Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome, and thank you for joining the Asetek Q1 2022 earnings call. Throughout today's presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. If you would like to ask a question, you may press star followed by 1 on your touch-tone telephone. Press the star key followed by zero for operator assistance. I would now like to turn the conference over to Peter Madsen. Please go ahead.
Perfect. Thank you, operator. To the audience, welcome to this Q1 2022 Asetek earnings call. My name is Peter Madsen. I'm the CFO, and I have on my side here André Sloth Eriksen, who is our CEO and founder. Hello, André.
Hello.
For this week, we are being visited by our COO, John Hamill, who is also in the room here. Hi, John.
Hi. How you doing?
Perfect. The way we will do this earnings call as usual is that we will go through the presentation which our board just met a few hours ago and approved, and we launched the numbers also a couple of hours ago via the website and the new services. We go through the presentation. There will be a Q&A session afterwards where you can either follow the instructions by the operator or you can type in your questions as you go on the application that you're following the website on.
With that, operator, please, forward 2 slides to the highlight session, and then over to you, André.
Yes. Good afternoon, everyone. Just on a practical note, I have been sick the last 2, 3 days, and I actually still am. If I start to cough or something like that, then please bear with me. I'll try to pull it through. Some headlines from the quarter. Q1 revenue of $14 million compared to $25 million last year. Gr r oss margin of 38% compared to 43%. SimSports orders and backlog of roughly $1.5 million by right now, essentially end of April, where we started shipments in March and the additional products to come still. We maintain our 2022 outlook basically because we don't know better.
We don't have a better guess right now or a better estimate given the situation out there, so we have chosen to stick with what we know. Please change the slide. If we look at the revenue and the margin, I think there's no big surprise. When revenue is high, earnings are high, and when revenues are not so high, the earnings are also not so high. I don't think there's anything surprising in that. Please go to the next slide. If we just rewind the tape a little bit, when we gave our 2022 growth expectations, we felt they were conservative based on what we knew at the time, and they may still be or they may not. It's simply impossible to tell.
What we can say is from the company side, there's hardly nothing that we are not hit by right now of what's going on out there. Of course, we are seeing the shutdowns, the power outages. Going back a little bit in the quarter to the Winter Olympics, of course the COVID impact, of course logistics, supply chain, shipping, you name it. Of course, we are hit by all of that and then some. So that's how the world looks right now, and we are trying to navigate the best we can. From an industry perspective, not specific to Asetek, of course the supply chain challenges is a big concern for our customers and the same with the rise in components and not the least just the ability to get the components. We
That we and they are of course seeing the shortage of semiconductors. We see that GPUs, CPUs, hard drives, everything is affecting the PC market. Of course, the U.S. tariffs and the added increasing logistics cost is a big concern. I'm sure Maersk is happy about it. We are not so happy. In terms of the outlook, what we can see right now is that the volatility seems to continue. I don't have any crystal ball that the rest of you do not. I probably see the same as you. Of course, structurally, our 15% growth target year-over-year has of course not changed in the long run.
I believe everything we see right now is temporary, so there's no structural change in that. Of course, we are uncertain as to when things will normalize, and that's the world we live in. From our side, what we try to do, of course, is to continuously focus on strengthening our supply chain capacity and capabilities as well in terms of sourcing, getting the right parts, getting the right part booked, getting them shipped and all that stuff. We have of course also adjusted our prices along the way.
It's always difficult, not just to increase prices, but it's also, as the world is right now, when you think you have adjusted your price to cover for something, then you wake up next morning, and then everything just went up once again. It's a difficult situation, especially with the, what you call it, inertia we have in the system. Keep in mind our OEM customers. Some of them are building inventory, months ahead. If we change the price today, it will not have effect until three months. How does the world look in three months? It's complicated. We do expect major launches from both NVIDIA, AMD, and Intel in the second half, so it'll be interesting to see if that'll be paper tigers or there will actually be products out there.
How the inflation is impacting end users, difficult to say right now. One positive note is that, if you want to turn something negative into something positive, the positive of the shipping rates is that they are so high that it makes sense to assemble our stuff in Denmark, which means that, we don't have to pay a U.S. tariff, on the SimSports products. Please change the slide. Starting with SimSports, I think it's more or less 17 months ago, I said that we're going to enter the SimSports market, and here we are. Or from the time of shipping, 17 months later we were shipping. It has been a very positive launch. I can say that now.
We have gotten extremely strong feedback, both from sim racers, reviewers, press, influencers, and by the hour right now, end user feedback is ticking in as well, and it's actually something I'm proud about. It has been even more positive than I had hoped, especially in the situation we are in, because we have the same challenges on the SimSports side with components and getting stuff to the factory and getting it at the right cost. As it looks right now, we have orders and backlog of roughly $1.5 million year right now, and that's of course thousands of pedal sets.
There is a risk, at least on paper, and I want to mention it because we have taken the stance as a company, and I think it's also legal, by the way, in Denmark, that we do not charge people's credit cards until we actually ship. So when we have, let's say, 1,000 pre-orders, there is of course, a conversion rate or the risk of people dropping off. It's not a lot we have seen, but I just want to mention it. On the flip side, we have new products in the pipeline that indicates more will come also in this quarter. I'll get back to that. Please change the slide. Yeah, you can change it again. Thanks. I don't want to spend a lot of time on this slide.
I do it more or less systematically every time, so I think I'll skip it this time other than just noting that in the right hand corner you can see we now have a spot in Malaysia where we are working on outsourcing some of our manufacturing. If everything goes well, I think in Q3 this year we will be able to manufacture in Malaysia and thereby avoid some of the U.S. tariffs. Please change the slide. One more. Looking at the product release activity, I think the headline of that, representing our customers, it will be uncertainty. We have or we had four new products that started shipping in the Q1 . 1 new customer, including 2 new coolers for graphics cards.
We have 11 new products estimated to start the shipping in this quarter. However, we can see the OEMs and the customers. They continue to assess the timing of the new products. It's of course because of shortages on their end, the logistics and the cost associated with the logistics. There's not much we can do other than observe and listen. It's just how it is. That is, of course, the SimSports business is really small, but that is one of the advantages we have in that business that we don't have here. We can, if we want, go and sell stuff to end users. We can do campaigns.
We can do marketing, where on the OEM side it's not so easy. We can do the development together with the customer.
They make a plan, and if they change the plan, all we can do is pretty much take a note of it. That's one of the uncertainties. We of course continue our investment in product development and in branding towards key customers. You know that again, there's no structural change here, so we keep doing what we always do and then wait for the market to pick up. Please change the slide. We are currently shipping to more than 20 OEM customers, and as usual, I will say, top five represent most of the sales.
That of course also means that if 1 customer is not performing, then it hits us hard. As you can see to the far right, there is actually a quite substantial shift in the distribution between the individual customer.
Of course, as always, our ambition is to increase the number of customers over time. Please change the slide. Looking into a top-down view on the G&E business, not much have changed. We work on the branding. We work on growing new customers, widening the OEM base, product development, exciting new technologies, bringing them to market. That's the same story as always, I would say. We focus on delivering what we are good at. We are trying to ramp it up.
We are trying to drive out cost. We want to be the performance leader. We have branding agreements in place with several OEMs. We connect with the gamers. We do everything as, let's say, as we used to do and more of the same.
We believe at the end of the day, it will come back. Next slide. One more. On the SimSports business, which of course is to a large extent the same type of end users, it's gamers, our product rollout is progressing to plan. We released our Invicta pedals, as you have probably seen and heard, and it's the Invicta pedals that I just gave you the numbers for. We have just opened the pre-orders for our next tier pedals called Forte, which is a mechanical brake cylinder system. If everything goes well, if we can get the components, we will actually start shipping those in this quarter.
That's what we plan for. On top of that, we are expanding our line of accessories, pedal plates.
As you can see on the picture here, we have also designed our own racing boots for sim racing. Just to give you a flavor of the challenges that we are facing, that's 110 days of delivery time. Even though the boots are done and dusted, I have the golden sample here next to me, it'll be 110 days before we can get them. That just shows you a little bit about why the supply situation is as critical as it is. Next slide, please.
In terms of a full ecosystem, which is our ambition for sure, things are also more or less on track.
When I say more or less, it's because I know that we could have been out faster if we did not have the supply situation on chips and semiconductors. We are hanging in there, and we have done the exclusive agreement with what we believe is the leading manufacturer of servo motors for sim use. Our wheelbases are well on the way. We are testing them right now. We are in tooling. They are up and running with our own IP, our own software, and we are still planning to launch them later this year.
For sure, that will make 2023 really exciting because then not only do we have the pedals, then we also have the steering wheel and the wheelbase.
At least we have, let's say, half of what a full ecosystem requires. On the marketing side, I hope to be able to announce soon campaigns within both Formula 1 and GT3. Doesn't make sense to spend millions and millions on product development if we don't tell the world about what we are doing. We have some interesting news coming within the racing world.
As I've said earlier, our product development is really founded on the deep experience we have in mechatronics in Asetek. I know the numbers are not what any of us hope right now. I think there are very good explanations for that.
I also think if you think about it, that in 17 months from having a vision to launching a product that's already recognized as being market leading, I think, that's something I'm very proud about. I'm proud about the team, that they've been able to pull that off. We could not have done that had it not been for the liquid cooling business. I think one of the things where we saw this right was that our existing capabilities within the organization could be used for other applications, and I think this is really the prime example of that. Next slide.
Looking a little bit more strategic on the SimSports, I almost already said it, the goal of course is to become the leader in this market space as well by leveraging what we already are good at. Of course, it's new to us to sell directly to end users, and of course, it's new to us to be actually a branded company, but I think that's going pretty well. I think it's a strong market opportunity. Of course, it's also affected by everything that's true for other gaming businesses. But so far so good. We keep focusing on innovation, bringing new and different products to market than what our competitors have, bringing real value.
You know, some of the customer feedback we have gotten, which is, I think, the greatest you can achieve. One thing is you can talk about quality, and you can talk about price, and you can talk about industrial design. You know, we went to market with a radically different braking system than anyone else out there, and that was a big bet. We believed it was the right bet because we wanted to recreate the sensation of a real race car. Some of the customer feedback we now get is really that, after getting our pedals, people drive faster. As this is like in any other game or any other race, it's about winning. If our customers can drive faster, we are really giving them substantial value.
By the way, we have an Asetek SimSports community group at Facebook that you can join if you want to see some of these end user comments for yourself. Feel welcome to do that. We are, of course, building on the channel strategies. We have a lot of different companies and resellers and distributors and what have you come to us, and of course, we are also chasing some ourselves. It's typical, you know, electronic outlets to specialist shops, to motorsport shops. Right now we are still, you know, working on it as we go. There's no stress because we sell direct on our website, so it's pretty easy to try out different things.
The challenge for us, of course, is we want to have the best products, but we also want to have the best price, not necessarily the lowest price, but we want to have the best price. Some of the competitors we are dealing with or fighting with, they don't have resellers. They only sell direct. For us to make margins, good margins, I would say, and to make sure the customer gets the right price and make sure to have room for a retail outlet as well, is not an easy task, but I think we can manage. That's of course a huge competitive edge for us. Yeah. Next slide.
On the data center side, you would think that with the gas situation we have in Europe, that there would be much more focus on reusing waste heat and things like that. I would say that we are doing as usual. I have meetings with some politicians here at Asetek next week also. I would say in general, the interest has not sparked by what's going on in the world. We keep doing what we do, and that is to work on the European side of things. There's not really a lot of new things to report.
One thing I can say is that I have heard the news that there is a citizen in Denmark that is going to, I'm not sure how to translate it, but as a citizen in Denmark, you can come up with a proposal, and if you get 50,000 votes, then the parliament actually have to consider it. I know that this proposal will be launched within the next few days or weeks. We will of course link to it on our Facebook page. It has nothing to do with Asetek officially, but at least if you're located in Denmark, I can only encourage you to go and support this and hopefully we can force the Danish politicians to at least tell us why if they are not interested. Yeah.
Please, change the slide to the financials. One more. Thank you. I'll hand over to you, Peter. Thank you, sir. Please change the slide once more, operator. Thank you. Starting from the top line on the P&L, a soft quarter, 44% down compared to the same quarter last year. A $14 million top line as André mentioned. However, keep in mind that Q1 is always a low quarter compared to the Q4 that we come out of. It's always been the case.
Even the $25 million last year, it was a lower quarter than the Q4 behind it. Still it is a soft quarter and there's no reason to hide that. We sold 211,000 units in Q4. That's a reduction of 40%-49% compared to last year's.
Gross margins, I'm coming back to. Total operating expenses on the surface, it looks nice. It's on level with last year, and it is nice. It's a shift from data center expenses over to SimSports expenses. That's what's being reflected here. We've been helped by the Danish krone being a little cheaper compared to US dollars compared to last year. That's given us $100,000, I believe on the profit and loss here. We also see the effect that because the SimSports launch has been as positive as it has and the business case have been validated, that means that we need to capitalize a higher amount of R&D cost. Of course, that also helps us on the P&L side for the operating expenses for this quarter.
That'll be the case also for the coming quarter. Then we'll start seeing as we start selling the SimSports product, then we'll start seeing how those capitalized expenses are being written off. But of course, that comes with revenue and earnings also. Next slide, please. On margins at 38.2% versus 43% last year. A reduction, yes, and lower than the stated minimum goal of 40%, yes. Keep in mind though, that with lower revenues almost always comes lower margins also. Our logistics cost, our quality cost, our inventory adjustments, et cetera, even though they're qualified and classified as variable, then they tend to be fairly fixed, and that means that when the revenue is lower, then also the margin goes low.
We still believe that the gross margin should be over 40% as such for the year. We do see, I can just as well repeat it as from André, we do see higher increased shipping costs and we do see higher cost of goods also. I think our raw cost of goods was adjusted upwards due to a Forex exchange here in January. We aim at above the 40% marker. Next slide, please. Balance sheet. The big thing here is that our cash position has gone from around $25 million, that neighborhood to $13 million, I believe. Of course, that's a big amount. We are still fairly cash rich, I would say.
The reason for this reduction here is that our accounts payables have been reduced in Q1. If you look back at it, then you will see that our accounts payables have been very high for the last few quarters, even though the revenue has been at a lower level. That has caught up with us at this point where we had to pay down the accounts payables to a more normal amount. That also means that the accounts payable days have been reduced from, I think, 150 to 112 or something like that. It's quite an impact, but it's a one-off. Apart from that, we have low interest-bearing debt. As always, we still have the flexibility that we need.
From that structural point of view, there's no changes. Change the slide, please. The financial strategy, not so much. No structural changes in that since last quarter and the last many quarters, I would say. We are more operationally focused these days where we're seeing the troubles around the world. That also impacts us here in finance. We've been working diligently on getting our new SimSports business up and running. It's a totally new business for us, and that also means that operationally there are some quite a lot of tasks to be dealt with, and that's what we are busy on. With that, André, back to you. Next slide, please.
Yes, one thing I failed to mention, but I think is worth mentioning, is if we look at the quarter and the revenue of the quarter, I would say there is 1 customer that's probably representing 60%-80% of our revenue miss. You can read a lot into that if you want to, and interpret it in many ways. The way I read it is that in general terms, the business is not so bad. When 1 customer is failing and we have, remember top five accounting for 80% of our revenue, then we hurt big time.
I would say the miss we have this quarter, I would say that it's it's related to all the issues already described, but it's on 1 customer side more than others.
I don't want to mention who it is or the type, but I think that's worth taking into consideration at least. That's also why we are not shaking hands, and that's also why we keep our long-term ambition because we don't see customers abandoning us. I think it's fairly easy to understand that if you make a living out of selling PCs and you cannot get the other parts in the PC, then of course, what should you use a liquid cooler for? I think that's easy to understand.
Our 2022 growth expectation, I will put it plainly and honestly. My focus right now is to drive a profitable business, and then it will end up as it will end up.
There is not much we can control right now, but we try to control what we can control. One of them is that I'm not happy with a quarter that's into the negative numbers, and that's my focus. I don't like that. That's where we are mentally. In terms of what levers we can pull, we cannot really pull any levers on the OEM side. It's not a price game. It's not a competition game. It's a reflection of the world out there. What we can do, at least, is on the SimSports side, push as hard as we can, because as long as we have products and the ability to sell there, then of course. Of course, it's a brand new business.
It cannot make up for our big, 20-year-old liquid cooling business.
For sure, a dollar on the bottom line is a dollar on the bottom line. Of course, we are pushing full force ahead there. Same with development. We are really pushing. I think that's what we're going to say for now. Have a Q&A. Please change the slide, operator. Then we will do the Q&A. We'll start out with oral questions via the phone, but I can see that the web app is also working. There's a couple of questions there. We'll address them afterwards, and feel free to type in any questions as you see. Operator, if you could go through the oral session.
Ladies and gentlemen, at this time we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by 1 on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star followed by 2. One moment for the first question, please. The first question is from Mr. Xu from SEB. Please go ahead.
Hi, André and Peter. Thank you for taking my question. I have 3 questions here. Firstly, Rick, you have mentioned you have adjusted price for the G&E products. Is it possible for you to give us an indication on what the ASP level or it was in Q1? I'll do one question at a time.
I'm sorry. I did not really understand the question.
The average selling price for the G&E segment-
Yeah
In Q1. Is it possible to indicate?
It's in a way it's completely stable compared to Q4.
Okay.
Yeah
Okay. Great. My 2nd question is on the operating expenses. Looking back over the last 2 years, you had booked some legal costs. Is it possible to give us an indication on the legal costs for this year, for 2022?
Not in total, that's too early. There's been some actions or whatever the term should be in Q1, which means that Q1 has been actually not on the higher side, but on the average of last year, which was a high year.
If you compare to last year, which was $4.7 million, could you give us some sort of a sense, should we looking lower at this level?
André, do we want to comment on the litigation level this year?
Very briefly here, I can say that I expect it to be lower, and we were building up to a lawsuit, but then the court. I don't know how it works in Europe, but in the US at least, and that's where we have the lawsuit. The way it works is if you run a patent case, it has to kind of get out of the way if there's a civil case that's more important, and that's exactly what happened. We should have been in court here essentially now, I think, but the court case got postponed because of a more important civil case.
Because of that, I expect the burn rate to go down this year. That's pretty much all I can say.
Okay, great. Great. Thanks. My last question is on the revenue side. $14 million revenue for Q1, is it possible to break down to the division level?
No. We are staying away from that, this, at this point.
Okay. Fair enough. Thanks. I'll jump back to the queue.
Sure. Thank you.
As a reminder, if you wish to ask a question, please press star followed by one.
That's fine, operator. We'll take it from here. That's the usual level of all questions. We'll change to the questions that come in via the web here. The first one, André. I know you forgot your glasses today. Can you read the question?
Yeah. It's actually the other way around. I cannot see things so small.
Okay.
You did expect some final orders from the HPC, data center customers. Do you still think they will place final orders? Yes. They are, and they have been, and they will continue to do so throughout the year. Yeah.
Changing gear totally, there's a question on our tax situation, and I take that as a more general question. By the words tax situation, I'm sure the person here is alluding to the fact that we are, as a company, considered a tax citizen, tax subject of both United States and Denmark. That happened because the company in 2012 moved back from U.S. to Denmark, where it was originally founded many years ago. At that point, the Americans had decided unilaterally that that would be considered a tax move to a tax haven kind of country, and situation.
They decided that unilaterally. That we are challenging because there's a tax treaty between the 2 countries saying that you should only be taxed one place.
That sounds like the fair approach. We are working on that situation, but it is a really slow process. We have requested the Danish tax authorities to take up the matter with the U.S. tax authorities, and that's a slow process, and it's a process that happens behind the curtains. They make deals, so to speak, with each other, and we are sorry to say a small piece of that puzzle. It's slow. We are hoping for a situation where we can be a part of a deal. That has not come yet.
We are hoping to hear more, aiming to hear more later this year. The asker here is asking about legal cost, other cost.
There is no legal cost and no other cost related to this. The situation only, if I may use that word a little liberally, pertains to Asetek A/S, the parent company, when we pay out dividends to our shareholders. It's not an operational situation that impacts us. That was a long explanation. John or André, revenue miss, can you add some colors there?
No. We are not doing quarterly guidance, so I don't want to go into that.
Very good. There's a question about the one customer who caused the miss. Is it a postponement of orders? Will they come back? Blah, blah.
It's impossible to say. In the world we're living in right now, it's not like people are buying a computer one day and then 6 months later it has still not arrived. We cannot say.
Sure. Operationally, are you negatively impacted by the recent lockdowns in China?
Yes.
Yeah. Very much so.
Heavily.
That was a simple question and a simple answer. Again, you mentioned that one of your biggest customers within G&E had a 68% miss. Do you see that is a one-off or is it and/or will the customer come back to the normal volume amount in short to medium term? That's, I suppose, that's the same answer like before.
Keep in mind that it would be the same as asking me if Danfoss would come back to their normal business in case it was not.
Sure.
We have no way of telling. What I can say, what we have done on our side is that in our internal forecast, which is of course separate from the guidance, we have cut it down heavily just to be on the conservative side, meaning that from our perspective, for us to meet our guidance, we would have to rely on others. If everything came back, it would be a bonus.
Sure. There's no structural changes anywhere saying that they should not come back.
No, but I think everybody in this call understands what's going on out in the world now. If not, then please watch the news. You know, we cannot speak on behalf of our customers. We don't know why they are not shipping. We don't know why they cannot cope with the shipping prices. I mean, it's impossible.
Yeah.
Yeah.
It's a frustrating situation indeed. Going to the SimSports business, remind us how big is the TAM, total addressable market, for your sim racing business if the product range is completed?
We don't know what it is. What we do know is we have one competitor that is around EUR 100 million, and then our earlier assessment have been that the sum of the rest is the same. It's important to say that this does not include Logitech and Thrustmaster level of products, because that's not where we want to play.
Very good. Changing gear again. I assume you're using boat for shipping components today. Have you looked into flight transport for the key components that are missing?
Yes, of course. We are looking into everything that can move.
We are not only using boat shipping today.
No, we are using everything.
It's the mix that we can actually get our hands on.
After the war, unfortunately, train is no longer an option either.
Mm
because it goes through Russia, but we also use that.
Yeah.
There is one more.
Oopsie-doopsie. Can you read that? Will there still be a third pedal option, or is the Forte the lowest grade?
No, there will be a 3rd line as well. We have of course focused on the highest end first and then the mid one. I can't really say when it will happen, but it will not be anytime soon because the focus right now is on completing the full, more or less full, let's say, product program to have an ecosystem. Next in line is the steering wheels and the wheel bases, and then after that, it's the rig and the seats and that stuff. But I think one important thing is, pricing is not carved in stone yet on the Forte, but as it looks right now, it will ship at $499.
If you compare that to the competition, it's a pretty aggressive price.
That concluded the questions. One comment from me, we have changed the reporting format this time, that was decided late last year at some point, so we don't re-release a full-blown financial report at the end of Q1 and at the end of Q3. However, keep in mind that we have on our website there is a database of financial data that you can download and model with. If you, being a professional investor, feel there's something number-wise that we need to develop more on, then feel free to send me your suggestions. We will evaluate and develop that online tool to some extent that we are comfortable.
With that, we are closing down this earnings call. Thank you for your interest in Asetek.
Thank you.