Good morning, ladies and gentlemen, thank you for standing by. Welcome to today's Asetek First Quarter 2019 Conference Call. At this time, all participants are in a listen-only mode. There'll be a presentation followed by a question-and-answer session. At which time, if you wish to ask a question, you will need to press star one on your telephone and wait for your name to be announced. I must advise you that this conference is being recorded today, Tuesday the 30th of April, 2019. I would now like to hand the conference over to your speaker today, Peter Madsen. Please go ahead, sir.
Thank you, Sharon, welcome all to this Asetek Q1 2019 presentation. It's Tuesday, it's 8:30 A.M. We're coming to you from Aalborg in Denmark. My name is Peter Madsen, I'm the CFO. I have André Eriksen, our Founder and CEO here also. Good morning, André.
Morning.
We'll take you through a number of slides then we'll open up the floor for verbal questions. If you're more so inclined, you can also post your questions online via the web application that you're following. There should be a button to that effect somewhere on your website there. With that, André, you should get started.
Yes. This is about Q1, let me talk about some recent highlights. It was a fairly uneventful quarter, pretty much as communicated and expected already. Group revenue of just above $11 million, that's unsurprisingly down from Q1 2018, 19%. The split was, gaming revenue of $10.5 m illion, down from $13.2 million, and the remaining data center, obviously. I think more interestingly is that we have seen some pressure on the entire industry for the last couple of quarters. I don't want to put any numbers on it at this point in time, but I think the encouraging news is that we are also, as expected, and also earlier communicated, seeing some waterfront improvement in the second quarter of 2019. That's good for all of us, obviously.
As you may remember, our Q2 last year was really, really high, and from my chair also a little bit, one of the reasons why we saw some of the following quarters being a little bit soft. We do see a good and healthy Q2 for sure. Just to recap from the Capital Markets Day, that we are going a little bit back to our roots and focusing a little bit more on getting our brand there among our end users, and that effort's already on the way. Of course, there's still a lot to do, but it's something we're executing on. To remind you, we have two type of customers. There's probably more, but two main type of customers. That's the gamers, and then it's the enthusiasts. Just to preempt any questions about cloud gaming, no, that does not worry us at all.
Number one, because I think from my chair, again, I think it'll be far out before it actually works satisfactorily for the clientele that we have. Even more importantly is that as you see a few slides down the road here, our customers are building their own PC. That's pretty damn difficult to do in the cloud. Therefore, our customer is not tempted to do the cloud gaming route because the whole point is they want to build their own PC. That's why they buy their own motherboard, their own CPU, their own liquid cooler and so forth. Just to remind you that most of our customers are actually enthusiasts.
Yes, they may or may not game, you cannot just say that if gaming goes up, then Asetek goes up, and if gaming goes down or disappears to the cloud, then Asetek also disappears to the cloud. That's not how it works. From a strategic perspective, I'm on slide four now. It's needless to say almost that we obviously focus on the Gaming and Enthusiast, as I just mentioned, it's 95% of our revenue. The longer-term opportunity that we are looking into is still data centers. No news there. Let me also highlight here immediately that I've seen some rumors and I've seen some talks about that we are letting go of the data center business. That is not the case. If it was, I would have told you at the Capital Markets Day.
What it's about is that we think, unfortunately, it's going to take longer than we had initially thought, and since we do not see the elasticity, we see no reason to keep in pumping a lot of money while waiting for the market to mature, while we can wait for the market to mature and only spend half the money. Let me just be clear on that. It's not that we have taken focus away from it. I am very much focused on it. I'm spending a lot of time on it, and have been doing that for the recent months and weeks. Let's just get that misunderstanding out of the way also. With that said, I want to hand over to Peter, who'll talk a little bit about the financials, and then I'll be back a little bit later.
Exactly. Thank you. Let's start from the top line. We're focusing here on the 95% of our business, the Gaming Enthusiast segment, where we, in Q1 of 2019, made $10.5 million worth of revenue versus $13.2 million from last year. That's the 19% decline that André, you were talking about. Yeah, André, he talked about the softness in the market with no particular prioritization. We could talk about the Brexit. That is, of course, a factor that creates uncertainty in the market, and also maybe more importantly, the tariffs in the U.S. There seems to be some kind of agreement between U.S. and China at this point, not to at least escalate the trade war between the two countries. There's been quite a level of uncertainty in the market over these things. The slide here also shows the variability in the revenue over the quarters.
We have good quarters, we have bad quarters. That has been the case for many years. As we say, we tend to always have one bad quarter per year. We just never know which one it is. We believe that Q1 of this year 2019 is the low quarter, which by the way, also was the case in 2018. Yes, we have had reductions in revenue in the last few quarters. One of the reasons is the very high quarter Q2 of 2018 that André alluded to. That could also be that Q4 was a little bit higher because of these tariffs that I spoke about, that our customers got products into the U.S. prior to the tariffs taking effect. We really don't know the size of that component.
If you group the revenues up by year, keep in mind that we still showed a very respectable 16% growth in revenue from 2017 to 2018. We're looking into quite a bright Q2, I would also add. As André said, we haven't forgotten the data center segment at all. If we add the data center revenue to these numbers, then the number for Q1 was $11.2 million versus $13.9 million in Q1 of last year. Gross margins is a very positive story. We are at 42.7% at group level for this quarter versus 35.7% the same quarter last year. Quite a significant increase, which we started seeing in Q3 of 2018, then it has carried through until now. We expect that we may see a small decline here in Q2, we don't know yet.
At least from a, what's a good point here, a level point of view, we believe that we're going to be at mostly the same level as we were last pay. These higher gross margins come from a mix of several things. First of all, we simply have a richer product mix. We tend to be selling more high-end products, more complex products, that also comes with a higher gross margin. We've also had some support from the U.S. dollar versus the China currency. We don't know where that's going, of course. It seems to be stable for now. That is a factor that we are monitoring. Let me also throw in here that we have been working quite diligently with our sourcing people in China, getting better cost prices over the last year quite successfully.
Our R&D people are working to optimize our products also for cost. It certain all helps. The data center gross margins are up to 35.5% versus a very low 15.5% last year. Yes, the graph looks good. It is very flexible, variable, I should say. It goes up and down. Those of you who have been following us will know that that is mostly due to the fact that we sometimes sell rather large installations to governments, research facilities, or we have research projects, I should call it. Those research projects often come with third-party revenue, third-party products that we are selling, we cannot mark those up, and that calls for a lower margin. As you can see, we have not really had any of this in Q1 of 2019.
I also think that those research projects are pretty much out of the picture by now. We will see strict commercial sales with higher gross margins going forward. Keep in mind though, it is at this point only 5% of our total revenue. The impact from this very variable gross margins on the data center is minimal. Let us look a little bit at the two segments, Gaming and Enthusiast. Again, revenue goes up and down. We spoke about that. EBITDA margins had, over the years, increased to low to mid-30s, which is of course a very nice number, at least I believe it is. It goes up and down, sometimes following the revenue. In low revenue quarters, we will also see low EBITDA margins because the overhead costs are fairly fixed.
In this quarter, though, because we have started focusing more and of course, we have started allocating more resources to the Gaming and Enthusiast segment, the EBITDA margin is down to 27%. Of course, this enhanced focus comes with the expectation that we will see more growth in the quarters to come. It is a chicken and egg situation, and we have decided to focus more and allocate more resources in this segment. For now, that drives down the EBITDA margin. The same on the data center or the converse development on the data center side of things where the EBITDA dollar amount is now a minus $1.3 million versus a very high $2.3 million last year. You can see that even though the revenue is fairly much the same, the investment we have done in this segment is reducing as per plan, as per communicated, and as per expected.
If you group the two segments together, we will see that the, is it black or is it dark blue? The top bars is the earnings. The contribution from the Gaming and Enthusiast is a very healthy dollar amount, which easily pays for the investments we have done in data center over time, could continue to do so. As we have talked about, and André will talk more about, our focus will be more on the Gaming and Enthusiast side for now, because we believe we have a product offering that is rich enough at this point to scale down primarily the R&D investment in data center. Basically sell what we have on the shelves instead of continuing to develop new products. If I can figure out how to hit the button. There it was.
If we look at the income statement in numbers, we have the Q1 2019 on the left-hand side, the Q1 2018 on the right-hand side. Revenue, we spoke about that. Fewer units, yes, because we have a softer market, in these quarters, fewer units obviously lead to a lower revenue, albeit the ASPs, the average sales prices, are up, and thereby also the gross margins are up due to higher margins on these high-end products and a stronger US dollar, et cetera. You will see that our total operating expense is $3.2 million versus the same amount last year, $3.2 million. Look at the split between the Gaming and Enthusiast and Data Center. We spent, in this quarter, $1.7 million on Gaming and Enthusiast versus only $800,000 in the same segment last year.
The opposite effect, a reduction of expenses from $2.4 million to $1.6 million in Data Center. That is a very tangible result of the efforts we've been going through in recent months of refocusing efforts, increasing resources on Gaming and Enthusiast and decreasing resources to Data Center. If this is the picture going forward, I don't know. We have declared that 2019 is the year of transition, I will not right here commit to a similar split, or even further reductions or increases in Q2. At least it's going the right way. We're still in a learning curve here, that's for sure. For those of you who are detail-oriented, you will see that our depreciations are up from $850,000 roughly to $1 million roughly.
That is driven by a new accounting standard or policy that we have to adhere to on January 1st, where we capitalize and then write off our leases, our operational financial leases. All this drives an EBIT from the two business segments of $260,000 versus $590,000 last year. EBIT margin of 2.3. We have our overhead expenses on the HQ, the headquarter level. The only thing I want to point out here is the litigation expenses. We have been pretty busy, or our attorneys have been pretty busy in this quarter with various legal matters. One of them, a settlement that André may want to comment on at a later stage. This settlement and other cases have been fairly expensive in this quarter.
The settlement is also a finalization, a close, that means that at least that case should not be costing us any money in the future. All in all, earning before interest and taxes, $1 million to the negative this year versus $1,000 to the negative last year. Earnings per share of -$0.03 this year versus $0.04 last year. Cash flow. The only comment I want to make on that is that we have improved, we have collected basically our outstanding receivables from the end of 2018. There were some questions at our last earnings call about accounts receivables and how we collect on these, I can just report that we have brought down our outstanding debt receivables from, I think it was $15 million to $10 million. That shows in the bank account.
We have $21 million in the bank at this point versus $19 million almost at the end of 2018. Balance sheet, same story remains. Very strong cash position, almost no, at least very low interest-bearing debt. That means that we have a lean and mean balance sheet enabling growth and financial flexibility. That is important in our case. We are still a relatively small company. We need to show to both customers, competitors, and not least vendors, that we are a stable company, and we can certainly do that. I should add that this accounting policy implementation has increased our balance sheet by, I think it's $3.2 million. With that, I'll hand the microphone back to André, who will talk about building Gaming and Enthusiast. Great.
Thank you. Just a little bit on the branding side. Just to recoup the situation. Up until recently, we made our products OEM for our customers, meaning that it was their brand that was promoted. Nothing wrong with that, but that also meant that we got more and more anonymous. We think it's important to keep the end-user awareness. I have seen some notes about we will see whether this pay off or not. I look at it the other way around. This is not about whether this investment pays off or not. It's also about if we don't do it, we will end up in a situation where the end user cannot tell our products from the competitors and the rip-offs. I don't think that's a nice position to be in.
It's not just an investment, it's also making sure that our customers actually know at the end of the day what they are buying. At SARS, we are working on different things. For example, dual branding and brand behind the brand strategies together with our customers. We don't want to compromise our customers' brands either. We are not going to compete with our customers. We are going to do this hand in hand. As a part of that, we have established the Esports Academy. We have gone back and hired some PC enthusiasts and branding experts into the company, so we now have that in-house. Just a small example on what it is we are working on. One of them is a CS:GO tournament called CoolNation Masters, where registration open soon. It'll be a global tournament, where people can basically participate in this Counter-Strike tournament.
We will host the finals here at Asetek in our headquarter, in our Esports Academy, where the finals will be streamed. That's just an example of one of the things we're doing. Another example of what we've been doing is on the left on slide 16. It doesn't say much other than you can see a radiator and a small fan, but this is a good example of where we have made a product directly available to the end users. We still sell it to resellers, et cetera, but it's not made with one of our customers, our OEM customers, because apparently none of our OEM customers are working on this direction. We took the opportunity to develop this product for small form factor PCs that a lot of customers ask about. That's just to give you an example of that also.
Looking a little bit on the data center opportunity as well. This slide with this pretty picture of me and even prettier politician on the left is basically saying a lot about what I'm spending my time on, in terms of the data center. Just to recoup from the Capital Markets Day also, I and we still very much believe in the opportunity. We have also realized that unless you're looking at very special data centers, not mainstream data centers, then the need for liquid cooling or the desire for liquid cooling is just not there yet. Microsoft issued, or the press issued a Microsoft interview recently about their data center saying that, yes, they were aware about liquid cooling. Yes, they knew it was better for the environment. Yes, they knew you could save CO2 and power and what have we.
For as long as there are no standards or requirements, they were not going to do it. That's basically what we have seen. I'm spending time on working with politicians and other decision-makers right now, other companies within, for example, the district heating area. Because in my view, it's crazy that we are talking so much about how we can save the world, how we can save the planet, how we can drink less red wine, how we can eat less red meat, but at the same time, nobody asked the biggest sinners to do something about it. An example that I have used often and still do is that in the car industry, I'm sure nobody woke up one morning and say, "Let's put on a EUR 4,000 catalyst on our car and then make it green." No, it was the other way around.
EU made some requirements and said, "If you want to drive on the European roads, you have to have a catalyst on the car, period." I think that's what we are trying to work on here, that if you want to establish a data center in Denmark or in Europe, you have to be able to recoup the waste heat so you can reuse the enormous amount of power that goes into the data centers. I cannot guarantee you that I'll be successful with this. I cannot guarantee you how long time it's going to take. What I can tell you is that we have gotten a lot of response. There's been a lot of politicians to the house. There will be two EU politicians tonight, actually, in the company to see our demo, et cetera.
Again, it's not something that's happening overnight, but I'm convinced that this is where we should be putting our resources in. We have for years put our resources into the OEMs and said, "Okay, if we just convince the OEMs to take in our liquid cooling, then they are going to save the world." I can perceive that was wrong. That was our mistake, in the sense that they are not doing anything to save the world. They are doing what their customers tell them to do. If nobody tell their customers how a data center should be built, they're not asking for it.
From that perspective, we are a little bit back to square one because although we can probably all agree that all measures should be taken to save CO2, et cetera, it's just the fact that most politicians and the guys who are actually doing the legislation, they have no clue that we even exist. This is still very much a greenfield. It's also exciting because there are new opportunities that we've never even dreamt about before. I think I'll leave it at that for now. You will obviously be the first to know if and when something positive happens. On the summary and outlook, I think I already did the summary, but in terms of the outlook, we see the improvement in Q2. We will maintain our 0%-10% growth for the year, and that's probably disappointing to some of you.
I look at it a little bit different because if you look one year back, we were all super excited about Q2, and we thought we were going to kick it out of the park, and then what happened then, we had two soft quarters. Therefore, I would rather keep the guidance until I know any better in any direction. Don't read too much into that other than that's how the world looks right now. For those of you who know us, you know that we have five minutes of visibility, so it's really tough for us to say anything about Q3 and Q4 at this point in time, other than things for sure look to be much better than it has been. When we meet next time in a quarter, then for sure we'll know even more.
True. Thanks, André. With that, we should start taking your questions. Let me remind you that you can follow two ways. Either you can type in your questions on the website, or you can follow the instructions by operator Sharon, who will take over now. Sharon?
Thank you. Ladies and gentlemen, as a reminder, if you wish to ask a question via the telephone, please press star and one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, star and one if you wish to ask a question via the telephone.
We have one question on the web here, and it says, What should we read into the Alienware R5 PC with two liquid-cooled GPUs? Well, I'm not sure I understand the question. You can read into it what you want. I think it's Alienware showing what can be done, and they are now liquid-cooled GPUs, obviously, with our liquid cooling system. Yeah. I'm not sure what more flavor I can add to that. There's a question if we can add more flavor to how Q2 looks right now, can you put some numbers to the improvement? No. If we wanted to do that, we'd put it into the presentation.
Yep. Sharon?
We do have a question on the phone lines. Your question comes from the line of Per Paulsen from Danske Bank. Please go ahead. Your line is open.
Yes, good morning. It's Per Paulsen from Danske Bank here. I had two questions. I think you already answered the first one, but it was just concerning growth in Q2. If you could just put on some more flavor, if you would want to, just if you look
No. You'll be the first to know when we have more to say about Q2.
Okay, sounds good. The second question is concerning the data center. Could you just give an update on the in-rack liquid-cooled module? Like if you've received more feedback since last, and then if customers have placed any orders. Thank you.
I don't really have any further comments on it right now.
Okay.
Thank you. There are currently no further questions on the phone lines. Please continue.
Thanks, Sharon. We have a question from the web also. Please provide us your graphic breakdown on your revenues.
We sell by far the biggest chunk of our revenue out of China, deliver in Hong Kong or in China itself. What happens from there, we really don't know. We have an idea, and my gut says something about 30%, maybe a little bit more in U.S., and then a little bit lower number in Europe, maybe, and then rest in Asia. We really don't know a lot about it.
There are no further questions on the phone lines at this time.
All right. There seems to be no further questions on the web either. Let me just remind the listeners here that if you have questions, then you can certainly contact us on our web or email investor.relations@asetek.com. With that, we'll call it a day. Thank you very much for your interest in Asetek.
Thank you.
Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.