Hi, and welcome to Elliptic Labs Q3 2022 presentation. My name is Laila Danielsen, and I am the CEO of Elliptic Labs, and today I have our CFO, Lars Holmøy, joining as well. The three main takeaway from today's presentations are as follows. First, we here at Elliptic had a strong Q3 quarter with solid revenue in both the smartphone and the laptop market. Secondly, in the short term, we see some volatility which consequently may result in a lumpy Q4. However, the midterm market, we see a solid demand from the PC vertical. Therefore, we are and will continue hiring to meet this solid and strong demand from the PC market. This is important. Okay, let's jump into a little bit about Elliptic Labs. Our vision is to build the leading software platform for all sensor, making every device smarter, more human, and environmentally friendly.
What we do is that we leverage existing single-purpose sensor to create new user experience. Existing single-purpose sensors that are already in all the devices today. Let me give an example, and I'll sort of focus on the PC market since that's our next really strong and big market for us. One thing that we're seeing are coming, and this is what Lenovo is mass deploying in the market on their laptop, is the ability to detect if a human is sitting in front of the laptop or not. What we're doing is that we reuse microphone, speakers, and sensor fusion to send out [ultra] signal to detect if you are sitting in front of the laptop.
As soon as you leave the laptop, we can detect it, then the screen would lock for security, and also screen will shut down for power saving. This is just one of the capabilities that we are delivering to the market. We can also deliver many other capability, some that we have recently launched, like the AI Virtual Human Presence Sensor. We can also do gesture, we can do device-device connection, et cetera. Lots of different products that we can deliver to a big market. Today, billions of devices use hardware sensor components that we can leverage to create this new user experience. The market that we're going after are large.
We started out in the smartphone market which is high in volume, but the sensor one is using, and we'll talk a little bit more about that later in the presentation, is at lower cost compared to, for example, the PC market, which also is high in volume, but the sensors, the physical sensor that we start replacing to create a set of features has a higher cost. Also there are more room to charge a higher price in the PC/ laptop market, and there's lots more greater value we can even bring to this market. We're also exploring into the IoT market as well, and we also sort of carefully exploring a little bit also in the automotive market. Okay, back to Q3.
In Q3, we saw 75% of revenue growth from contracts with customer year-over-year. Laptop revenue represent a significant part of the Q3 2022 revenue, including a standalone milestone revenue and license revenue. The laptop license revenue is expected to continue to ramp up here in the fourth quarter and into 2023. However, as I mentioned initially, we see a temporary slowdown in the end customer demand in the smartphone vertical here in Q3 that we may expect to have some lumpy impact for us in Q4 of 2022. Okay. That doesn't mean that we're not signing new contracts in this market. Thus far, we have announced 28 smartphone launches year- to- date, which is really good, and we will continue launching in this market, and we will continue signing more contracts.
We see here very near term that it's a weaker consumer sentiment in the smartphone vertical. We will continue signing contract, to be clear, and we will continue launching. Still good need for our product in this market. Okay. Let's talk about our next growth vertical, which is as the PC market. We see short-term drop in a laptop demand. This is due to a challenging market condition. However, what we are seeing and experience that this actually gives us an opportunity because leading players in the market, you know, the Lenovo and the HP and the Dell of the world, Acer, ASUS, are increasingly focusing on innovative and software-centric solution. Let me try to illustrate this with an example, okay.
For example, let's say, hypothetically, if you are Lenovo and you bought a Lenovo laptop, and then you were working in a hybrid environment, which majority of us are doing these days. You will buy, let's say, Lenovo keyboard, a mouse, maybe even a dock station, external display, and you set that up. You wanna duplicate that environment in your office to ensure that it's easy to set up all these devices, and they work nicely together. These leading players are looking to us to provide this frictionless user experience that's easier to set up, easier to use. It's not just the components I'm talking about, but I'm also talking about the broader set of products that each of these customers have. This is really positive.
When we work with the customers, obviously in this market, we're starting from a, you know, not zero, but we're starting very early in a very large market that we can grow into. The customer we recommend, they're taking holistic approach like, "Okay, how do we fit in to not just the laptop market but the broader set of products that these customers have?" We start with a really strong value proposition with delivering a sort of near-term need that they have, and that's for the human presence detection, but we have a phenomenal product, software-only, that competes directly on single-purpose sensor, for example, like a time-of-flight sensor that it has a higher cost. We have a solid foundation that we start on.
Furthermore, when we work with these companies, we're looking, or the way they're approaching us is also like these are long-term relationship where we are creating a contract. The methodology of the contract is back to the example of Lenovo. We started out with a few models, then they added on an additional 18, and then they have kept renewing one contract after another, keep expanding their footprint of our software into the market. Note, this is just with one single product, but we have more, and we have more that we are talking to with all these players in the market. We are in a pole position to enable software-centric and scalable and cost-reduction solutions in this market. We are in unique position, and this is important.
Another takeaway from this particular message is also that these customers, we are looking at long-term relationship. This is not a one side project, but contracts that we can truly expand organizationally wide with our customers. That's important to note. All right. Talking about high pace of technology adoption with Lenovo, we start initially with the functionality of delivering presence detection, and this methodology and this approach is the same approach that we expect to see with more customers here over time. Also note, even with Lenovo, this was the first time we went out with one customer, and yet they have expanded, I would say fairly rapidly. This also demonstrates our ability to deliver our software scale. Even though we have great ability, we would still have to hire to meet the solid PC demand from the market.
This is important. Of course, as Lenovo has adopted our technology, we see and we continue to see a strong interest from the other PC vendors. Very positive, very optimistic, and very confident that the PC market will be a solid and excellent opportunity for us here at Elliptic Labs. Who do we generally compete against as a starting point? Well, we mostly see single-purpose hardware sensor. Note, I'll give an example here for a time-of-flight sensor or even a radar sensor that has a single-purpose capability. What is our value proposition to the customer? Well, one, we eliminate sourcing risk because we're 100% software. Two, we reduce cost because at scale, we can have a more aggressive price point or more elasticity in our pricing model compared to a physical hardware sensor.
We also increase the battery life, we can increase privacy, and at last but not least, we can also add more features, and this is what is very interesting for us when we are talking to the laptop OEMs. All right. Multiple opportunity for expansion. Sort of following the methodology that we did in the Smartphone, more customer, more models. What we see a stronger traction for sure in the laptop vertical is that it's not just, you know, the presence detection that the laptop market is looking at, but they also look at other type of our sensors or our product. Nicely positioned in this market for growth and very exciting time ahead of us. All right. Thank you. Now I leave the presentation over to our CFO, Lars Holmøy. Thank you.
Thank you, Laila. Elliptic Labs is well-funded for continued expansion across multiple verticals. We have a very strong balance. We have cash on hand, and we will continue to hire to meet customer demands, and especially in the PC vertical. We have had a strong growth trajectory supported by revenue from laptop vertical this quarter. Last 12 months, we have grown 75% in revenue from contracts with our customers, and this quarter was the first quarter we had license revenue from the PC market. We also had a standalone milestone revenue that was a significant part of our Q3 revenue. Looking at the total revenue, we had a 38% year-on-year growth. Marking this is also the first 12 months or the last 12 months, we do not have any other operating income, government grants, and so forth. First, Laptop revenue recognized in third quarter.
Although we are in the midst of an uncertain near-term outlook, we doubled our revenue from contracts with customer year-over-year. As I said, it includes now also a significant portion of Laptop revenue, whereas a significant portion of that again was from a standalone milestone revenue. We do see slowdown in the end-user smartphone market. This uncertainty in volumes in the coming quarters may impact our Q4 revenue. However, Laptop license revenue is expected to represent the majority of revenue in 2023. This quarter, looking quarter-on-quarter, we had 102% growth in revenue from our customers. Of course, as said, this is supported by our laptop vertical. As you also can see, we are profitable this quarter.
One of the key reasons is we are highly scalable with near zero COGS on current revenues. One of the key benefits on our selling our software. We also increase our employee benefit expenses year-over-year, and we have added on 14 more people year-on-year, and we are now 79 full-time employees at Elliptic. We will continue expanding our, yeah, H.R. and our people. We need more people to meet customer demands. EBITDA positive at NOK 6.2 million is proof that our model and the way we work is a workable solution. As I started this presentation with, we had a strong liquidity position.
We have NOK 200 million cash on hand. Negative cash flow from operations reflecting our increased net working capital. Our investing activities reflecting capitalized development costs, and it's quite conservative. Cash flow from our finance activities, as always, includes repayment of our lease liabilities, repayment of short-term liabilities, paid interest, and proceeds from issuing shares. We have an equity ratio of 94.5%, and as again, strong cash position. Our long-term liabilities mainly reflects our loan from Innovation Norway. Thank you.
Thank you. Thank you, Lars. Elliptic Labs will continue to increase its number of customers, models, and products, and will continue to enter into new vertical. Based on our growing number of projects in the PC market, we still maintain our ambitious revenue target of NOK 500 million in 2023, but acknowledge that the general global uncertainties may impact our target. All right, now we will take a short break to review the question, and we'll be right back. Thank you. Welcome back. First, just want to thank you the gentleman that has gathered lots of questions from the retail market and submitted that to us, so we appreciate that. Let's start addressing. We have gotten quite a few.
Yeah
Questions here thus far.
Yeah. Can you please elaborate more on the feedback on the laptop on the human presence, and how does it compare to hardware sensors competitors?
Okay. First, let me just start by this is very important to understand. Our value proposition is stronger than a single-purpose hardware sensor. First, I actually address the last question first.
Mm-hmm.
If you look at, for example, a time-of-flight sensors that you use for just basic presence detection, the only thing this single-purpose time-of-flight sensor is doing and providing as a service is only turning off this screen for presence detection. Our technology is so much more. This is exactly why the market and the, particularly PC market is coming to us for that. When it comes to the presence detection itself, we have, from the broader market, great interest, we have great feedback from the market.
We haven't received issues around the deployment, which is very nice, even though we have already started deploying this in mass scale. Obviously with this positive feedback from the market, it also has allowed and motivated for Lenovo in particular to deploy very broadly as we see for all the contracts that we have kept signing. Furthermore, we expect and see the rest of the market to follow.
Mm
The same and using our technology for.
Mm
Human presence detection. The fact is there are several solution out there for human presence detection, and the alternative, they are all single-purpose hardware sensor that we replaced with software only, better pricing.
Mm
We add more features. Overall positive, very positive response from the market.
Yep.
I'll take the next one for you.
Yeah. Okay.
Have you had any problems with scaling within laptops so far? I guess we have sort of answered that already. Do you have sufficient resources to also scale with other OEMs within the coming 12 months then? Yes, we do, but you can elaborate.
Yeah. Our software has been created and designed from the very beginning, from ground up with scalability in mind. I think this quarter is a proof of that. We have proven that over years in the smartphone industry. We're already in hundreds and millions of smartphones. Of course, with our very great engineers, which we're looking for more, we can deliver. Yeah, there's basically no problem in scaling. We are having customer demand, and we are looking for more people, but it does not hinder or stop our scalability.
No. As we of course are.
Mm
You know, building new products.
Yeah
Continue scaling with more and more customers.
We continue our R&D.
We have to also hire more people.
Yeah.
We are not slowing down in hiring at this point. I guess I'll summarize. As usual, we have received many questions.
Products
Products.
Yeah.
Like when is it coming out? When is the next Laptop contract coming? Lots of details.
Does it take longer time to?
Et cetera.
Yeah.
Lots of details.
Yeah
I n regards to pricing.
Mm
Scaling, who is doing when what. I mean, frankly, you deserve to have more information. I understand that. Unfortunately, as we have repeatedly stated.
Mm
Which is very common in this industry.
Mm
Is that we have strong and very strict.
Mm
Non-disclosure agreements.
Mm
Meaning we cannot share publicly information out about our agreements.
Mm.
Also, frankly, from a competitive point of view.
Mm
We do not want to either, even if we could.
Mm.
Because as we are moving into this market, I'll just make another comment here that it's a bold statement, but it is the fact that we see now that the way we are deploying into this PC market is that we start also in the mid-end. If you look at today's market, most, you know, models in the PC market in the high-end.
Mm
Already have the time-of-flight sensor. We started in the mid-end and took the mass volume.
Mm
Is that not just in now, but even Lenovo started.
Mm
They are replacing time-of-flight sensor and other, for example, radar sensor.
Mm
With software only.
Yep.
These, you will see some old models that has time-of-flight sensor. You have some that already have signed in before we even start working with these customers. That would still be in the market, but we expect to see more and more replacement as well as the broader deployment. They can do the broader deployment because of our pricing elasticity. Okay, I'll do the next one here.
Yep.
How does the slowdown in the
Okay
consumer segment
Yep
Impact Elliptic Labs?
I think, yeah, we see, however, we have shipped on 22 phones this year. We are aggressively expanding, as you can see, in the PC market. We're starting from zero. Even though the top- line comes down, we are moving up. We started pre-COVID levels, maybe it will end up at again, maybe we don't know yet, but it's where we're at. I think our, as you said, price elasticity.
Mm-hmm
I think our value proposition in total, as we do more than single-purpose things, we can have a broader scope. Yeah, we focus on security, power savings.
Savings.
Something. We can help them. We see that they shifting their focus to a more software-centric approach.
I have another question.
Yeah
Address that quickly. It's basically specific details. Can you comment if a contract to date with Lenovo accounts for more or less than 50% of the laptop volumes in terms of volume? We cannot answer that. We are able to answer it, but we're not allowed to answer due to non-disclosure agreements. We'll continue here. I have some more questions down there.
Yeah.
Okay. Well, you sort of addressed this, but maybe you wanna talk a little bit more about recruiting. Is there a bottleneck? Is the bottleneck for succeeding your expansion, is that due to that we have issues around recruitment?
No. I think, on a broader scale, there is easier for us now as we are expanding in the engineering side. It's easier for us to recruit. Short answer. We do.
Okay. Can you explain how you're working with both laptop customers?
Mm
Chip producers and other software integrators when you're trying to make an entrance into more market players? In other words, are you selling the product directly to laptop companies or are you working mostly with, for example, Intel, Qualcomm, MediaTek, to position your product in the best and most efficient way? Our model is that today in the PC market.
Mm
We sell directly into Lenovo. Here we have some pricing elasticity reduced to software only. Today, how we are charging, we're charging a price per unit, so a license price per unit.
Mm.
When we deliver our software to do the integration, we work closely with the biggest P.C. chip manufacturer in the world, Intel, AMD and Qualcomm.
Mm.
We work jointly together with Intel, Lenovo, and ASUS.
Mm
In this integration project to ensure support, we require support from Intel, which they are giving us. It goes two ways. One, they wanna create more differentiating solutions on their chipset.
Mm.
Two, they get pressures from the OEMs.
Mm.
We partner with Intel, actually not to sell, but to deliver our product into the laptop manufacturers. The product is sold directly into it. There are other models that we are exploring and that we could potentially do, is we could sell our software into Intel, and they would bundle it into the chipset and sell it to the OEMs. What we see thus far is, and that is a sort of business discussion, you know, what type of price point do you give.
Mm
To get to that level. Is that the best foundation for us to grow with the customer? Because the way we work with our laptop manufacturers, you know, I'll talk a little bit.
Yeah
B ecause I'm getting a bunch of questions about how we are selling and working and how they're buying, is that the customer take an holistic approach, um, when they work with us. They, they don't look at this as a short-term one-off deal-
Mm
A solution that they, at least for the presence detection as a start, to do a broad deployment. Furthermore, as you may know, is that these large PC manufacturers, they have lots of other products like accessories. They're trying to do a closer integration between all their product lines, so give the consumers better user experience, more frictionless user experience. For example, a frictionless user experience, so they can also ensure stronger customer stickiness. Let's say if you buy a Lenovo laptop, that it's easier to buy a keyboard and a mouse and a display and a dock station, for example, and other products, maybe a conference system, et cetera. This is here where our software also can help. We start with sort of holistic approach. We make sure that the agreement, which is complex and takes a little bit of time to negotiate, cover the whole enterprise.
Mm-hmm.
We start first with the sort of the minimum viable product.
Mm
To get in, which is the presence detection, get the core platform in, and then we start adding on functionalities.
Mm
As we go along. This is how the customer view us, and they are looking at us as a long-term partner. Okay. I think we have one about.
Yeah.
The 2023 number maybe.
Yeah. In general, there are quite a lot.
Yeah.
Yeah, you can pick and choose, but how are we gonna reach?
There are many questions about that.
Yeah.
Yeah.
So.
You know, once again, I do understand that it's hard to calculate.
Mm
How we get to the number for everybody that's sit and listen to this presentation. If you look at just some numbers, if you look at the big three.
Mm
You know, that have over 50% of the market.
Yeah.
If you look at the price point, they have, for example, for time-of-flight sensor at $2 or $2.50. Let's say you look at Lenovo.
Mm.
They have about 70 million times two, that's $140 million. I'm not saying that we are charging $2. What I'm saying is that since we're starting from the ground, even though the market is going down, it seems like it's going down pre-COVID. It's still a large market for us, we see that we can start scaling very efficiently.
Mm.
This is what we are relying on.
Mm
We have to continue expanding with our customer.
Mm.
Either expand even further with Lenovo to reach this target, which we see that they have a strong interest in.
Mm.
Also, you know, as Laila talked about, even if we do 100% of Lenovo, we are there, or if we add on a few more of these.
Mm
Larger or smaller OEMs.
Mm.
This is how we expect to reach the number. Of course, we will get some revenue.
Mm
We see here short term, we addressed for Q4 that it's a little lumpy due to the smartphone market.
Yeah.
This we expect to be very near term.
Yeah
In 2023 we see that our smartphone customers gonna continue deploying with us. What we really are relying on is the continued expansion with the PC market. That's a fact. That's how we expect to reach it. We know it was ambitious target.
Yeah.
We know there are some uncertainties and global uncertainties.
Mm
If even looking at the past two weeks, there are lots of curveball comments. We see such a solid demand in the PC market.
Mm
That we concluded and to still stick with this ambitious target.
Yeah. I also received quite a few technical questions about revenue recognition for those. Yeah, IFRS 15. As we said, a significant portion of our Q3 revenue is from the Laptop, and a significant portion of that again is from our milestone.
Mm.
How and when we do get milestones is, of course, we can't comment. No.
Yeah
That's basically it. I think we've covered most of it, yeah.
Okay.
Yeah.
Very good. Okay. Thank you very much and have a good day.
Thank you.
Thank you.