Welcome to Napatec's 2021 Half Yearly Report. Today, I'm pleased to present CEO, Ray Smets and CFO, Heine Thorskard. Please go ahead.
Good morning. I'm pleased to welcome you all to Napatec's 20 21 Half Year Report Presentation Webcast. I'm Ray Smith, CEO of Napatec. I'm located in Copenhagen today and joined by Heine Thorsgard, our Chief Financial Officer. Today's half year report for 2021 was released earlier this morning on the OSC and is available on the Investor Relations page on our website atnavotech.com.
For your information, a recording of this webcast will also be available on the Napatec website as soon as possible later today. Given the resurgence of the global pandemic we've seen, I hope you're all staying well. We here at Napatec are completely healthy. Next page, please. As always, we want to be available to answer your questions.
We'll answer your questions at the end of our presentation via text, which you can submit on the webcast page Using the button below the presentation, we can take your questions on the phone if you prefer to. If you'd like to ask a question, follow the instructions on this slide. Next page, please. Please note that this presentation contains forward looking statements that are subject to a number of risks and uncertainties. Our actual results may differ from those discussed in forward looking statements.
Next page, please. So let's get started. During this presentation, I will present our first half twenty twenty one business highlights, including a summary of key financial achievements And an update of how Napatek is doing within the SmartNIC market. As always, Heine will provide a detailed review of our first half and Q2 financial results And then I will disclose what our expectations are about the 2021 outlook for our business. Next page please.
Same as in Q1 twenty twenty one, in Q2 and first half twenty twenty one have been on track and as expected With both growth and profitability, we delivered first half revenue growth of 5% year over year in USD Against a very strong first half last year, we've been guiding that our growth would be lower in the first half of twenty twenty one due to the stronger compare. We forecasted this because our expectations of timing of revenue from several key large OEM accounts. If we were to remove one of our biggest clients Year over year for the first half twenty twenty one. We generated solid gross margins of 71.8% in Q2 and nicely within our guided range. This is a continued validation of our value proposition in the marketplace.
On the earnings front, overall earnings were Significantly up and growing year over year demonstrating the overall strength of our business from the top line to the bottom line. With these results, we have delivered 11 quarters in a row of year over year revenue growth adjusted for the 2018 sale of the underperforming Pandion product line. And we delivered a combination of year over year revenue growth and profit for the 5th quarter in a row. One of the key areas we are carefully watching Is the general industry supply chain challenge for semiconductors and other vital technology components. We have strived to stay away ahead of this worldwide challenge by pre purchasing hardware components to ensure that we have them in place to support planned revenue goals in the second half of twenty twenty one and into twenty twenty two.
So when it comes to free cash flow, which Heine will talk about in a few minutes, We put working capital into action to protect our supply chain, which resulted in negative free cash flow for first half twenty twenty one. Although this wasn't expected at the beginning of 2021, we have shown resilience with how we have managed this to the best of our ability. Next slide please. To provide a little more color using several key metrics, take note of the chart on the left. First half twenty twenty one revenue was USD15.1 million which is up year over year and up over the prior first half periods.
Due to foreign exchange headwinds in first half twenty twenty one from USD to DKK, we were down in revenue in DKK as a result. However, the same foreign exchange headwinds on revenue were tailwinds for expenses. On the right side Shows that with well managed expenses, we delivered record earnings, which demonstrates our business leverage and our potential for long term profitability. We did all of this with another unpredictable year of challenges and distractions so far. All in all, our performance in the first half shows that we delivered as promised, But we are now operating within the new normal.
We still have some employees working at home virtually and we have a global travel suspension in place for employees Unless approved by me for the safety and security of our employees, customers and partners. But productivity is strong and we are hiring new engineering and sales talent to keep on pursuing the big opportunity that sits in front of us. Next slide, please. So now let's talk about the opportunities that we are pursuing. Next slide, please.
Napatek builds SmartNICs, which are the devices displayed in the middle of the slide. They are made to easily plug into any standard server which are now the fundamental building blocks for all networks, clouds and data centers. These SmartNICs are built with a super powerful reconfigurable microprocessor called an FPGA, which when combined with our software Accelerates applications across multiple application segments such as cybersecurity, monitoring, infrastructure, cloud and edge and mobile. These application areas require more and more compute power to operate, perform faster and securely. The demand for higher performing compute these applications creates demands for SmartNICs.
But the key strategic advantage to our success is Napatec's software that runs on these SmartNICs That delivers the real value to our customers. The software provides the features that make our customers' software solutions work better, smarter and more securely. But when it's married to our hardware, we add the benefit of FPGA hardware performance to accelerate these applications even further. Next slide, please. So how does Napatec grow within a fast growing programmable SmartNIC market?
In an oversimplified way, We want more smart NICs that we build, that little card in the middle of the slide, to be deployed inside as many servers, That large box on the right hand side is possible. Together, they are used to solve network application acceleration challenges. We designed SmartNICs and SmartNIC software to deliver network application acceleration solutions in 5 gs Mobile, The cloud and edge networking, cybersecurity and financial services. Our solutions will keep getting faster To serve the growing demand that comes from increased network speeds from 25 gig to 100 gig and now pointing towards 400 gig. Our customers benefit with improved TCO in their data center by making servers more powerful.
That way the data center needs less servers to do the same work, Lower cost to power and condition them and reducing overall cost to deploy and operate. Next slide, please. In our business, we believe growth is optimized when we engage multiple paths to the markets that we serve. This requires us to build new partnerships to get us there. That is why we have been working hard in 2021 to put the right partnerships in place and then executing them to get them to revenue.
As we presented previously, our announced partnership with Lenovo is noted as an important step for Napatec. Lenovo is a top 3 server maker with a long standing deep relationship with the kinds of customers that we want to get access to. In this partnership, we have been testing our latest solution focused on virtual networking with key end user customers of theirs. We are expanding our newest link virtualization SmartNIC software designed to accelerate apps and services meeting the most demanding virtual requirements of 5 gs mobile telecom operators and cloud service providers to meet the needs of their target end user customer base. Napatec estimates that the revenue potential of this design win to exceed $10,000,000 over the life of the product once orders begin from their end user customers.
Together with Lenovo, we are fully engaged with several customer testing efforts right now and our ambition is to achieve a design win potentially In the back end of 2021 and ramping product volumes into 2022 and beyond. Another key partnership we presented is with Silicon, A well respected industry leading provider of high performance networking and data infrastructure solutions. Napatec software will power the silicon smart NIC, Which is based on the Intel FPGA SmartNIC IPU reference design. This is a partnership to bring Napatek's Linked virtualization software combined with Silicon's leading Intel FPGA SmartNIC to the market. We continue to work with our friends at Silicon And we'll work hard to help Silicom target use cases and win new businesses together.
Napatec's partnership with Acronix And feature set for SmartNIC designs. Achronix is a leader in FPGAs and embedded FPGA IP offering high end FPGA based Data acceleration solutions designed to address high performance, compute intensive and real time processing applications. As we get this moving, we intend to create a win win in an effort to provide a feature rich high performing solution to a growing set of data center, cloud data center operators, 5 gs Mobile Telecom Service Providers, Enterprise Data Centers and Government Agencies and we expect that this will give us better access to the opportunities That are growing in the hyperscale and service provider 5 gs markets needing higher speed from 100 gig and higher. This is a sampling of the efforts we're working on, But not to exclude our long standing deep relationships we have with Intel and Xilinx too. These kinds of strategic partnerships take time and effort to pull them off then it takes time to make them win we expect them all to be winners for Napatec in terms of new revenue streams As I'd like to show every quarter, here's a sampling of the logos of customers from all over the world who put their trust into purchasing Napatek SmartNixon software in Q2 alone.
I've categorized our logos into the key market segments Like networking and security, telecom and cloud, government and defense, in financial and technology or other. We had important sales in all of these segments With solid recurring business customers in the networking and security category, including key growing customers like IBM, Live Action, VIAVI, Neox Networks, Arteza Networks and Polystar, just to name a few. This is where speed and security against evolving threats are paramount. On the telecom and cloud side, we among others continue to see business with Facebook and we are Building business momentum with key service providers like Orange, NTT, Vodafone, Sedme Oje And OEM partners selling service provider solutions such as Nokia and Mobileyeon. In these domains, Higher speeds and the need for better performance is driven by 5 gs, increasing security threats and the need for greater visibility and faster packet processing.
I'm also glad to see the business activity in the government and defense segment which has been a growing focus area for us over the last couple of years With returning OEM customers like Rheinmetall and Exelio and one of our newest customers, Sealing Tech, all serving the cybersecurity defense market, But also end users and other customers like Airbus Defense, Raytheon, Rockwell, Harris and several of our newest customers, one called provides us Corporation providing high performance software defined radios and the preeminent Pacific Northwest National Laboratory Which is part of the U. S. Department of Energy's Office of Science. In these use cases, mission critical apps need higher performance with 0 packet loss, But with the greater network visibility and control that we provide with our SmartNICs. In the FinTech or other category, we continue to earn business key OEM customers like PICO, Velocimetrix and Refinitiv and end user customers like Bank of America, Handelsbanken of Sweden, The Eurex International Exchange and Capital Group, 1 of the largest investment management firms as well as Jump Overall, we're pretty pleased with the customer wins in Q2, which is seasonally our slower quarter of the year And as we build momentum as the year matures, we're looking forward to the second half.
Next slide, please. As we reported before, we like to keep our investors updated on the latest news of the overall NIC market and specifically the smart NIC market. Our goal for showing this information is to assure our investors that we are approaching a large and growing market with plenty of headroom to thrive and grow. In the latest report showing results at the end of Q1 2021, the total overall NIC market is expected to approach $2,800,000,000 this year, growing at about 21% year over year. This new report reiterates forecasting for 2025 of 5,600,000,000.
In total, the overall market over this period will grow at a healthy 19% CAGR through 2025. In this total NIC market, Napatec continues to be reported as a top 10 player in the overall NIC market in Q1 2021 And we continue to be viewed as a nimble specialist that has proven world class renowned ability to serve the highest performing needs in the network application acceleration market. Focusing on the programmable NIC market on the right hand side of the slide, it's the orange bar at the top of the bar chart. Navitec holds a higher ranking among the growing and evolving mix of companies here. In this grouping, there are 2 kinds of companies.
There are the large self build players, namely Microsoft and Amazon, who up to this point don't buy commercially but prefer to make their own programmable NICs For their own use. And the other kinds of companies are vendors who make SmartNICs for companies to buy and deploy. That's where we sit and that's where we exist. In this part of the programmable SmartNIC segment, Napatec ranks number 6 among the vendors. The smart NIC market is growing faster than the overall NIC market at 26% CAGR due to increased spending by target customers like the ones we're doing business with already and other ones that we are targeting.
And they need products that we are developing and deploying. We grow in this market by winning new designs and building pipeline, Growing partnerships and expanding channels to get access to more and more customers. As we execute our product and go to market strategies, we aspire to approach The long term growth rates of 30% or more per year in this area. We are also carefully tracking the progress in the server market where analysts have been reporting Strong performance in 2021 so far. That's great to hear.
However, they also report that demand for data center compute Would have been much stronger had it been not been for the semiconductor supply shortages. These analysts are seeing a strong indication that shortages in the CPU substrate materials and other components are having an impact on the server supply in 2021. We're watching this Negatively impacted if our customers cannot buy servers that they need to install our products. Next slide, please. Since when I took the role as CEO of NAPA Tech a little over 3 years ago, I promised to keenly focus on our core competencies in building software and FPGA based smart mix.
Also with this, we have been executing on a 3 pronged strategy to grow our business and this strategy has served us well. So just to reiterate, our plan for growth is to focus on our product strategy where 1, we expand our core product revenues with new competitive features 2, we grow new product revenues with new inline features to access new firewall market opportunities. And 3, we gain traction in the fast growing virtual use cases with addressable market needing apps deployed in a as a virtual instance on a virtual machine Such as in the 5 gs Mobile or Cloud and Edge Domains. This multi pronged approach assures we are building core revenues on a solid foundation and expertise While enthusiastically building new revenues in areas where we think we can win. Next slide, please.
Now let's go to the financial details. I'd like to turn the call over to Heine Thorsgard to review more details about our second half and first half twenty twenty one results. Heine?
Thank you. Slide 15, please. Revenue in USD in Q2 was up 4% compared to Q2 last year. Due to the weakened U. S.
Dollar, revenue in DKK fell 5% compared to 2020. For the half year, revenue in USD was up 5% compared to last year and amounted to €15,100,000 and EKK revenue in first half amounted to €93,200,000 compared to €97,400,000 in 2020. Gross margins in Q2 ended at 71.8%, down 3.4 basis points compared to Q2 last year. Gross margins in first half of twenty twenty one were 70.9%, down 1.1 basis points compared to last year. Our staff costs and other external costs in Q2 amounted to €29,900,000 compared to €27,500,000 Q2 last year.
For the first half of twenty twenty one, staff costs and other external costs amounted to CHF 60,300,000 compared to CHF 61,000,000 last year. EBITDAQ in Q2 amounted to €3,400,000 compared to €9,400,000 in Q2 last year. And EBITDAQ for first half of twenty twenty one amounted to €5,800,000 compared to €9,500,000 first half of twenty twenty. Staff costs transferred to capitalized development costs in Q2 Amounted to $5,200,000 compared to $2,400,000 in Q2 last year and $11,600,000 for first half compared to $6,200,000 first half last EBITDA in the first half of 'twenty one amounted to $17,400,000 compared to $15,700,000 last year and EBIT amounted To $7,600,000 compared to $4,000,000 in first half of twenty twenty. Results for the period in first half amounted to 11,000,000 Up $8,500,000 compared to first half of twenty twenty.
Slide 16 please. Net cash flows from operating activities in Q2 amounted to negative NOK900,000 compared to positive NOK14,700,000 last year. For the half year of 'twenty one, net cash flows from operating activities amounted to negative SEK13 1,000,000 compared to positive SEK18 1,000,000 last year. End of Q2, net working capital was €36,600,000 compared to €13,600,000 end of Q2 2020. In Q2, our working capital grew €9,700,000 and compared to end of Q2 last year, our inventories are up €17,000,000 As we've mentioned, we have proactively been sourcing components for some time due to the uncertainty around the supply chain.
And this conscious choice is reflected in the net working capital levels. Net cash used in investing activities in Q2 amounted to 3,500,000 compared to 2,500,000 in Q2 of 2020. And for the half year, Net cash used in investing activities amounted to CHF10,400,000 compared to CHF5,800,000 last year. Free cash flow in first half of twenty twenty one amounted to negative SEK23,400,000 compared to positive SEK12,200,000 First half of twenty twenty. Cash and cash equivalents end of Q2 'twenty one amounted to 38,300,000 Compared to SEK 69,900,000 at the end of Q2 2020.
Now back to you, Rang.
Next slide, please. Thanks, Heine. Now let's turn our attention to our outlook for 2021. Next slide, please. We continue to carefully assess our situation as 2021 matures with respect to business momentum, the realism of the changing nature of the pandemic in the world market And our ability to execute on our goals.
Therefore, we are reiterating our stated guidance for 2021. We remain committed to our previously published outlook for 2021, where we build near term revenues and long term growth. On the revenue front, we expect revenue to be in the range of DKK210 1,000,000,000 to DKK230 1,000,000. As we stated and obviously notable from our first half year results, timing of revenue is expected to be significantly stronger in the second half of twenty twenty one Compared to the first half of twenty twenty one, we are confident in performing well in the second half of twenty twenty one for several key reasons. First, we have better visibility to our second half twenty twenty one pipeline and we feel confident that we have sufficient targets and opportunities to deliver on the expectations second half 'twenty one.
Secondly, we expect to deliver strong sales performance from direct and channel sales who have reported momentum in each of our key focus areas. And thirdly, we also believe in winning new revenue in the range of $1,000,000 to $2,000,000 from our We announced linked virtualization solutions via our announced partnerships, which I reviewed earlier, and we've been building those all year. This kind of revenue does not does I should say this kind of revenue does take time to develop and build momentum. And we know there are some risks associated with timing. However, the feedback we're getting from these partnerships gives us the expectation that we are within reach of these new opportunities.
So yes, we are going for it. We expect gross margins to be between 70% 72% for the full year 2021 We continue to focus on product cost optimization and maintaining our product value in the marketplace with ongoing investments and competitiveness of our products. We expect our staff and external costs in 2021 to be in the range of DKK125 1,000,000 to DKK135 1,000,000 And we expect capitalized development costs to be in the range of DKK 20 1,000,000 to DKK 25 1,000,000. And we expect depreciation and amortization To also be in the range of DKK20 1,000,000 to DKK25 1,000,000. We expect EBITDAK and EBIT to be in the range of DKK22 1,000,000 To DKK30.6 million.
With performance in the middle of the guided ranges, EBITDAK and EBIT will be DKK 26 0.2000000. We remain vigilant about the impacts being felt across many of the markets today due to the COVID-nineteen pandemic, But we feel good about our ability to execute and we believe we're managing our business through these impacts of the pandemic well as well as possible. Next slide please. So in conclusion, we are striving every day to build a company that's deeply rooted in what we do best. That's building innovative FPGA based SmartNIC hardware and software solutions that solve real world problems today accelerating applications and improving the economics of the data center.
We're looking to unlock opportunities within the expanding 5 gs networks and supporting the growth of apps running in the data centers. Over the years, we have delivered a combination of stability, growth and positive earnings. And in doing so, we build a good prospect for investment for our investors. Our increased focus on building key partnerships promises to support our goal of expanding into new parts of the market. We will always strive to give you a realistic view of what we can And then we are committed to find a way to beat it.
Next slide, please. And now I'd like to invite Heine to join me to take your questions. If you'd like to ask a question, you can submit it now on the live webcast page using the button below the presentation or you may dial into one of the phone numbers on the screen And we will do our best to respond to as many text questions as possible that we receive. Operator, do we have any calls in the queue?
Thank If you wish to withdraw your question, you may do so by pressing 2 to cancel. While we are waiting for questions being registered, Let's start with the written questions. Ray, please go ahead.
Okay, operator, thank you very much. I appreciate that. We do have a handful of questions that are texted in. So we'll jump into a few related to our second half visibility. One question is with results reported in the first half of twenty twenty one, you have a large objective for second half.
Can you further comment on visibility of your pipeline for second half? And another question that I'll combine in here is what do your OEM customers communicate in the second half? If I understood it correctly, you have good visibility from OEMs. Do you see pent up demand already in Q3? Those are very good questions and I'll try to cover all of the aspects of that to give you guys a good sense for second half.
So As you know, historically, our second half tends to be stronger than our first half. In 2021, it will be no different. We've been reporting that since the beginning of the year And we feel pretty good that we've judged that very accurately. Also in conjunction with second half being our strongest Half of the year. Q4 is our largest quarter and we're just now getting a better view of what could be possible in Q4 as well.
So our pipeline visibility for second half It's obviously underway. We're in the middle of Q3 and getting a good look at Q4. And we feel very confident that we have sufficient pipeline and Sufficient targets to deliver on our objectives in the second half. We do tend to have a higher dependency on end user activity in the second half, especially In Q4 and that does have a shorter life in the pipeline. So these activities with the end user Pipeline activity tends to be a little bit short and our visibility tends to be a little bit weaker, but so far so good in terms of what we're seeing as we enter the middle The second half of the year.
And on the OEM front, we do think that we'll be back to more of a standard normal business volume in the second half From a visibility perspective, we feel pretty confident with what we're seeing in the second half. Sales is reporting positive momentum as we move through Q3. And although nothing is guaranteed and obviously forecasts are subject to change, we're watching and executing this second half very carefully and we feel very confident So thank you for that question. Operator, do we have any calls live that we should take? We do have other text messages here waiting.
We have received one question over the phone so far.
All right. Let's take it.
Yes. The first question is from Andres Klubsen at SEB. Please go ahead. Your line is now open.
Good morning, guys, and thank you for the update. And great to hear that you're in Denmark, Ray.
Yes.
Two questions. First of all, could you elaborate a bit further about the progress with Lenovo? And then secondly, if you could also if it's possible To add some further color to this OEM, as you said, there has been a bit slow in H1. Thank you.
Sure. Thank you for the questions and it is really nice to be in Copenhagen. So a little bit about the Lenovo relationship. Thanks for that question. It's obviously a very important key strategic relationship as I commented on in the presentation just a few moments ago.
And we've been working with Lenovo very carefully and very diligently for quite a number of months now and reported This official relationship earlier this year, we are in the process of testing with multiple customers. The process with Lenovo is They are our customer and they have their end user customers that they bring to the table offering their solution built on the NapaTec design. The testing process is underway. These are very rigid schedules. If you're familiar with how China Does their annual kind of vendor selection process and PO process, it's a very structured and laborious process and you just have to go through The process in order to achieve success.
Each and every customer that we have been testing with Lenovo, which should be an indication of Activity, which is a good thing for us to report. They all have different sets of needs. Not every single use case is identical. The good news is our solution is attracting the attention of their end user customers in certain subsets. And we're working towards achieving results through the testing process.
It is a very interesting time to do this, of course. We're doing this all remotely. All of it's going very, very well. These are Complex lab environments that are not easily set up remotely. The good news is we have local China employees that are working with Lenovo to make sure Testing processes go well.
We have 2 end user customers that are currently in the spotlight, both in the telecom and the cloud sector. We have testing going on currently in Q3 and into Q4. And so we have this process continuing in the second half. And We're focused on expecting to get to initial PO with one of these efforts. Probably we'll start small And then probably larger in the year after.
This is very typical. It does take time. Design wins of this Tight and this complexity do take time. But the fact that we've entered the testing process is that's a major milestone and indication of progress with this relationship. And we are hopeful and ambitious about getting our first purchase order there.
And Certainly, we would endeavor to achieve that before the end of the year. So that gives you a sense for how we're doing with Lenovo. So great question, Anas. And On your second question regarding the OEM, so some we obviously we consider the OEM relationships Kind of our A plus revenue relationships, we love the end user relationships of course, but the OEMs give us a little bit of a look ahead. That's one of the benefits we get with the OEM relationships.
OEMs take time to develop, but once you actually win the relationship with the OEM, you tend Have a revenue arc that exists for 3 to 5 years. And many of our OEM customers have been loyal customers for a number of years. So we have close relationships, but they don't all operate the same way. They all have different fiscal years. They all have different fiscal Q4s.
They have different cadence in terms of how they order. So all of the OEMs do have their own kind of cadence of Productivity through the year and we get to know that over time. And we do have some expectations when we do forecasting what we typically see and then we actually receive forecast From the OEM customers and we always endeavor to get 3 to 6 month visibility from our OEMs. So in the case of the large OEM that we reported The first half that we would have grown at about 23%. So that should give you an indication that that's a fairly large and important OEM to us.
We don't see any negatives with their business. This is just normal kind of changes in how their business is operating. They're continuing to operate very well. We're doing some Very, very good work with our current designs and moving into new designs. And we expect that OEM to continue to be very interesting and productive and growing for us as we Move into the future.
And we have a view of what that looks like in the second half. Obviously, we do have forecast from OEMs and that's why we're reiterating Our guidance for the second half. So thank you for that question. Very good. Operator, we should take a question from text and Oh, I'm sorry.
Go ahead.
No, just thank you for the elaboration.
Yes, thank you. I didn't know you were still on the line. So thank you very much for the question.
Thank you. We haven't received further questions at this point. So back to you.
Okay. We do have a couple other text questions here that I'll try to Cover one was came in and I'll just read the question and then I'll comment on it. Do you believe in consolidation in the market? And what would be Navitek's take on that. So, of course, you know, the as we've been reporting about the market, If you look at the total market space for NICs, we exist in the faster growing programmable NIC segment.
When you look at the vendors that participate Within the NIC market, you see very large, very mature players in this particular space. And then you see some smaller players like Napatec that are emerging especially in the faster growing newer part of the NIC market called the programmable NIC market. So when you look across that market, some investors may recall I call this the wild, wild west of the NIC market. It is not consolidated Like the other two portions of the NIC market, the basic NIC and the offload NIC market is highly consolidated. There are significant share owners in those particular parts of the market and consolidation has occurred over the years for them to achieve that.
The programmable NIM market in my opinion is ripe and ready for consolidation. We have large players and small players participating in this market, growing at different rates And it's a fast growing part of the market. So my take on that is that we'll probably see some changes. We saw Xilinx acquired by AMD. Of course, we saw Alterra Acquired by Intel.
As that consolidation has occurred, we're going to continue to see changes in this marketplace. There is a question that just came in regarding the FPGA market. So I'll just read the question and Between Heine and I will answer it. The overall shortage of FPGAs in the market, will this have an effect on Napatek's revenues Or will this lead to new business opportunities? We also have a question regarding commenting on cash and Capital working capital development in the second half of the year.
So I think this question we can kind of take I'll take the first half and maybe Heine can take the second half. As we reported, we put working capital to work. We've been watching very carefully and evaluating The component supplies that are necessary for the hardware portion of our product offer. We knew that there was a problem in the Supply chain market since last year, but we called it right. We anticipated that this shortage would get more And of course in terms of FPGAs, we didn't want to get caught so called with our pants down, obviously being a very important part of the component Of our product offers, we have seen lead times dramatically increase on FPGAs.
We have a close ecosystem strategic relationship with our FPGA supplier. So we get premium access To that as much as we can. But the good news is we have been putting working capital in place to acquire the components necessary for us to build our products. We've done a super job doing that in preparation for second half. We took a decision a couple of months ago to deploy more working capital to secure Component supply into 2022.
This is a first for us. We've never had to buy this far in advance, but we had the cash to do so. And I think we made a great decision to put it to work. So overall, the answer to the question is the FPGA shortage should not have an immediate impact To our revenues at this time. And Heine, I'd like you to comment on any sort of comment on cash and working capital development
As noted, we've increased our net working capital over the last couple of And if you look at the cash flow statement, you'd also notice that if we eliminate for the changes In working capital, we would have been producing a positive free cash flow. At the current level, we expect our working capital basically not to increase in second half And consequently, also expect a positive free cash flow in second half. I think that's The comment on cash flow.
Okay. All right. We have another texted in question. It's a little complicated and I might need some help on this, Heine. So let me read the question out.
I think between the 2 of us, we can answer it. It says The last 5 years, Napotek has not grown at all given you reach your forecast of DKK 220,000,000 for revenue. And the growth rate has been declining in USD terms. At the same time, your market grows with almost 20% annually. It implies you could lose relevance.
How do you reflect on this development? So the over the last obviously, over the last 5 years, we've gone through a migration Product strategy and direction, I think it's most relevant to evaluate our company over the last 3 years as we've accelerated our investment in the SmartNIC market. We obviously are watching this market very carefully. We understand the growth rates of this market change almost on a quarterly basis. But the good news is The programmable NIC market continues to be a growth market.
The programmable NIC market also has 2 large Self build players within that market that to some degree obscure the long term forecast of what that Growth rate will look like and also there are different portions of the market, sub segments of this market That address different use cases, specific use cases that comprise the entire market. We focus on use cases in the networking, The cybersecurity and the virtualization part of the markets, which we believe we are in the best position to address and provide us what we believe is a Significant growth opportunity within this growing market. So we're focusing on our core competencies. We're going long here. We're going to continue to foster our development and our expertise in the packet capture part of our marketplace, which delivers, we believe a very Nice growth curve as we continue to invest in that, but we're actually investing more heavily in 2 new areas that are faster growing parts of the market.
We call 1 the in line portion of our opportunity, which is kind of port to port forwarding technology, which Where we can activate use cases within the 5 gs market as well. It takes a little time to get into those markets. Those markets are beginning to grow as we speak And Napatec is beginning to knock on that door. So we continue to have a very confident posture about our long Heine, would you like to comment on the next question? There is a question that's been texted in regarding our inventory and our gross margins in the short term.
Sure. The question is, will your inventory buildup affect your gross margins in the short term? Our gross margins, as you probably noticed, vary from quarter to quarter due to the product mix Changes in the quarters where our software features are adding More value, so the high end products are dominating the revenue. Our gross margins tend to be higher. The actual buildup of inventories, the purchase of components that we've been pursuing for the last couple of quarters Will not affect our gross margin.
So we expect, as iterated on the guidance, That we would see gross margins in the level of 70% to 72% Continuing in the next couple of quarters with the few normal variances that we have. So So basically no effect from the inventory buildup expected on the gross margins.
All right. Thank you for that. Operator, do we have any calls on hold?
We have not received further questions. I will hand back to you.
All right. It does not look like we have any other text questions. So I guess we'll bring this To close, I'd like to thank our viewers and investors for your confidence in Napatec. Thank you very much to everybody. Thank you to the Napatec