Earnings Call: Q1 2019

Apr 30, 2019

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Acertek First Quarter twenty nineteen Conference Call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I must advise you that this conference is being recorded today, Tuesday, 04/30/2019. I would now like to hand the conference over to your speaker today, Peter Madsen. Please go ahead, sir. Thank you, Sharon, and welcome all to this Acertek Q1 twenty nineteen presentation. It's Tuesday. It's 08:30. We're coming to you from Alborg in Denmark. My name is Peter Raslan, the CFO. I have Andre Erickson, our founder and CEO here also. Good morning, Andre. Good morning. We'll take you through a number of slides, and then we'll open up the floor for verbal questions. If you 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 to that effect somewhere on your on your website there. With that, Andre, you could get started. Yes. So this is about q one, so let me talk about some recent highlights. It was a fairly uneventful quarter, pretty much as communicated and as expected already. So group revenue of just above 11,000,000, and that's unsurprisingly down from q one two thousand eighteen, 19%. And the split was again, revenue was 10 and a half, down from 13.2, and the 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. And 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 somewhat of an improvement in the 2019. So that's good for all of us, obviously. As you may remember, our Q2 last year was really, really high. And from my from my share, also a little bit, one of the reasons why we saw some of the following quarters being a little bit soft. And but we we do see we do see a a good and and healthy q two for sure. Just to recap from the the Capital Markets Day is that we are going a little bit back to our roots and focusing a little bit more on on getting our brands there among our end users, and that therefore, it's already underway. And, of course, there's still a lot to do, but it's something we're executing on. And to remind you, we have two type of customers. That's probably more, but two main type of customers. That the the gamers and then it's the enthusiasts. And just to preemptive 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, satisfactory for the clientele that we have. But 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. So, therefore, our customers 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. So so just to remind you that most of our customers are actually enthusiasts. Yes. They may or may not game, but you cannot just say that if gaming goes up, then ASIC goes up. And if gaming goes down or disappears to the cloud, then the ASIC also disappears to the cloud. That that's not how it works. And from a strategic perspective, I'm on slide four now. It's needless to say almost that we are obviously focused on the gaming and enthusiasts. As I just mentioned, it's 95% of our revenue. And the longer term opportunity that we are looking into is is still data centers. No news there. And 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. So let me just be clear on that. It's not that we have taken focus away from it. We are I am very much focused on it and spending a lot of time on it and have been doing that for the recent months and weeks. So let's just get that misunderstanding out of the way also. And with that said, I want to hand over to Peter who'll talk a little bit about financials, and then I'll be back a little bit later. Exactly. Thank you. And so let's start from the top line. We're focusing here on the 95% of our business, the Cambium FluShares segment, where we, in '19, made $10,500,000 worth of revenue versus the 13,200,000.0 from last year. That's the 19% decline that Andre was talking about. And yes, Andre, 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. But there has 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 2018 that Adler alluded to. There 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. But if you group the revenues up by year, keep in mind that we still showed a very respectful 16% growth in revenue from 2017 to 2018. And we're looking into quite a bright Q2 where we also add. If we as Andre 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% versus 13.9% in Q1 of last Gross margins is a very positive story. We are at 42.7% at group level for this quarter versus 37.350.7% same quarter last year. So quite a a significant increase, which we started seeing in 2018, and then it has carried through until now. And we expect that we may see a small decline here in Q2. We don't know yet. But at least from a, what should I point it, a level point of view, we we believe that we're gonna be at this at this closely the same level as where we are today. These higher gross margins come from a mix of several things. First of all, we have a we simply have a a richer product mix. We tend to be selling more high end products, more complex products, and that also comes with a higher gross margin. We've also had some support from the US dollar versus the the China currency. We don't know where that's going, of course. It seems to be stable for now, but but that is a factor that we are 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, And our R and D people are working to optimize our products also for cost. And it all it certainly all helps. The data center gross margins are up to 35.5 versus a very low 15.5 points last year. And yes, the graph looks good. It is very flexible, variable, I should say. It goes up and down. And those of you who have been following us will know that that is growth due to the fact that we are we sometimes sell rather large installations to governments, research facilities, or we have research projects, you should call it I should call it. And those research projects often come with third party revenue third party products that we sell, we cannot mark those up. And that calls for a lower margin. And as you can see, we haven't really had any of this in 2019. I also think that that those research projects are pretty much out of the picture by now. So we we will see strict commercial sales with higher gross margins going forward. Keep in mind, though, it's a it is at this point only 5% of our total revenue. So so the impact from this very variable gross margins on the data center is is minimal. Let's then look a little bit at at the two segments. Gaming enthusiasts, again, revenue goes up and down. We spoke about that. Gross EBITDA margins had, over the years, increased to to low to mid thirties, 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 Food shares 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, but it's a chicken and egg situation, and we have decided to focus more and allocate more resources in this this segment. And for now, that drives down the EBITDA margin. The same on the data center or the converse development on the on the data center side of things where the EBITDA margin the EBITDA dollar amount is now a minus $1,300,000 versus a very high $2,300,000 last year. So you can see that even though the revenue is fairly much the same, the investment we've done in this segment is reducing as per plan, as per communicated and as per expected. And if you group them to two what two segments together, you will see that the is it black or is it dark blue? The top bars is the earnings, the contribution from the premium and blue shares is a very healthy dollar amount, which easily pays for the for the investments we have done in in data center over time, could continue to do so. But as we have talked about and Andre will talk more about, our focus will be more on the gaming enthusiast side for now because we believe we have a product offering that is rich enough at this point to to scale down the primarily the r and d investments in in data center and basically sell what we have on the shelves instead of continuing to develop the new card. If we 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 twenty nineteen on the left hand side and Q1 twenty eighteen on the right hand side. Revenue, we spoke about that. Fuel 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 U. S. Dollar, etcetera. You will then see that our total operating expense is $3,200,000 versus the same amount last year, dollars 3,200,000.0. But look at the look at the split between the Gaming Inclusiast and Data Center. We spent in this quarter $1,700,000 on gaming and flu share versus only $800,000 from the same segment last year, and the opposite effect, a reduction of expenses from $2,400,000 $1,600,000 in data center. And that is the result, very tangible result of the efforts we've been going through in the in recent months of refocusing efforts, increasing resources on on hemiplegiclutrients, and decreasing resources to to data center. If this is the picture going forward, I don't know. We we have declared that 2019 is the year of transition. So I will not right here, commit to a to a similar split or even further reductions or increases in in q two, but but at least it's going the right way. But we it's it's we're still in a in a learning curve here. That's for sure. For those of you who are who are detail oriented, you will see that our depreciations are are up from $850,000 roughly to one point $1,000,000 roughly. That is driven by a a new accounting standard or policy that we have to adhere to on January 1, where we capitalize and then write off our leases, our operational financial leases. All this drives to an EBIT from from the two business segments of $260,000 versus $590,000 last year. EBIT margin of 2.3. And then we have our over overhead expenses or the h two headquarter level. And the the only thing I want to point out here is the indication 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 Andre may want to comment on later at a later stage. But this settlement and other cases have been fairly expensive in in in this quarter. But settlement is also a finalization, a close, so that means that at least that case should not be costing us money in in the future. All in all, earnings for interest and taxes, $1,000,000 to the negative this year versus 400,000 to the negative last year or an earnings per share of negative $03 this year versus $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 2018. There were some questions last in our last earnings call about the accounts receivables and how we collect on these. And I can just report that we have brought down our outstanding debt receivables from, I think, was $15,000,000 to $10,000,000. And that shows in the bank account, we have $21,000,000 in the bank at this point versus '19, almost at the end of of eighteen. Balance sheet, same story as remains. Very strong cash position, almost no, at least very low interest bearing debt. So that means that we have a lean lean and mean balance sheet enabling growth and and financial flexibility. That is important in in in our case. We are still a relatively small company. We need to show to both customers, competitors, and and not least vendors that we are a stable company, and we can certainly do that. I should add that this this accounting policy implementation has increased our balance sheet by, I think, it's €3,200,000 With that, I'll hand the microphone back to Andre who will talk about building AIMING and a future spread. Thank you. Just a little bit on the on the branding side. So 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. And 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 sell our products from the competitors and the rep ops. And I don't think that's a nice position to be in. So it's 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. And at Saks, 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. So we are not going to compete with our customers. We're going to do this hand in hand. And as a part of that, we have established the Esports Academy. We have gone back and hired some PT enthusiasts and and branding experts into the company. So we now have that in house. And just a small example on what it is we are working on. One of them is a CSO tournament called Pool Nation Mathers where registration opens soon. It'll be a global tournament where people can basically participate in this Counter Strike tournament, and then we will host the finals here at Ecotec in our headquarter in our Esports Academy, where the finals will be streamed. So that's just an example of one of the things we're doing. Another thing we're doing is 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 radiator on 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, etcetera, but it's not made with one of our customers, our OEM customers, because apparently none of our OEM customers are working on on this direction. So we took the opportunity to develop this product for small form factor PCs that a lot of customers ask about. So so 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 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, but 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 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 c o two and power and what have we. But for as long as there are no standards or requirements, they are not going to do it. And that's basically what we have seen. So 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 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 and still do is that in the car industry, I'm sure nobody woke up one morning and say, let's put on a €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. And 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 the enormous amount of power that goes into the data center. I cannot guarantee you that I'll be successful with this. I cannot guarantee you how long time it's going to take. But 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 in the company to see our demo, etcetera. So, again, it's not something that's happening overnight, but I'm convinced that this is where we should be putting our resources in. And 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. But I can perceive that 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 And nobody tells their customers how a data center should be built, then no asking for it. So from that perspective, we are a little bit back to square one because, although we can probably all agree that all measurements should be all measures should be taken to to save c o two, etcetera. It's just the fact that most politicians and the the guys who are actually doing the legislation, they have no clue that we even exist. So this is still very much a greenfield. But it's also exciting because there are new opportunities that we've never even dreamt about before. But but 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, yeah, we see the improvement in in q two. We will maintain our zero to 10 to 10% growth for the year, and that's probably disappointing to to some of you. I look at a little bit different because if you look one year back, we were all super excited about q two, and we thought we were going to kick it out of the pack. And then what happened? Then we had two soft quarters. So so therefore, I would rather keep the guidance until I know any better in in in any direction. So don't read too much into that other than that's how the world looks right now. Those of you who know us, you know that we have five minutes of visibility. So it's really tough for us to to say anything about Q3 and Q4 at this point in time other than things for sure looks to to to be much better than it has been. And when we meet next time in a quarter, then for sure we'll know even more. Thanks, Andre. And with that, we should start taking your questions. Let me remind you that you can, you can you can follow, two ways. Either you can type in your questions on the web, on the website, or you can, follow the instructions by operator, Sharon, who will take over now. Sharon? Thank So we have one question on the web here, and it says what should we read into the Alienware r five PC with two liquid cool GPUs? Well, I don't I I'm not sure I understand the question. You can read into it what you want. I think it's I think it's Alienware showing what can be done, and they are now liquid cooling GPUs, obviously, with our liquid cooling system. So, yeah, I'm I'm not sure what one more flavor I can add to that. Then there's a question. If we can add more flavor to how q two looks right now, can you put some numbers to the improvement? No. If we wanted to do that, we can put it into the presentation. Yep. Karen? We do have a question on the phone lines, and your question comes from the line of Per Paulsen from Danske Bank. Please go ahead. Your line is open. Yes. Good morning. It's Peer 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 like, if you should look You'll be the first to know when we have more to say about q two. Okay. Sounds good. And then the second question is concerning the data center. Could you just give an update on the the in rack lag module? Like, if you see the more 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 on the from the web also. Please provide us with your graphic breakdown on your revenues. We sell by far the biggest chunk of our revenue out of out of China, deliver in Hong Kong or in China itself. And what happens from there, we we really don't know. But we have an idea, and my gut says something about 30%, maybe a little bit more in US and then, yeah, a little bit lower number in Europe maybe and then rest in in Asia. But I I we really don't know a lot about it. There are no further questions on the phone lines at this time. Alright. And there seems to be no further questions on the web either. Let me just remind the the listeners here that if you have questions, then you can certainly contact us on our website or email investor. Relationsasetek dot com. With that, we'll call it a day. Thank you very much for your interest in Asia Pac. Thank you. Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.