Earnings Call: Q3 2019

Oct 23, 2019

Ladies and gentlemen, thank you for standing by, and welcome to the Acertek Third Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. I must also advise you that the conference is being recorded today, Wednesday, 10/23/2019. I'd now like to hand the call over to your first speaker today, Peter Madsen. Please go ahead, sir. Very good. Thank you, operator. Welcome all to this Q3 twenty nineteen earnings call. Our board, they met last night, and they approved the report that we issued out this this morning. And we, of course, have this quarterly presentation available for you also. My name is Peter Matts, and I'm the CFO. I have with me here our CEO and founder, Andre Erickson. Good morning. Good morning. The way we will do this, as usual, is that we go through the presentation. And at the end of presentation, we will have a q and a session that I will hand where I'll hand back the microphone to to to the operator. You can also, if you prefer to do so, type in your questions in the application that you are using to to view this presentation. With that, I'll hand over the microphone to Andre for the presentation. Yes. So looking at the the quarter a little bit, our revenue for the quarter ended up at 10,400,000.0 compared to 17.4 same quarter last year. A gross margin of 42%, pretty much same as last quarter, but a big improvement for the first nine months of last year. Our adjusted EBITDA came down to $32,000 versus $3,000,000 same period last year. We do expect our revenue to go up next quarter compared to this quarter, But still, and as expected and reported, we expect it to decrease compared to the same quarter last year. And on top of that, there will be a noneventful, gross margin decline simply due to the fact that we are cleaning out an inventory for a final sellout for an end of life product. And you could say the flip side of selling a cheaper would be to have an inventory, and then it would have to be written off later. So it's it's just, you know, normal common sense. And and, yes, we maintain our our guidance for the year. As you already know, we have two business segments, gaming and enthusiasts and the the data center. And as typical up until now, it has been the gaming enthusiasts business driving the lion's shares of the the revenue. I'll get back to that a little bit. Yes. And as you can see and as already reported, the the the the quarter is unnormally low. As a matter of fact, we have to look some three years back to get to the level where we are now. So there's there's no doubt about that we have a technical hit. And if we look a little bit deeper into the the gaming enthusiast first, there's no doubt we've been bothered by the macro and and industry headwinds blowing against us right now. The unresolved China trade issues, still an issue for us. The Brexit uncertainty is is definitely not helping. It's influencing this segment both on the Chinese side, but also on the European side. On top of that, we have one customer, one larger customer that is declining more than the other customers. And we are not always privileged to this kind of information of what's going behind the on their scene, so to speak. But we can only speculate that it's indicating changes to the product. If they are selling the vendor they're using or larger than an average inventories and and or a mix of of these things. And and, personally, I believe it's a it's a mix. But but for sure, it all influences us. And just to carve it out a little bit further, if somebody is or if it's unclear, on our customer side, so on the OEM, the the cash flow effect of paying 25% US tariff on on all China imports is obviously massive. It would be and is for for any business. And, of course, their ability to internally absorb this becomes slimmer by the day. And I think it's also pretty obvious that the incentive to build up an inventory is not really there. And, of course, it's impacting the business confidence that what's going to happen is the tariff going to go up. Is it going to go down, or is it going to go away? And for the end user, it has a spillover effect, obviously. And and the the sum of all this is that it obviously impacts us. It it changes the forecast. It changes the way people are forecasting. It changes our our our, let's say, confidence in the forecast we are giving. And and for sure, the the forecast we have done have been reduced in the 2019 as already disclosed. And and, obviously, it's also what's already reflected in our revenue guidance. But, yes, that's that's how it is right now. If we look at the more positive side of the the story earlier this year, as you know, we started to focus more on on bringing our brand forward. So why did we do that? Historically, our brand became more and more anonymous. And the fundamental problem with that is that the end user would not necessarily know, which liquid cooling product he actually ended up getting. So we wanted to change that. We have spent some resources on it, and we are continuing to do that. And but the idea is really to get our own brand out there. And on top of that, we are also going to introduce, let's say, some new and high end products that will definitely carry the the the brand and and get people excited. If we look at the the strategic development of of what I just said, the the goal here, of course, is to continue dominating this market. And there are different things we are or different levels and different knobs we are we are turning on and adjusting on. And if you look at at r and d, as you'll see when Peter get to the numbers, for sure, we are investing more in r and d in the gaming and in in in blue chip. We are not only, you know, listening to our direct customers and and ask them what they want and then we go build that. We are also, you know, investing in our own innovations and our own things that will come forward during 2020. So that's one of the things we are doing on the branding and and marketing side. We have done several things, and we are doing several things. For examples, we have co branding agreements in in place with six of our customers, and and there will be more rolling out. We are connecting directly with gamers and enthusiasts via our full nation forums and our gaming CS GO tournaments. And then on top, we are widening our customer base. We currently have 25, roughly, 25 OEM customers. We added gigabyte in Falcon Northwest with a new talent PC here in q three, And we do expect more new customers to come and obviously want to sell more, but we obviously also want to get less dependent of one or more large customers. Of course, we will always have larger and bigger and better customers than others. That's the the definition of how it is. But it's better to have five large customers than to have one large customer. So for sure, we are looking into that big time. On the on the Cool Nation side of things, we started out softly with, let's say, national tournament in Denmark. And after we launched this strategy in March 2019, we have launched the Cool Nation Forum. We have launched the Cool Nation Masters Counter Strike Global Offensive tournament, and it's already underway. There's 39 Danish team subscribes and competing. And weekly, we have more than 250 individuals gaming under this tournament. We are streaming it live, obviously, on YouTube, Twitch, and Mix. So, yeah, the picture you can see here on the slide is actually from a little bit more than a week ago here in our Esports Academy from the semifinals. On the adding new OEMs, I'm not going to read out loud this nice quote about us, but I I am going to mention that, you know, Gigabyte is a big brand in in the gaming and in the enthusiast side. And and they came to us, and and we launched this this great cooler with them. So it's just a sign that we are adding more customers. And if we look at the slide 12 here, just some very brief and short stats. As you know, 95% of our revenue is from gaming enthusiasts, and we have top five of our customers representing 85%. And we have for most of our our larger customer received positive feedback to to our new strategy. They they like the fact that their customers know who we are. The trick is not to turn our customers into an ACTech reseller. That's not the point. The point is to help our customers build products based on ACTech technology. That's the that's the goal, and and they endorse that, most of them anyway. And I think it's no big surprise if you look at our top five customers in alphabetical order. It's Alienware, Asus, Corsair, NZXT, and Thermaltake. And if you look on on the right and say, okay. How is it actually going spreading out revenue on on more customers? And there has actually been on on most of the customers. You can see, let's say, an offset in what they used to buy and and buying now. And, again, you know, the trick, of course, is not to turn three customers to zero. Just to change the the graphs here, the the the the point is to make all of them successful at the same time. But from an agent perspective, from a revenue distribution where we are not as vulnerable as we have been. Talking a little bit about the the product developments that are going on, I I think it's I think it's timely, and I think it's appropriate to to mention and restate who our core customers are. We get a lot of questions about gaming, obviously. But I think if you look in the middle here, if you have the whole blue big circle, that's all the gamers on the planet. And it's not correct to assume that they are all addressable to ASIC. Number one, there are a lot of gamers who are not using a PC. Number two, there are a lot of gamers who are gaming, and that's it. They don't really focus on what's inside their PC. They are just gamers. So our lighter blue circle is our core market. That's hardware enthusiasts. Now as you can see, this is not the science, but as you can see, the the main part of the hardware enthusiasts are also gamers. But it's it's dangerous to make the opposite logic. So the the core team we are going after are really hardware enthusiasts where most of them are also gaming. And for sure, when NVIDIA, AMD, Intel, and so forth comes out with new and exciting technologies, that is that is driving demand on our side. And I got an I got a question yesterday saying that, well, the the PC market is going up. Why is gaming PCs and and gaming enthusiasts market not also going up? But there's a simple explanation for that. The PC market is huge, but it's commodity PCs being sold to corporate users who are now upgrading because a new Windows operating system is on the market. So that's why they they operate, but it has really nothing to do with our core market. So, again, that's a that's a dangerous comparison. But because of new hardware platforms are coming out, it will drive demand. And, of course, with the product development that we have going in, as I mentioned before, that will fit in nicely with that. Looking a little bit on the data center side of the story, from a revenue perspective, there's actually not been that much going on as you're already aware of. I would say that, personally, I am probably spending more time on data centers right now than I have been for a very long time, in fact. And although it's not seen in the numbers, I I can say that as of the week before that, I was personally in Brussels where we had set up a number of meetings with both politicians from the European Parliament, but also a lot of commissioners from the EU Commission and a lot of officials down there. And just as a very low key indicator, in one of the meetings we had set up on a very high level, actually, we had expected to see one guy, but there were, like, nine persons in the room from, I think, seven different countries. So the the interest of what we are doing here is significant. I have been positively surprised how well we have been received and how easy it was to set up three days of meetings nonstop at the same time as they were actually voting for the new European parliament members. And one of the days we were there, the the I I think it was the French candidate that got rejected. So there was a lot of, you know, resources being spent on that, but still they had time to meet with us. And I'm I'm not naive and think this is going to turn into legislation in a in a in a short time because it will not. It simply takes time. But I can say that the interest is really significant, and a lot of them really understood why we were there, what we were doing, and what we were trying to achieve. And I would also say from a a timing perspective, I think it's also important to to see things in the helicopter perspective once in a while instead of just on a quarterly basis. And it's no secret that we have been pushing this data center story for a while without the desired outcome yet. But I would also like to say that now that I have been in Brussels, had we been there five years ago pushing for this, we would have gotten no interest. So I think we are fortunately, if you want to be a market leader, unfortunately, if you're looking at short term revenue, I just think we have been out too early, and I still believe that's the case. I still believe it will turn. I still believe it will come. But it is hard work, and it is, you know, back to what I said at the Capital Markets Day early in 2019 without legislation or regulation, I do not think we will hit the goal. But, yeah, to put it short, there is a significant interest from the guys who are actually dealing with this on a daily basis and as well the the politicians. And with that, I will turn the mic to Peter to talk some about the numbers. Very good, sir. Thank you. Q three was, to some extent, actually quite uneventful. Of course, the revenue were not where we had hoped them for them to be, but but some of the other components in the in the financials are actually quite positive. We're starting here on the top line. The revenue came in at roughly 40% lower than Q3 of 'eighteen. For the year as a whole until Q3 here, we are 24% below 2018. The year as a whole, Andre will come back to that, but we are aiming at a number 20% lower than 2018 as the full year. Gross margins are good this quarter. We came in at 42%, which is quite similar to the year last year. We have a rule of thumb in the house here saying that if we are above 40%, then we are happy. So we are, by definition, happy this quarter. And we have been so for actually quite an extensive period of time. I'll come back to that on the margins just in a slide from here. Shifting down to operating expenses, you will see that we are quite flat compared to last year. Also, have been helped a little bit by the U. S. Dollar being in our favor this year. But but, like, let's take it as a flat. It's actually a little bit lower due to an accounting policy change or rule change where we move around $140,000 down to depreciations every quarter. But but just staying a little bit at the operating expenses, the interesting news here is that we are successfully carrying out the strategy that we laid out early in the year where we're transitioning our efforts from data center to gaming enthusiasts. It's a very deliberate. It's a very how should I say it? It it it's a it's a it's a big task, of course, and it's being done with great level of interest from everybody in the company. And what we do is simply scaling down the the r and d mainly in in data center simply because we came to a point where we did not need many new products to support the market as we see today. And then, of course, instead, we're scaling up over on the gaming enthusiast side. And there is almost no limit to to what we can list of new options or possibilities over there. Continuing down through the p and l here, depreciations, as I said, also flat, a little bit higher than last year due to this accounting rule policy change. Coming down to the EBIT at a meager $69,000 versus $3,000,000 the year before or 0.7% versus 170.3%. In the gaming enthusiast segment, the 15.6%, of course, that's lower than where we would like to be, but that is you can almost backtrack up to the to the revenue. That is due to the to the revenue component being significantly lower than what we are used to in this segment. That brings us down to the HQ portion of our expenses. They are a little bit higher or somewhat higher than last year due to litigation expenses being high. We have seen quite a lot of activity in in that segment. In q two, three months ago, we received a settlement income of $3,750,000 roughly. We we have not had the luxury of booking such a settlement income in in this quarter. We have good attorneys, but they're not that good. So that brings our headquarter cost to $1,300,000 versus $1,100,000 a year ago. The other HQ expenses, there's a little bit of periodization involved there where we have to charge a one off one off expense in this quarter versus spreading it out over time. That brings us to the EBIT total of $1,200,000 in the negative versus 1,900,000.0 or almost $2,000,000 in the positive last year. For the year as a whole, this year, we have a $115,000 in the negative versus $3,200,000 in the positive a year ago. I'm not showing it here, but I know that we we had good help on the finance line in q three. Also, we I think we booked around $600,000 of mainly foreign exchange related income on that line. Margins, I promise to come back to that a little bit. The way this slide here is structured is that the bold black and blue lines on the left hand side is the group gross margin and the gaming enthusiast gross margin, respectively, since gaming enthusiast is almost, I think it's 95% or more in in the of the revenue. Of course, those two lines are very similar to each other. And as you can see, they are quite flat over the over the last five quarters here. We should add to the story that in early twenty eighteen, Q1, Q2 and Q3, our gross margins were at 36, where we then, by definition, were not happy. But since we bought it above 40, that's another scenario than we were a a year ago. The the thin gray line on the left hand side is the is the gross margins from the data center. It varies up and down quite a lot, and we are actually we're pretty comfortable with the level we are at at this point. Cash flow, not so much to say. Here, we are cashing in from our quite successful q two. You will also notice if you're looking pretty much smack in the middle of the whole thing that we have reduced there's a reducing trend at least in our investing activities. We are simply spending less on both tangible and intangible fixed assets. And that all this all brings us to a cash position at this point of $2,026,200,000.0 dollars, where we were at 18.6 or some yeah. 18.6 at the at the end of q four last year. So it it we we are cashing in quite significantly. I should add, by the way, that I do not have an update at this point on the the ones you who have been following us will know that we have a dispute, an issue with the US IRS, US taxation authorities primarily over dividend taxes and how dividend taxes are sort of blocking us from paying dividends. It's it's only two months ago that we reported last time, and I do not have any updated on that topic at this point. Balance sheet, very much as as the news has been for the last two years or so, strong cash position, low low debts, and a balance sheet in total that allows enables growth and financial flexibility. Let me just round off by by re mentioning our financial priorities as we laid them out also at the CMU early in the year. In the gaming enthusiast market, it's about leadership. I think we just used the word domination before product innovation, rebranding in order to really see growth. You may you have seen us earlier how we're actually carrying out the device diversification exercise, and you have also seen how we are successfully protecting and optimizing our gross margins. In the data center business, which is the smaller one at this point, wherever it makes sense, we are supporting OEM and and end user of adoption. But apart from that, it's more about ensuring an an efficient operation in in that segment at this point in time. The way we work with cost based optimization is that we are quite prudent and cost conscious. We have, of course, very clear understanding of the fact that our revenue are lower than where they we want them to be, and, of course, that pays into plays into how we are spending money. And we are quite prudent when it comes to to our IP and R and D investments because that's where things can actually move significantly. We are trying to run our manufacturing both in house and our third party outsourced manufacturing as as optimal as possible and and and make sure that we are optimizing there. And all this bottom line, of course, needs to turn into cash conversion, and I think, yeah, you've seen us do quite well on on that on that topic also. With that, Andre, full year 2019 expectations? Yeah. Well, there's only one quarter left. And, fortunately, we had to reduce our guidance for the year a little while back, and it's not been an easy task to to this what we guided back then. We are fighting hard for it and working hard for it, but we maintain our guidance for the year. And, of course, we all would like to know how 2020 looks like. Unfortunately, we don't know yet, so it's it's simply too early to talk about 2020. There are other persons in play than me who decides how that's going to look. But but the summary and outlook is really that, as expected, q three reflect the the slowdown, which again means the the the profit situation is a reflection thereof. We are focused on on doing what we do well, and that is to build it for cooling for customers. We are focusing on getting new customers. We are focusing on getting our brand out there. And then I, at least, is is is pretty confident that we will get back to where we we should be. And, again, without mentioning a lot about 2020, my job is to earn money for the company. And if the top line does not grow as fast as it should, then obviously, we have to do other stuff to make sure we are making money. So that is a a big priority for us. But, again, it's it's it's in which world. So by that, I I think we have reached the end of the official presentation. So, Peter? Yep. And, thereby, we also go to the q and a session, and you can either type in your questions in the app. I don't know how your app looks, but find the place where it says questions, I would say. Or if you're on the phone, then I would now hand over the floor to our operator, Summer, who will conduct the q and a session. Summer? Thank you. Yep. Just as a reminder to participants on the phone, it's star and one on your telephone keypad if you'd like to ask a question. And it's just the hash key to cancel. No questions have come through on the phones at the moment. Okay. Let's give Pete just a minute more, Summer. And while we do that, we can read out a question from Germany that I've got over here. Any view on 2020, how much of a solution in the trade war between US and China would could lead to a recovery of, pent up demand? Is do you have anything to add, Andre? Not really. I mean, it's, it's anyone's guess. You can get my guess. And my my guess is that, yes, for sure, if we got some political stability both in around Brexit and around the The US and China trade war, for sure, I'm rather confident that that will have a big impact on our business. But but to quantify it, I mean, it's simply impossible. Very good. Summer, any questions that came in on the phone? No questions have come through on the phone. Alright. And I don't see any other questions online either. So that means that we just have to point back to our website, our email address If you have any investorrelations@aceatec.com, we will do our utmost to to reply to your emails with good answers, of course. And with that, I just have to say thank you for your interest in AceTech. Have a wonderful day. Thank you. Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.