Welcome to today's Napatech Third Quarter 2022 IMS Call. My name is Bailey, and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the conference over to our host, Ray Smets, CEO of Napatech. Please go ahead.
Good morning. I'm Ray Smets, CEO of Napatech. I'm pleased to welcome you all to the Napatech Third Quarter Interim Management Statement Presentation Webcast. I'm in Copenhagen this morning for this report. Today's third quarter 2022 IMS report was released earlier this morning on the OSE and is available on the Investor Relations page of our website at napatech.com. For your information, a recording of this webcast will be made available on the Napatech website as soon as possible later today. I will answer your questions at the end of this presentation via text, which you can submit on the webcast page using the button below the presentation. I can take your questions on the phone also, if you prefer. If you would like to ask a question, follow the instructions on this slide.
Please take note that Heine Thorsgaard , our CFO, is not able to join me today because he's on a sailing expedition and is unreachable this morning. For those of you who have specific questions for the CFO, he will be available over the next few days to take your questions.
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. 2022 has been a year of many unexpected circumstances, so I have tailored today's presentation to focus on the topics about Napatech today. My objective is to review the results through Q3 2022, emphasize the breakthroughs we're making since we've been embarking on our updated product strategy since about 18 months ago, and provide an update on our board's efforts to evaluate our strategic options going forward. I will finish with the current market outlook.
Let's first get into the financials. Clearly, when we set our sights on 2022, we did not have the ability to predict the impact that the now known market climate conditions could have on customer order activity, nor the impact of the then unknown geopolitical challenges we are facing. When we spoke in August in our Q2 report, we had some expectations that the market would pick up in the second half of 2022, especially in Q4. This is now expected not to be the case. As you already know, Q3 came in lower than we expected on revenues. What we got in Q3 was slightly up from Q2 by about DKK 2.5 million , but we expected that the market would have picked up, and we would have delivered an even higher result in Q3.
Consequently, we are continuing to see the same impact to our customer buying behaviors in Q4, which have an ongoing impact on what we would normally have expected in Q4, especially with enterprise end customer pipeline and orders. We're communicating a lower forecast for the full- year 2022 as a result of what we see today. Through Q3 year to date, gross margin was 56%. Gross margins were significantly impacted due to the alarmingly higher component cost of a specialized chip in our hardware builds that we did not expect. I will share more information on the next slide about gross margin impacts in 2022 to give you more color about the fluctuations we're seeing here. As we entered Q4, the component costs have not abated, which will impact full year 2022 guidance.
We have taken engineering measures to change our hardware design by switching out the higher cost components. We expect the gross margins from a product perspective to normalize in 2023. We see this as a temporary issue. Staff costs were up year-over-year as a result of additional hiring we did in our engineering team. We've added about 20 engineers in 2022 over 2021, which is the primary reason for our higher expenses. This is what we expected per our strategy. This increase in engineering headcount is, once again, a statement to our very positive view of our revenue growth going forward. I will cover more about costs, EBITDA and cash in our outlook slide coming shortly. I'd like to provide more color on gross margins for 2022 and why we see this as a temporary issue.
Gross margins have been under pressure all through 2022, mostly driven by two areas of impact that we expect to be temporary. First, as reported by almost all other companies in the market, Napatech is experiencing an ongoing component global supply chain shortage and subsequent cost impacts overall due to this situation. This component cost was significantly higher in several components we use in our hardware design, but mostly in a specialized component we use which has had an alarmingly higher cost than normal. We have designed this component out of all future hardware designs while maintaining product performance and quality, and we will see the benefits of this lower COGS impact in 2023 and beyond as a result.
Secondly, our customer revenue mix has materially shifted in 2022 to a lower gross margin profile due to temporary spending changes that we have observed by gross margin-rich enterprise end customer sales. Due to their own inflationary price pressures, hiring challenges, and other market factors, enterprise end customer spending across the board has been reported by many companies as much slower and lower than normal. We have seen this especially in the second half of 2022, which is where we normally have a higher amount of enterprise sales. We expect to see this rebound as the market improves in 2023.
I've included the detailed income statement and the cash flow statements for your review further in the presentation, but I'd like to move quickly to our 2022 outlook on the next slide. With everything that we can see today within our customer markets and pipeline development, we are updating the guidance for our full year 2022 as follows. We have revised our revenue range downward by about 13% to reflect the current market impact on our pipeline and top-line expectations. We expect revenues in the range of DKK 170 million -DKK 200 million . As mentioned in the prior slide, we now predict the outcome of the ongoing component cost impacts and revenue mix to our overall product line gross margins. We expect 2022 gross margins to be in the range of 57%-61%.
Staff expenses and other external costs are expected to be in the range of DKK 140 million-DKK 150 million in 2022 due to the deferred and slower hiring and some budget tightening we have taken into account. As a result, staff costs transferred to development costs have also been lowered and now are in the range of DKK 23 million-DKK 28 million. Thinking longer term on expenses, you'll hear me talk a lot about our partnership strategy. Our partnership strategy allows us to be more efficient from a gross go-to-market perspective because we leverage our access to their marketplace, and we will capture that savings to invest more into R&D.
We are confident with expected market improvements that our cash position will not be an issue, and we will further analyze this as we complete the 2023 business plan soon. We expect depreciation and amortization to be in the range of DKK 23 million-DKK 28 million, and with performance in the middle of the guided ranges, EBIT would be negative DKK 35.4 million. I'm excited to talk about why we continue to be optimistic about Napatech by sharing some key and critical updates about important strategic breakthroughs and commercial successes that's already setting us up for a great year to come in 2023. Napatech is keenly focused on the fast-growing SmartNIC market, and we have emerged as the fifth-largest SmartNIC vendor and the number one producer of SmartNICs based on FPGAs, which gives us a significant benefit over ASIC-based solutions.
Our performance and software programmability has made our solution a standout amongst other players of much larger status and sophistication in the marketplace. We aren't the only ones who believe this. Industry major cloud players like Microsoft Azure or industry experts like Omdia believe that the FPGA is the future of the SmartNIC, and we will capitalize on this opportunity. Without a doubt, we see a large opportunity ahead of us, and the time to invest in winning is now. The targets we want to sell to need us to act now too. We have been successful building a solid base of revenues and profits in our core product line, but we are also keenly focused and executing to build new product capabilities and solutions with our Link-Inline and Link-Virtualization product offers to unlock faster areas for growth.
This multi-pronged approach in our product strategy assures that we are building core revenues on a solid foundation while enthusiastically building new revenues in areas where we believe we can win. As such, we've been increasing investments in software development to accelerate feature velocity within this evolving market. We have been expanding our engineering capacity since early 2021 by hiring full-time R&D engineers and subcontractors to help us to get to revenue faster with a more competitive solution. We have added more than 20 additional engineering headcount and subcontractors since Q2 of 2021, a significant increase in engineering capacity year-over-year. We estimated this investment will impact our cash flow over the coming quarters as we accelerate software development, but we fully expect these investments will enable new design wins, which will drive new revenue expansion for years to come.
We are seeing breakthroughs now. We are getting commercial successes in place as proof points of this success, of this strategy. In 2023, we will continue to further strengthen our positions as the number one FPGA SmartNIC vendor. We have developed several new partnerships that will underscore that point as we develop greater scale. We have received industry feedback that Cisco, Lattice, and others, for example, have taken notice of Napatech's position with best-in-class technology. Despite the challenges of the market climate in 2022, 18 months ago, we embarked on a product development strategy to win new business in 2022 and beyond, and we are pleased to discuss the strategic breakthroughs and commercial success we are seeing already from this effort.
It's suffice to say we aren't happy with the results of our business over the last few quarters as we work our way through this market climate. I want to be fully transparent and open about where we stand, how we feel about Napatech, given the backdrop of our 2022 performance. First of all, this isn't a tactical business that is focused on each quarter. To win in this market, we need to think long, we need to have a good foundation for growth, a solid strategy, we need to go for it or go big. Let me underscore in detail what we have been doing over the last 18 to 24 months to capitalize on our positions of strength and the commercial successes we're seeing from these efforts, which will lead us to a great 2023.
Let's look back for a moment. I met with my team with all our past experiences, expertise, and knowledge about the future of this market, and we decided to go for it, to go big. We decided to unlock growth, and we needed a multi-pronged process to achieve that. We needed to infuse more engineers to get more traction around our virtual and inline products, that they would be best in class and ready for this growing and needy market. We needed to build new meaningful partnerships with the biggest players in our domain to get access to larger parts of the market without investing more into sales. We needed proof points by landing new, large and larger commercial successes. We're on that timeline now, and we are in a more relevant space now than ever. Let me walk you through a few of these.
We got Lenovo as a lead partner to help us flesh out our virtual product solution and to get access to the largest telecoms in the world who will not buy directly from Napatech due to our size. Testing continues. We're making good and steady progress with the latest round of testing with a large Chinese-based service provider and Tier 2 cloud provider. I'm more optimistic now about landing a win with Lenovo in 2023 than I have been in the last year. We launched a new product initiative to expand our inline solution to target the growing need for SmartNICs in the virtual UPF space to capitalize on 5G growth.
We are doing this with a coalition of partners like Mavenir and Fujitsu and Dell and others to get access to that part of the growing market, and we are making good progress in some evals that we've recently engaged in. After Xilinx was acquired by AMD, we took a new perspective with them to expand our position within their larger ecosystem and to take on an active role. We recently announced the expanded partnership with AMD sales and marketing, building new pipeline to sell our Xilinx-based FPGAs to their customers. We also caught the wave of the new Intel IPU strategy early to be part of this next generation of SmartNICs, leveraging an onboard CPU.
Intel is throwing everything they got at this major strategy to build a beachhead with telcos, cloud service providers, and enterprises, we're on that wave with them in a very meaningful way, building products and solutions and porting our software. This will build pipeline. Leapfrogging to the new design win we are working on for 2023, this is a proof point that the commercial success is indeed happening with Intel, there is a lot more where this came from. Our standing now is vastly improved, we are truly more relevant in this market than ever before. In 2023, we're assuming that our classic core capture business, which we have always said is the foundation of our business platform, will be better and grow over 2022. The future of our revenue growth will be so much more than that.
As we invest more into engineering to unlock the potential of this evolving market, our future will be driving revenue with big, significant name brand partners like Intel and AMD and a coalition of partners for the 5G UPF in new emerging areas of growth targeted by our large partnerships. Our partnership strategy allows us to be more efficient from a go-to-market perspective as we will leverage partnership access to the market too. We will leverage that savings and make sure that we invest more into research and development. Throughout 2022, we kept innovating, building partnership momentum, driving our product strategy with deeper software engineering investments. We built an important presence in this market. Even within these current market conditions, we made big progress on this go big strategy. 2023 will be a takeoff year.
Case in point, with a significant commercial win we announced with the new key customer buying our newest Intel-based SmartNIC solution. For sure, revenues grow, so will profits. We will maintain a highly leverageable business model. To underscore the potential growth here, again with this partnership strategy, here is an interesting data point. Today, we're shipping about 8,000-9,000 SmartNICs per year. With the new and enhanced products targeting larger parts of the market opportunity, along with our new partnerships that we believe can increase our annual production, that we might be able to increase our unit production and aspire to 50,000-100,000 units per year. We have never been in a more strategic commercial situation than we are now. Let me provide a little more color on these breakthroughs in commercial successes.
In early 2021, we were very excited to formally announce a strategic partnership we had developed with Lenovo, one of the top three global server manufacturers. This is an ongoing joint product and technology development effort between our two companies. We're developing Lenovo-branded SmartNICs based on the Napatech 25 and 100 gig solutions, running our newest Link-Virtualization SmartNIC software designed to accelerate virtual networking solutions within 5G mobile telecom operators and cloud service providers. Our production-grade FPGA software delivers line rate throughput, ultra-low latency, and is packed with networking, security, and virtualization features, including Open vSwitch offload, live migration, hardware quality of service, telemetry, service chaining, and OpenStack orchestration. It dramatically improves the networking performance and CPU utilization of servers deployed in virtualized environments.
Starting with 5G telecom and cloud data center operators in the Greater China market, Lenovo, together with Napatech, will extend the SmartNIC solutions globally to other world's top network operators. Napatech estimates the revenue potential of this design win to exceed $10 million over the life of the product, and we hope to see initial orders in 2023. The design and development of 5G networks are changing everything. Networks are now data center applications running on servers with a growing number of CPU-hungry apps needing lots of CPU horsepower to run efficiently. 5G will boost speeds in mobile networks to 20 Gbp s while reducing mobile network latency dramatically. These new abilities, with will generate a lot of new mobility use cases from smart vehicles to remote control devices, all requiring high performance and bandwidth. Where does this all get built?
It gets built on servers and data centers, right where Napatech solutions can add immediate value. Napatech is building our solutions in the heart of the 5G network virtual architecture deployments, and this is one emerging area that is getting us even more excited. I'm really excited about our new partnership with AMD, which we alluded to last quarter and subsequently announced in detail in September. We announced a marketing and business development program with AMD that reaches further than ever before into their ecosystem and out to their customer markets. We expect this to be significant as it develops and matures. In this new partnership, AMD sales and channel teams collaborate with Napatech to build pipeline of closable deals for Napatech solutions made with Xilinx FPGAs. AMD agreed to invest in outbound marketing to increase Napatech's market awareness in AMD's addressable market of opportunities.
We have been present in very key events with AMD, such as Mobile World Congress Americas. AMD's goal is to increase sales of Xilinx FPGAs by selling more Napatech SmartNICs. We are starting to build this new pipeline of opportunities in North America, EMEA, and APAC. We already have observed that this new partnership arrangement is going to increase our visibility to new pipeline and grow revenues in 2023 and beyond. Between our companies, we have a goal to build about a $75 million pipeline of opportunities that we can sell to in this new partnership. It is big. SmartNICs have expanded and have been enhanced by combining the horsepower of the FPGA with an onboard CPU to drive even more offload performance for the SmartNIC.
This is now known as an IPU or a DPU, and they are needed now more than ever to solve the application performance gap on standard server platforms. The difference between the IPU and the original SmartNIC is that the SmartNIC can effectively accelerate infrastructure applications, which is what we at Napatech do every day. The IPU is designed to go further and offload and run the entire network stack, which will give service providers a new option to deploy network and security functions. Leveraging the FPGA chip with our market-leading software to drive application performance improvement, enterprise data center infrastructure cloud edge networks now have the power to improve performance of the apps and gain significant TCO advantages within their data center designs. The potential is huge. Notice in the SmartNIC graphic our reference to Intel.
We are already well on our way to designing our IPU solution in partnership with Intel, with all of the advantages you see on this slide from performance, agility, and efficiency to improve the economics and scalability of data centers while reducing the overall footprint and energy consumption of these deployments. Leveraging the momentum of the IPU strategy, Napatech has built a growing and important partnership with Intel. Napatech has focused on designing its first IPU based on Intel's market-leading design. We are already well on our way building this solution by optimizing our software to provide superior performance on this Intel IPU design. As a proof point of this partnership, Intel is publicly disclosing Napatech as a key partner to help them fulfill their IPU vision.
Outbound marketing has been engaged to build a pipeline of new emerging opportunities for the Napatech IPU. Intel has disclosed this partnership in several key events and multiple keynote presentations at Intel's developer and user conferences. We expect this partnership to grow and expand the opportunity for Napatech in the enterprise, Tier 2 cloud, and service provider domains. We are already seeing new significant pipeline opportunities from this collaboration with Intel. As we announced a few months ago, Napatech has been awarded business by a new customer requiring best-in-class SmartNIC solutions. This customer is a multi-billion dollar global leader in networking and security solutions, selling its solutions to the world's largest enterprises, financial institutions, service providers, and governments. Napatech will deliver its newest Intel FPGA-based SmartNIC solution with production starting in 2023.
When we reach full scale with this new customer, we estimate full year revenues will be about $10 million in 2024 and beyond. With this new revenue beginning to ramp in mid 2023, we can estimate that 2023 revenues will also be positively impacted. Until a later point in time, this customer has not allowed us to disclose who they are, but we do believe we'll be allowed to announce them soon. This is a key new revenue direction for Napatech. It's new, it's big, and it's exciting, and this is gonna be part of our success going into 2023. Based on the inbound interest that we've received from other players within this potentially consolidating market, our board announced and launched a strategic process last quarter to plan aggressively around how we can capitalize on the large opportunities ahead of us.
We are well-positioned now in this market, which is consolidating and partnering like never before, and Napatech has had big interest from large players within this domain. The Napatech board views that in lieu of our business size, we need to either be part of a bigger company or have an even stronger strategic partnership or two to secure a quicker ramp to our newest technology and features. Also, due to our size, many target companies would prefer to work with and buy from larger companies than those of a smaller scale like Napatech. We have experienced much more interest than we expected, and we have several opportunities to work through. The board and the company are focusing on the alternatives that gives the best possible outcome for shareholders by increasing the value of the company substantially, but more importantly, securing strong commercial success going forward.
We are confident that the process could have a positive outcome for the company and shareholders going forward. When completed, we will provide more details anytime soon of our plans and actions going forward. I'd like to update you on the current outlook within our SmartNIC market. Napatech is focused on an important high-growth segment of the market known as programmable NICs or SmartNICs. These SmartNICs are deployed in servers. The servers are part of a massive wave of data center deployments to run every application and service for every enterprise cloud or service provider company. We look at both the server market growth potential and then the impact it has on the SmartNIC market where we are intensively focused. The good news is that the server market is hot.
As data centers are designed to be the center of the networking universe for every application deployed now and into the future, server deployments are absolutely pervasive and growing fast. In the most recent industry reports published in Q3 of this year, the server shipment forecast shown on the left side of the slide is expected to accelerate over the next five years with an expected CAGR of about 5% through 2026 on some very large numbers. Why is this important in Napatech? Well, each and every server deployed in the data center needs anywhere from 2 - 8 NICs to operate and perform, increasing the performance of those apps that run in the data center. Our FPGA-based SmartNIC is designed to fit within these servers to accelerate specialized CPU-intensive workloads, increasing the overall performance of the server while improving the financial performance and ROI of the data center.
This is a very healthy sign and is a precursor for the potential growth of the SmartNICs part of the market because every server deployed drives SmartNIC growth. Every server is a physical addressable market for our Napatech solution. More SmartNICs means less servers, which is a significant financial benefit to data center operations. As you would expect, on the right-hand side of the slide, you can see that the market we serve is also expected to keep growing over the next five years. Despite some near-term temporary market climate conditions, which were not forecasted until recently by industry analysts, the programmable NIC and the SmartNIC market shown in the pink on this market report is expected to grow from less than $1 billion in 2021 to a sizable $3.8 billion by 2026. As reported by Omdia, we remain in the top 10 of the largest overall NIC makers.
More importantly, the SmartNIC market is the fastest growing part of the overall NIC market, and we were listed as the top vendor in this market of this part of the market with over 7% of market share, and we are the number one supplier of FPGA-based SmartNICs. Industry analysts are confident that the long-term growth potential of our market remains very high. As we know, and what is also reported by these analysts, the macroeconomic conditions are expected to influence enterprise spending in the short term. The industry analysts confidently reassure us that the adoption of cloud services are expected to surge too. Watch this space. This is a growing market. Case in point, I hope you caught a really interesting perspective that was written by Iain Morris of Light Reading about tiny Napatech taking on NVIDIA and the 5G core.
The author focuses on the FPGA-based SmartNIC product with our software to run the 5G UPF, which is part of the 5G packet core responsible for the inspection, forwarding, and routing of traffic in modern mobile networks. In modern 5G networks, the UPF workload is CPU-intensive and will gobble up server resources. Napatech's solution allows the server to be offloaded by running the UPF on a SmartNIC. By leveraging the FPGA, we can get 7x performance over the ASIC-based solutions like those provided by NVIDIA. It's a good overview of the company and the opportunity and the market that we're serving and how the market's getting even hotter and hotter. Now I will 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, or you may dial into one of the phone numbers on your screen where an operator will answer your call and place you into a queue. Please keep your questions to one or two per caller. We will do our best to respond to as many text questions we receive. Operator, do we have any calls in the queue?
Thank you. There are currently no questions lined up in the call queue. I'd like to hand over for any written questions. Thank you.
I'll take those first. A couple questions regarding our cash position. What are your thoughts about our current cash position? Can you comment on where your cash position is? Thank you for that question. Obviously, it's something that we're well aware of in terms of our cash position as it relates to current revenue estimates and our gross margin estimates that I just reviewed. I certainly do acknowledge the risk that is being pointed out here. Obviously, if looking at the details and the numbers, our net cash flow from a year-to-date perspective is negative DKK 12.8 million . We do have cash and cash equivalents of about DKK 28 million . We feel pretty good about our view going into 2023, as I also reported. We're gonna carefully evaluate the trends and the estimates and the timing to be sure we are okay.
You know, as we've been reporting for the last couple of years, we've been investing to grow our revenues, and we feel pretty positive about how that's going. If necessary, we can revert those investments, if necessary. Much of those investments are in contracted headcount, if necessary, we could easily make those reversions. The new design win that we revealed is a case in point about how our investments are gonna bring us new revenues. Those revenues are significant, as reported with the new design win that we'll be delivering on next year. We're working on this, and we're gonna make sure that we're on the right course with respect to our cash position, and I appreciate the comments on that. Operator, any calls in the queue at this point?
I do have another question that's been texted in.
We currently have no questions in the queue.
Okay. I do have a second question, or second group of questions regarding the strategic process. Can you talk about the timing for next steps in your strategic process? As I've communicated in the slides, just a few moments ago, this is an ongoing process. We started this process last quarter, and we're making some good progress on what the options have led us to see. As I mentioned during the update, our board has concluded that Napatech needs to be either part of a bigger company or we need to have a much stronger partnership, strategic partnership in particular, to secure a quicker ramp to revenues and getting the technology developed and the features developed as well. It's.
Those are the types of options that are being considered in the strategic process. We have had significant inbound interest, and certainly we're getting some very interesting discussions underway, and we do have several opportunities to work through. The board is definitely focusing on the different alternatives that give us the best shareholder value, whether we secure the value of the company substantially through those engagements or securing a strong commercial success going forward with significant partnerships. We can't really absolutely ascertain what the, what the outcome will be quite yet, but we do have ambitions to bring this together to the next steps very, very soon, and we'll provide more details as soon as possible on this. Thank you very much for that question as well.
Operator, I don't have any other, texted in questions. Any other calls, waiting on the queue?
There are still no questions waiting for you on the queue. Thank you.
All right. Seeing that we don't have any additional questions, I guess I'll bring this to a close. I guess, what I'll say to all of our listeners and our investors, thank you very much. I hope you sensed that we are indeed optimistic about Napatech's future. Despite the rough waters that we've encountered with this very interesting market situation that our peers and our customers are also encountering, we're doing our best to navigate Napatech towards a very bright future, and I think we're going in the right direction. Thank you very much for your attention today, and I hope you have a great day. Thank you very much.