this requires sensors and AI to improve productivity, efficiency, and safety. We now have one of the world's largest industrial OEMs as a customer. The third market is the healthcare market. This is where you use wearables and patch devices to monitor people. This requires custom semiconductors to get the required battery life and the sensor interfaces. The company has deep knowledge and IP related to vital signs and biosensing. Our sales pipeline has two opportunities with large healthcare device suppliers, and we have developed what's known as an application-specific standard part targeted at vital signs monitoring that is now in the prototype evaluation stage.
The fourth market is the satellite communication market, which is growing massively and now being integrated with the 5G standard. One example of this is the integration of satellite communication into the iPhone 14, where it uses satellite for emergency connectivity. The satellite broadband market is a large consumer of ASICs, and the antennas used in that called phased arrays use hundreds of ASICs. One example of this is the Starlink satellite terminal uses over 640 ASICs. We've developed a chip for satellite terminals partly funded by ESA, and it's currently under evaluation by a number of customers.
All of these markets are high know-how, high growth markets, and EnSilica is well-positioned to take advantage of them. I talked about the sales pipeline earlier. It's really an all-time high, and the demand for chips is increasing. There's a shortage of companies with our level of mixed-signal expertise and RF expertise to deliver them. We have three chips released for production, and we anticipate long-term revenue from these. We also have four chips which are in the design stage, so going back to that flow diagram, that's between stages four and nine. Although it's a snapshot of our sales pipeline, it demonstrates we have strong traction in all of our focus markets.
The opportunities are spread across the segments with the largest opportunities being in the healthcare and communications opportunities with the largest lifetime value. I'll hand over to Matthew to talk through the financial highlights.
Thank you, yeah. As Ian previously highlighted, our turnover has increased by 77% this year, so that's now at GBP 15.3 million, up from GBP 8.6 million in 2021. We make adjustments as exceptionals for IPO costs in 2022 of GBP 700,000 and in 2021, a write-down of impairment on intangible assets of GBP 2 million. After adjusting for those items, our adjusted operating profit is up GBP 900,000 between the years, and our adjusted EBITDA is up GBP 1 million from last year. Under our business model, we capitalize those parts of our development costs which the customer does not cover. In 2022, we capitalized GBP 2.2 million, which was up from GBP 1.7 million the year before.
Ahead of the IPO, we tidied up the intangibles and wrote off the GBP 2 million I've just spoken about in that year so that the intangibles now focus purely on those design and supply chips and ASSP, application-specific standard part projects that we have currently. This leaves capitalized NRE at the end of 2022 at GBP 8.5 million. Looking at our funding initially, before we started to change the design and supply model we're now operating in 2016, we used cash reserves to fund the business. In October 2019, we took an unsecured loan from KBL of GBP 3.4 million, and that is to be repaid by 2027. COVID, like everyone else, hit us, and so we took out a CBILS loan in 2020 for GBP 2.4 million to be repaid by 2026.
The result of that, with our cash of GBP 5.7 million from GBP 6 million of IPO costs, IPO funds and a convertible loan note of just short of GBP 1.4 million, we finished the year with GBP 5.7 million and GBP 600,000 of net cash, compared to GBP 1.4 million of cash last year and GBP 4.7 million of net debt. Looking at the income statement, what was very pleasing this year is to see that our focused strategic design and supply focus has greatly increased and is now more than our consultancy and IP revenue. Legacy income from consultancy and IP grew 26% from GBP 5.78 million to GBP 7.3 million and represents 48% of our turnover rather than two-thirds in the prior year.
Whereas our strategic design and supply NRE and wafers sales is nearly three times as large as it was in 2021 at GBP 8 million. Our gross margins have increased from 24% to 33%. That 9% growth in gross margin has come mainly from being able to accept higher margin projects and increasing utilization of our engineers in 2022. In 2021, we were hit by COVID, and in order to keep our engineers busy and occupied and retain them, we undertook lower margin work. This was reversed in 2022. Going forward, as supply kicks in, we would expect margins to continue to increase. When we look at admin expenses, those have increased in the year as we geared up towards the IPO.
We have now sort of restructured and have a full board, a full-time CFO, more sales, a sales director, and other admin staff. We would not expect to see a similar increase in admin expenses going forward. A key point to note is, in this business, we receive an R&D tax credit each year, and so the tax number is a credit. It is reduced by a deferred tax charge, hence the reason it's lower than the tax credit, which is GBP 1.7 million this year and was GBP 1.1 million last year. I'll move to the balance sheet. Oh, hello. Hello. Okay. No. Sorry about this. We're just losing the screen. The balance sheet. I want to talk about sort of the biggest numbers on our balance sheet.
Intangible assets are our single biggest number. As I said, we capitalize those parts. Sorry, the screen is going very strange. We capitalize those parts where the customer doesn't pay for the NRE. That finished the year at GBP 8.9 million. Sorry, GBP 8.6 million. I hope you're still seeing what
Just to confirm Neil, we're seeing the balance sheet as we stand.
Okay.
All right.
Yeah, we're not, which is slightly freaking me out, so I do apologize for that. As we go down the balance sheet in the sort of the current assets, corporation tax recoverable has dropped from GBP 2.2 million to GBP 1.7 million. That 2.2 was actually two years worth of corporation tax recoverable, 2020 and 2021. Due to the IPO process, we were delayed in submitting our 2020 claim, and cash receipts from both years was received in 2022. Our claim for 2022 of GBP 1.7 million is expected to be received in around December this year, and that's cash from HMRC. Cash, as I have previously spoken about because of the IPO process, was GBP 5.7 million compared to GBP 1.4 million last year.
Borrowings is reducing because they are both loans are on a repayment basis. A key point to note is our deferred tax provision has been reduced because as part of our IPO, we crystallized employee share options. They did very well, and there was a notional gain, and it was a gain to them. Under corporation tax rules, we are allowed to claim an allowable deduction for corporation tax purposes only, so not a loss on our income statement. That created losses, which we will be able to carry forwards of around GBP 12 million, which will stop us having to pay tax for a while in the future.
It allowed us to increase the size of our R&D tax credit reclaim, and to create a deferred tax asset which offsets the deferred tax liability caused by capitalizing intangible assets. Our capital reserves has obviously been shaken up by those options becoming exercised shares and then the IPO. If I then move to the cash flows. Working capital movements in the year of GBP 2.4 million include the reversal of the deferred tax liability of GBP 1.1 million, as well as increased working capital as a result of our greatly increased revenues. The tax receipt in the year includes 2 years' worth of R&D tax credit receipts. Investing activities on here are mainly due to the capitalized development costs.
Financing activities include net cash receipts from the IPO and the GBP 1.4 convertible loan notes, and that's offset by the capital and interest payments on our loans. Overall, this gives us an increase in cash of GBP 4.3 million compared to a decrease of GBP 750K in 2021. When we look at our strategy for growth, it's to leverage the strengths we've gained in our selective high growth markets. Additional capital will allow us to scale the group's successful mixed-signal fabless model to fully exploit market opportunities, and we will look to develop our internally funded application-specific standard parts as a further driver of growth. As well as organic growth, we will look to expand our offering through M&A activities, whether that be acquisition of people, as Ian will talk about in the Blu Wireless case, or other opportunities.
If I now hand back to Ian.
Oh, thanks. I mean, as I mentioned earlier, we've further developed our sales network. This includes recruiting a new VP of sales based in Germany. This is a new appointment for us. Peter was previously working for Renesas Electronics, who were acquired by Dialog Semiconductor. Peter brings many years of experience in running global sales team and has already helped improve the size and quality of our opportunities. Peter appointed two ex-Dialog sales reps, QLS now covering North America, and Cedar Technologies covering the Nordic region. We're already seeing a pipeline of opportunities coming from these new sales rep appointments. This adds to our existing sales reps, Semix, covering Israel, who are strong in RF and satellite communications, and Logic 360, who are UK-based and cover automotive and industrial.
We now have a German entity, EnSilica GmbH, and we've recruited two additional sales and sales support staff in Germany. Germany, as everyone knows, is the heartland of industrial and the automotive sector, and it's important to have people on the ground there. Move on. In July, we announced the award of an ASIC supply contract by one of the leading industrial OEMs. Well, I mean, I should really say the leading industrial OEM. This was a great achievement for EnSilica, firstly obtaining preferred supplier status from this quality-focused OEM, and it's a credit to our operations and engineering team as there's a high barrier to entry for working with this type of customer. This award helps underpin EnSilica's position as a leading European chip supplier.
It's worth $30 million over three years. The NRE element has started already with $several hundred thousand already invoiced. The customer will start taking production parts in our financial year 2024. This is relatively a quick time to revenue, as this product's a derivative product from an existing product which is part of their flagship product range. We expect to see further invitations to bid for ASICs from the customer in the course of next year. Mark. In the past, we've had great success in recruiting and integrating design teams. The first being a team in Oxford in 2016. We recruited a team in Sheffield in 2020 and then a team in Brazil in 2021.
In July this year, we added a team of engineers from a customer called Blu Wireless. Along with the team, we acquired advanced node digital design flow IP from them. The digital content of mixed-signal chips and RF chips are growing, and this team will help us address these types of applications using the smaller technology nodes. We now have an office in Bristol, and we will take advantage of the talent pool in the Silicon Gorge, as they call it. We're also partnering with Blu Wireless to deploy their gigabit communication modem IP used for applications such as 5G backhaul and virtual reality to customers. I'll let Mark.
Just to wind up the presentation before we take some questions, we've obviously had quite a decent financial year 2022, and that underpins our 2023 momentum.
We've got a good order book where we've got some good pipeline opportunities to address, and we believe that also underpins our momentum. We feel that we're well-placed to take account and to capitalize upon the opportunity in the silicon semiconductor industry that we find ourselves addressing at this present time. That's the end of the presentation. We'll now hand back to Paul, and we can get onto the questions.
That's great. Fantastic. Thank you very much indeed, and thank you for the presentation. Ladies and gentlemen, do please continue to submit your questions using the Q&A tab situated just on the top right-hand corner of your screen. Just while the team take a few moments to review those questions submitted today, I'd like to remind you the recording of the presentation, along with a copy of the slides and the published Q&A, can be accessed via your investor dashboard. As you can see, guys, we have had a number of questions submitted throughout today's presentation. Thank you to everyone who submitted those so far. Mark, if I may just ask you to read out the question where appropriate to do so.
Sure
Just ask one other member of the team to answer it, and I'll pick up from you at the end. Thank you.
Okay, the first question is from John W. The question is: Is GaN the future of chips, not silicon? How do you differ from Sondrel?
Okay. I think there's sort of two distinct questions there. I mean, the compound semiconductors, GaNs, GaAs, and other more exotic processes, I mean, they have their place, and they're generally used for high-power, high-frequency applications. I mean, our focus is on CMOS, and I mean, they do say if you can do it in CMOS, you will do it in CMOS because it's a lot cheaper and often a lot less power. They do have their place for particular applications, but you know, not the ones that we're on the whole addressing. You talked about Sondrel. How do we differentiate?
We have things in common. We both started off doing design services roundabout the same time. We're very different as in, they're addressing the digital markets, and we're addressing the mixed-signal markets. As I mentioned before, sort of, you know, the fabless mixed-signal model, it's a proven model, and it's also an area that, you know, requires a lot more IP and knowhow, particularly around designing having design elements you can reuse from one design to another. You'll see that in our, well, as Matthew said, our balance sheet investment over the years has a considerable amount of IP investment that we've made.
The next question is from David S. The question is: How is the supply chain impacting you?
Yeah. Yeah. I mean, we've really just started full-scale production. We've managed to secure the chips that we need from the wafer suppliers and the other assembly capacity. It has been hard work and, you know, you get on wafer allocation, and then you work with the foundries to make sure that the customers have the chips that we need. We are expecting to see that pass and, if anything, there's gonna be some overcapacity in the foundries in the coming years.
Thank you. The next question is from John W. The question is: Is your customer base rather too concentrated presently?
Shall I answer that?
Yes, sir.
I think, you know, we are quite a small company, and our customers are quite big in relation to us at the moment. However, as we win more contracts, gradually that concentration dissipates, and each year we become less reliant on single customers. I'm not saying we're at the end of that challenge yet, but if you look forward two, three years, we expect the business to be far less lumpy and far less reliant on single customers.
The next question is from David S.: What is the size of the forward order book and the visibility? Where do you see margins in the short term?
Can you hear that?
The order book, I think sort of Allenby Capital have just upgraded their note today. Those who don't get it have to ask them for it. It's sort of that's assuming around about the sort of just over GBP 19.5 million mark. The vast majority of that is very visible. There is a small amount that isn't, but a lot of that would be design services type work, the consultancy aspect, which we tend to use to flex our engineers' time when we have extra. We would expect gross margins to increase going forward.
That would be driven partly by supply, where margins will tend to be above 40% for supply and sort of nearer to 100% for royalties. We will continue to make sure our utilization is high and we are taking higher quality work, and that will be aided by having this greater strength in our sales capabilities, so we can pick those customers that deliver that higher margin and where we are able to reuse a lot of our existing IP.
Okay. The next question is from Rob B. I think we've just answered it. The next question says: On the gross margin, can you say what is a sustainable level of margin over the medium term? I think we just answered that, I think.
Yeah.
I'll move on to the next one. Rob B. again. Cost pressures. You have been hiring for growth. Can you talk about employee expense inflation and your ability to hire and retain key skills? Thank you.
Ian, do you want to have a go at that one?
Yeah. I mean, there has been, you know, wage pressure in the market, but I mean, with engineers, you know, I mean, you have to pay them the market-going rate, but also give them interesting work. We've had no problem with employee retention. I mean, we work on some leading-edge projects that keeps our engineers excited, and we have good pay and benefits packages. You know, as I said, you know, we have to be conscious of it, but we don't have any issues in that area.
The next question is also from Rob B. About capacity. You have a very healthy pipeline. If, say, a GBP 50 million order came in, could you and the founder partners ramp up quickly? I think the short answer to that is we've just done that, or we just won a big contract, not quite GBP 50 million, but quite a big contract, and we've been able to take that on. I guess if we took two or three on at the same time, it might be a bit of a struggle.
Yeah. In terms of foundry capacity, I mean, if you're designing it now, it's gonna go production, you know, in 2-5 years' time, so there's no problem booking that foundry capacity given they're adding additional amounts. In terms of it, you know, in terms of engineering capacity, it's, you know, it's always a good problem to have for recruiting more engineers.
Thank you very much.
Okay.
You've kind of covered off all the questions we've had through, Mark, and thank you very much indeed for that. Of course, any further questions do come through, the team will have the ability to review those, and we'll publish all responses where appropriate to do so on the Investor Meet Company platform. Ian, perhaps if I may, just before redirecting investors to provide their feedback, which I know is particularly important to you, if I could just ask you for a few closing comments, please.
Can I just say something before we do? I think Ian misspoke during one of the bits about the big contract we won, and he said it was a $30 million order over three years. I think you meant seven years.
Seven years.
Okay. Just wanted to.
I said we've had strong performance in year 2022, and you know, it's underpinned the momentum for 2023. You know, we're very pleased we've successfully delivered ahead of market expectations and, you know, we're really looking forward to 2023. As you've seen, there's lots of market opportunities. You know, semiconductors is really now counted as a critical industry and the use of semiconductors is really not abating. I think there's a great opportunity for EnSilica with our markets we're addressing and our high level of know-how and traction in those markets.
We've just had another question. This is from John W. Is Silicon reaching the end of the road as to what's possible? Ian?
I mean, silicon always moves forward. I mean, we're, it's currently, you know, at 3 nanometers. I mean, most of our designs are actually using mature technology, so we're able to address most silicon applications using mature technology. I mean, I think that sort of question obviously pushes, you know, latest AI engines and latest processors going into mobile phones and computing but really doesn't affect us to that extent.
That's fantastic.
Okay, thank you.
Thank you very much for taking that last question.
All right.
Of course, if any further questions do come through, we'll be able to pick those up as well. Ian, look, thank you very much indeed for wrapping up. Mark Matthews-
All right.
Well, thank you for today's presentation.
Thank you.
Thank you.
Please ask investors not to close the session, which will be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This will only take a few moments to complete, and I'm sure will be greatly valued by the company. On behalf of the management team of EnSilica plc, we'd like to thank you for attending today's presentation. That concludes today's session. Thank you, and good afternoon to you all.