Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today Asetek Q1 2020 Presentation. At this time, all participants are on listen-only mode. Meeting will be followed by a question and answer session, at which time, if you wish to ask your question, please press star and one on your telephone. I'd also advise your presentation is being recorded today on Wednesday, the 22nd of April, 2020. I would now like to hand everything over to your host today, Peter Madsen. Please go ahead.
Thank you. Good morning, everybody, and welcome to this presentation of the Q1 2020 Asetek results. Our board met a few hours ago and approved the presentation and the report, and the report was made public one hour ago. I'm Peter Madsen, I'm the CFO, and I have with me here André Sloth Eriksen, who's our founder and CEO. Good morning, André.
Morning.
Very good. Today, by the way, is also the day of our Annual General Meeting. We'll start in 1 hour and 30 minutes, and you all welcome to dial in and listen if you so desire. There's a phone number and a web link on our website. When we're done with the presentation here, then I'll hand the word back to the operator for our Q&A session, and she will help us with that. Otherwise, you're also very welcome to post your questions in the app that you are presumably looking at right now. With that, André, the floor is yours.
Yes. Thank you. Let's dive right into the highlights for the quarter. A revenue of $9.1 million, a decrease of 18% from the same quarter last year. Don't read too much into that. I will come back to that. Gross margins increased to 49% from 43% in Q1. Basically, as we have alluded to earlier, it's driven by higher data center prices and our business model transition in G&E, and obviously a stronger U.S. dollar also. We had an adjusted EBITDA of $0.2 million compared to $0.3 million in Q1 2019, more or less the same. Our cash position increased to $26.2 million at the end of Q1 from $24.5 million at the end of 2019. In terms of Corona, we've not really seen any substantial supply chain or operational impact.
In the middle of the quarter, in the early of the quarter, Q1 that is, there was obviously a lockdown in China and our Chinese employees were forced to stay home. Q1 is affected a little bit by that but other than that, we've not really seen anything yet. As such, we maintain our group expectations for the year. Also, we are initiating a share buyback program launch to offset the stock options that we are granting. Talking a little bit about the COVID-19 situation. Obviously, we are prioritizing the health and the safety of our employees. We have really used a lot of home officing lately. Here in Denmark, though, we are basically more or less back, all of us. We obviously use social distancing, including in our manufacturing and on our manufacturing lines.
Well, needless to say, there are travel restrictions both in the company but also on government levels, so that speaks more or less for itself. I would say that our group functions are fully operational. I would say in terms of communication and execution in the company, we have not really seen anything going down compared to where it used to be. I really think and believe it's because, despite being a small company, we are spread all over the globe. We are used to communicating, and we are used to working this way. A good job to our team, I would say. If we look at our supply chain and operations, if we look at the external manufacturers or contract manufacturers, I would say that we have had a limited impact on our abilities to meet our customer demand so far.
As I said before in the beginning that in Q1, we had a few orders that were delayed because essentially the whole of China was on forced holiday. Roughly, a little bit more than half a million dollars is moved into Q2. That's a little bit of the explanation about the decline in revenue in Q1. We see definitely the situation in China improve, and they are and we are slowly reopening. I expect that we'll be back on full steam at the end of this quarter. We have seen some component shortages, but not something severe yet. Of course, we don't want to be overconfident. We don't know what we don't know. Like the rest of you, we cannot predict the future. All I can say is that so far so good, and so far we have not really seen a big impact.
At Asetek, basically in Denmark also, as I said, we are basically fully operational and back to where we used to be, I would say. We are constantly looking at the scenarios and how the business is evolving and how the market is evolving. Far, we've not laid off any people, so there's not been any adjustments, and we have no plans to that effect. What we have done, though, is we have said that this year, there will be no salary increases in the company, and that's company-wide. I think, number one, that's a good signal. Number two, I think it's also important to keep our cost base in check because things are uncertain. We still have money in our bank account, as you will know, but still, I think it's a good measure.
In terms of the market, we are still seeing positive signals from Gaming & Enthusiast OEMs. the purchasing pattern are pretty much in line with what we had expected. In terms of the data center, as you'll see a little bit later, we think the pipeline looks healthy, but of course, due to the lockdown in various places on the planet, it's really difficult to predict what's going to happen. Yes, as I said early on, we have a strong financial position. We're not going to go out of business anytime soon, no matter what's going to happen. Of course, it's not a sleeping pillow, but in these uncertain times, it's nice to know that we have a strong cash position. If we look at the year so far, we have Q1 under our belt, and we are on our way into mid-Q2.
As I said, we have a few special components that's been affected. However, it's not been critical in the sense that we've still been able to supply. We are seeing some of our customers having problems with some of their components, that could be a ripple effect down to us, that if our customers cannot supply. Let me give you an example. If a PC builder cannot get a memory stick, then of course he doesn't need liquid cooling because then he cannot ship his PC. That's the ripple effect. Again, it seems to be manageable right Gaming & Enthusiast demand looks good. People are gaming. People are having fun at home when they can't work. They are building and tinkering with their computers. We are seeing positive signals from the OEMs.
That being said, our visibility is as it always is. We can look a few weeks out, and that's it. In the data center side, we are seeing increased activity, more projects, so specifically HPC, but I'll get back to that. More projects are getting tender. However, it is uncertain how many will move to final award this year because of the COVID-19 situation. At least so far it looks good. Of course, it also means we have limited visibility for the second half of the year. What we can say, though, is that historically, the second half of the year is typically 10%-20% stronger than the first half of the year. Of course, in these times, the uncertainty is a little bit more, but yeah, it looks good. The net of this is that we maintain our guidance for the year.
As you may remember, and as I have said earlier, we have stopped doing quarterly guidance. First of all, we cannot predict what's going to happen. We know that our quarters are always fluctuating a lot, and as such, we have basically turned over to full year guidance. Our full year guidance this year is a decline of between 5% and 10% compared to 2019. Considering the current macroeconomic developments, our business model transition that I'll get back to, and reduced demand from one big OEM customer, that's how we landed on this. Of course, the uncertainty related to COVID-19 just makes things even more insecure. Net-net, we expect a positive income year. I think if we can get out of this year meeting our guidance being profitable, I think we've done pretty good, actually.
If we look at the long-term drivers, and I think that's important to remind ourselves right now, new hardware is Gaming & Enthusiasts, that market is still strong. As I said earlier, right now, we are definitely not seeing a demand problem. It's more a supply problem, if anything. The need for more sustainable data center solutions is definitely also there. Long-term drivers are the same. If we look at our business overview here, as you can Gaming & Enthusiasts, 95% of sales, data center, roughly 5% of sales. That's what we've said more or less for a long time, but it is fluctuating, and these numbers are also not representative for Q1. As such, we have also stopped guiding on segment level. Sorry, reporting and guiding on segment level.
When the data center market takes off and we have a meaningful business, we will of course, get back to it. For now, the lion's share of our sales Gaming & Enthusiasts, and to a lesser extent, the data center. As you saw this morning, probably, we just had a data center award. Of course, we'll keep sending releases when we get the sign wins, but it doesn't really make sense to report on it. If we look at the past, Q1 basically reflects the high market volatility that we are seeing. As you also know already, our business model transition, the fact that we pushed over 600,000 of orders from Q1 to Q2 basically explains why the quarter is lower.
There's no really drama behind the numbers. Looking Gaming & Enthusiasts market, we are currently shipping to more than 20 OEMs right now. Top five represent 81% Gaming & Enthusiast revenue in 2019, that's a decrease from 85% in 2018. Why is this important? Well, it's obviously important because we are focusing on not having or having too much customer concentration. As you can see on the bars at the right of the slide, we are actually quite successful in that. Let's put it like this, some of it is a volunteer effort and something is we are forced to by especially this one big customer. I'm actually quite happy and quite proud that we've been able to mitigate it as strongly as we have.
If you're in doubt about what I'm talking about, I think most companies, if they lose their number one customer, representing 60% or 70% of the revenue, and we are still going as we are, I think that's pretty damn good. We launched the highest performance and the most advanced liquid cooling to date, with NZXT. We're very excited about that, and we're very excited to see how it's going to go in the market. In terms of our branding effort, I don't know how closely you are following us or you are following the market. It's not something that we are doing a lot of, let's say, investor marketing towards, but definitely in the market, it's going pretty good with our branding efforts. We have done a lot with Alienware and different press sites. Right now, I think we have co-branding agreements in place with seven OEMs.
We are connecting Gaming & Enthusiasts via our CoolNation forum. We are really trying to position ourselves to monetize on our brand going forward. Talking a little bit about the data center market. In February, we began delivering waste heat from our in-house data center to the district network in Aalborg. That was, in my opinion, quite a big milestone because there are a lot of skeptics out there. There are a lot of people and companies who are trying to invent stories of why this cannot be done. Now we are doing it. We are selling hot water, basically. It's working really well, and there's been a lot of interest in it. We see a lot of interest from political side. We see a lot of interest from data centers across Europe, specifically.
Unfortunately, due to the Coronavirus, a lot of meetings have been postponed, and a lot of meetings have been canceled. Nevertheless, the global sustainability agenda obviously tightens in. Because of COVID-19, I think it's taking a backseat position right now, but as soon as we get to more normal conditions, it's definitely going to be right there immediately. In terms of market adoption, I think it's unchanged. We still need to do our political effort, and if you're wondering, well, how does that make sense when we just announced an order? The way I look at the market is HPC, so high performance computing, is obviously a data center. For us to be hugely successful, we need to get into the environmental agenda, not just HPC, where it's about high performance and density.
Speaking of which, if we look at the HPC market, as you know, we landed a big OEM recently, and that is actually progressing nicely. Of course, this specific OEM is also in lockdown, and their employees are working at least partly from home. What I wanted to convey is that it's definitely not standing still. It's moving ahead as planned. As most of you know, we launched an order last night and published it last night. We launched an order in January for another HPC, and as I alluded to earlier, we do see an increased pipeline of potential projects. That's really nice. Personally, I hope we will see a lot of final awards this year, but there is a chance that it will be moved out because of the situation. Again, so far so good. With that said, I will leave the work to Peter for a moment.
Yep. Thank you. I will start off with the income statement. As André said, we ceased reporting on the segment. Just about 5% revenue from the data center segment made a lot of confusion, I would say, a lot of focus on the data center segment that was not really warranted. We combined the segments into one big revenue stream. It also gave a lot of information to competitors and others, which were not business-wise beneficial. We see quite a significant improvement here in reporting. Revenue is $9.1 million versus $11.1 million the year before. That's 18% down. André alluded to the reasons. We have a business model change. We have the COVID situation where we push out some revenue to Q2, and then we have all the normal fluctuations going up and down in various quarters.
Our average sales Gaming & Enthusiast, the business line decreased slightly. That's this business model transition starting to kick in. The gross margins were up at 49% versus 43% last year. There's a number of reasons behind that. I'll come to that on the next slide. Our operating expenses are down by 6%, and one could ask if it's COVID-19 related, and yes, we have had a little bit of less travel here in March and stuff like that, but it's not that driving the whole thing. It's primarily the U.S. dollar versus Danish krone foreign exchange rates, where the krone has been 3% cheaper this year than it was the year before. Then also there is a mix of input from a lower amortization and capitalized development cost.
All in all, that ends at an operating income of $920,000, which is pretty much the same amount the year before, where it was a - $1 million. Income before tax is a - $700,000, which is also pretty much the same last year, -$814,000. All in all, income per share of -$0.03 per share versus $0.03 per share last year also. Changing focus a little bit to the margin development, we've seen quite an increase in margins up to 49.3% versus 42.7% last year, and it comes from all the business lines or product lines, especially, though, the data center Gaming & Enthusiast side, we see, as I said before, an increased margins from the business model change.
The logic here is that if we reduce the revenue by, pick a number, 5%-10%, but remain the same earnings in dollars, then of course the gross margin will increase. We've also seen positive impact from the dollar versus renminbi foreign exchange cross where the renminbi has been 4% cheaper this year, and that is a significant impact to the gross margins in that business line. Data center has impacted us positively due to the fact that we increased our sales prices over the course of late 2019, and that's starting to kick in now. Will it continue to be at this high level? Well, that remains to be seen. I don't have anything on the agenda right now that can indicate a reduction in revenue, but 49% overall is a very impressive number, actually. Let's see where it goes. Balance sheets.
Coming back a little bit to André's comments on the COVID-19 preparedness. We have $26 million in the bank. With a company like ours, with a high gross margin, where every time we sell for $100, then we spend half of it on cost of goods, and then there is around 30%, $30 back to fixed expenses overheads. That creates a situation where $26 million in the bank will carry us for quite a while. We have money in the bank to sustain operations for over a year.
If you combine that with the fact that we are primarily in Denmark where the labor market is relatively flexible, and we could, if need be, we haven't been there yet, and we are not there yet at all, but if need be, if we had to reduce staff, then we could do that over the course of maybe half a year or something like that. It's quite flexible. All this creates stamina, I would say, and of course, that is a good situation to be in right now. We are launching, shortly, a share buyback program. We're wanting to do that for a while. We need to hedge our employee option program. It's a common thing to do. It's a normal thing to do. It's a good thing to do. We haven't done that for a variety of reasons. We're doing that now.
We are targeting to repurchase one million shares at a value of up to $4.5 million. We will complete that by September 2020. I should add also, though, that those of you who have been following us will know that we have a tax situation around double taxation between from U.S. and Denmark. When it comes to our dividend tax situation that you will know about, then that is unchanged. We consider a buyback of shares for an option program to be a non-taxable event, and that's how we can proceed with this setup with a share buyback program for hedging the option program. We're simply buying the shares and keeping them. Financial priorities. Nothing much has changed here. We have combined the two segments into two product lines in the same segment. Of course, the approaches between those two product lines are slightly different.
Gaming & Enthusiast product line, it's about leadership, it is about innovation, revenue growth, and margin protection. You see the margin go up. We are quite happy with that. In the data center product line, it's about OEM and OEMs and adding revenue. Of course, all this goes with a cost-based optimization exercise where we think we have a quite lean machine, and we remain frugal, of course. All this adds to our enormous focus about cash flow and cash flow improvements in this situation. With all this COVID-19 going on, of course, we need to pay attention to cash and cash flow. All in all, pretty traditional chores of the CFO. André, back to the summary and outlook.
Yes. Most importantly, we maintain our guidance for the year. Our higher data center prices and our G&E OEM business model transition support increased gross margins. Let me just carve it out for those of you who may not have a strong memory what this business transition is. Normally, we would be selling our product with all the bells and whistles our customers would want. That would be software, it would be LED lighting, it would be a lot of commodities that's not really invented by Asetek, and it's commodities for us that would be really hard to have a high gross margin on.
What we did was we agreed with a number of our customers to say, "You buy the core product from Asetek and the core product only, and then you supply the beautiful box, and you supply the LED lighting and your own software." By doing that, our customers are happy because then they don't have to pay double price for a commodity. We are happy because it means we can get the gross margins we deserve. For sure, in a transition period, our revenue will not look as pretty. It's not all about revenue, it's about making money. That's what it's all about. Yes, as we maintain our guidance, we also maintain that our goal and objective for the year is to be profitable. Then as Peter talked about, we are launching the share buyback program. With that being said, that was today's presentation, and let's move to questions.
Yes, operator, if you will facilitate the questions, that would be wonderful.
Certainly. Ladies and gentlemen, if you'd like to ask a question, please press star and one on your telephone and wait for your name to be announced. It is star and one for any questions. We currently have no requests.
Let's hang on a few minutes to see if questions come up. Via the web, we have a question from Germany around legal actions. André, is that something you can comment on?
Sure. I can comment on it very hands-on in the sense that I personally should have been in the U.S. for a mediation in the ongoing lawsuit, but since I cannot leave the country and since the U.S. do not want to see me, and because the courts are shut down, then the court cases are currently on hold. That does not mean our lawyers are not working. In terms of court action, not much is going on right now.
Very good. Then there's another question here, and I have to admit, I don't fully understand it when I just read it, but the gist of it is, I believe, if this COVID-19 crisis has an impact on our business, could there be a business opportunity here in the fact that HPC is going up over time, maybe?
Well, let's say that I don't think the environment is less important than it was four months ago. What I see, and I think it's obvious to all of us, is the politicians have their hands full, talking to hairdressers how to cut people in a safe way, rather than how do we become more green. I don't see it's less important, but for sure, I can see the priority among politicians, et cetera, is definitely in a different place right now.
That was also the question I can see here now.
Yeah
Was questions about going back to core business, you could say.
Yeah. In terms of crisis driving data center demand, I don't see that at all. It's not that short-term. The HPC businesses we are winning right now are business opportunities that have been focused on for a year or more already. Short-term, I don't think it means anything.
Very good. Question from another gentleman. Can you please comment on the new data center corporation you announced some weeks ago? That will be back in January.
Yeah. What I can comment on is basically what we already announced, is that it's a global Tier 1 server OEM that is designing products into their HPC line, and hopefully we will launch it later this year.
Yep. Question on this larger gaming enthusiast customer that has ceased buying from us? Any comments on that?
Well, they have not ceased buying from us. They have gone from a big portion to a lesser portion. What I can say is that they have decided to buy from another vendor. That's what we know. What we can also say is that I'm confident to say that I believe they violate our IP, and that's the situation in itself that we will, of course, address. Instead of sitting back and cry, we have gotten a lot of new customers. At the end of the day, I think we will stand as a stronger business with more customers, less risk. Of course, as usual, we don't want people stealing our IP, so I have to look into that, and as soon as we get back to normal, we will do that.
Very good. A question from Denmark: when will the share buyback program start? It will start as soon as practically feasible. We are getting ready to roll. It will take some time, obviously, because we cannot buy shares in an amount where it affects the pricing, so it'll take quite some time. Another question, you mentioned interest from data centers in Europe. Can you elaborate on that a little bit further, or comment a bit more on the pipeline in data centers?
Yeah, let's separate the two things, because our pipeline is mainly HPC, so high performance computing. That is also data center. It is all good. It is money in the bank. HPC is not our big growth opportunity. That is, let's say, more general data centers. The interest I see from data centers across Europe, the comment I made was that specifically after we launched our own data center, where we reuse the waste heat, municipalities, cities, and politicians, also data centers, have contacted us and reached out and said, "We would like to come and see it. What about this? What about that?" There is an interest.
As I said, for practical reasons, we cannot really fly, and they cannot really come and visit. Of course, there is a lot of phone meetings, but there is also a lot of things that's been postponed. For sure, there's been a good interest.
Very good. Going Gaming & Enthusiast product lines, can you comment on customer inventories? They reduced last year due to tariffs. Have they normalized? What is the current status in terms of tariff?
If we start backwards, in terms of tariffs, there's no change. In terms of our customer inventories, I can't really comment on it because I don't know. I think everything is up in the air with everyone right now, and our customers are not really telling or talking too much about their inventories to us because, of course, they know we are selling to a lot of their colleagues also. As I said before, we are not in lack of demand. That's not our issue right now. Yeah.
Very good. We ran out of questions via the web here. Operator, should we just try and listen to see if there are any oral questions at this point?
Once again, ladies and gentlemen, if you'd like to ask your question, please press star and one on your telephone. We have no telephone requests coming through. Please continue.
We had one further question here. Esports is gathering more and more attention during the lockdowns occurring around the world. Is there a larger opportunity opening for Asetek in Esports as a result?
Well, I partly agree with that statement, but only partly because, yes, online gaming, if we call it like that, is definitely growing and getting more attention right now for obvious reasons. In terms of tournaments and in terms of people attending, not so much because everything is in lockdown. The question is if there's a larger opportunity opening for Asetek in Esports. Let me remind you that the way we see the end user market is that gamers and enthusiasts, is what we call them, G&E. Gamers are, in our opinion, people who like to play games. They can build their own computer or they can buy it from, for example, Alienware. They're still gamers. Whereas the common denominator for our customers is they like to build their own PCs.
There are a lot of people who are building their own PCs, and there are a lot of people gaming on their own build PCs. Esports as such is when there's a lot of people gaming, there's also a lot more people building new PCs, but there's not a direct link to Esports and then Asetek. I would say that way around, I would say no.
Very good. Question on gross margins, impressive gross margins in Q1. We agree. Thank you. Also driven by the U.S. dollars, as we mentioned. Do you see any reasons for why it should be below 45% again?
It's difficult to say because, of course, we don't know what's going to happen to Forex going forward. From a business perspective, no.
I agree. Systemically, there shouldn't be any reason why to go under 45 again. The business line data center has been fluctuating quite a while, and even though we've seen more stable and higher gross margins over in data center, then they will continue to fluctuate, I'm sure.
I can put it like this. In my bonus contract for the year, that's a high number.
That's often a good driver. Question again, there will be a new console generation coming out that are said to be so much more powerful. It should also allow new games to be more demanding on hardware. Will it also impact the PC business and make liquid cooling more interesting?
What I would say is that in a gaming PC, liquid cooling is already interesting. If you buy a real gaming PC today, there is also liquid cooling in it. If you go to, for example, here in Denmark, to some of the computer outlets, you can actually buy a lot of gaming PCs without liquid cooling. The reason is obviously cost, that they just want to compete on low cost. Yes, I do believe that it will open up for that. While at it, at the consoles, let me just refresh your memory why we don't see it as a threat, but why we also don't see it as an opportunity. We don't see consoles as a threat because, as I said before, our customers are people who like to build their own PC. Buying a console does not really fulfill that demand.
Therefore, building a PC versus buying a console, we do not see that as a threat. We also do not see it as an opportunity. The reason for that is I have personally been in contact and visited Microsoft Xbox, Sony PlayStation, and all of them many years back and also a few years back. What it always comes down to is they would rather accept a higher failure rate and a high noise level than to spend a few dollars more on a cooling solution. The reason is, just quoting them, is that they make no money on the hardware, therefore they are not willing to invest more in the cooling system, whereas the money is made on software. For sure, technically spoken, a console could definitely benefit from liquid cooling.
You have it in your house, you have it in your living room, and they are extremely noisy. Business-wise, at least so far, there's not been room for it.
Very good. If you can hear my mouse clicking, it's me hitting the refresh button, and there seems to be no more questions. As always, we have our website, asetek.com, and you can ask us questions at the investorrelations@asetek.com email. We shall do our best to reply. With that, we conclude the presentation of Q1 2020. Thank you for your interest in Asetek.
Thank you.