Hello, and welcome to Napatec's Q3 2020 Interim Management Statement. Today, I'm pleased to present CEO, Ray Smets and CFO, Heine Thorscott. Please go ahead with your meeting.
Good morning. I'm pleased to welcome you all to Napatec's Q3 2020 interim management statement presentation webcast. I'm Ray Smets, CEO of Napatec. I'm in our Copenhagen headquarters today with Heine Thorsgard, our Chief Financial Officer. Today's Q3 2020 IMS was released earlier this morning on the OSE and is available on the Investor Relations page on our website at napatech.com.
For your information, a recording of this webcast will also be available on the Napatek website as soon as possible later today. Despite the ebbs and flows of the global pandemic, I hope you all are doing well. I'm happy to report that our Napatec family is healthy with no known COVID-nineteen cases and we've been working virtually again per the recommendations of the Danish authorities and managing our global workforce to keep them safe and healthy as well. Next slide, please. As always, we want to be available to answer your questions whether live, directly following our presentation today or any time via email.
We will conduct Q and A following our presentation and we'll be taking your questions via text which you can submit at any time on the webcast page using the button below the presentation. Alternatively, you can also submit your questions by call, calling the phone number if you'd like to ask a question follow the instructions on this slide. Next slide 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 slide please. During this presentation, I will present our Q3 2020 business highlights including a summary of key financial achievements. I will also provide an update of how Napotek is doing within the SmartNIC market including several more detailed customer case studies. Heine will then provide a detailed review of our Q3 financial results and then I will close with our outlook for the full year of 2020. Next slide please.
Let's start with business highlights. Next slide, please. Despite being our seasonally and traditionally lowest quarter of the year, Napatec delivered another solid quarter in Q3 building on the momentum we have shown in the first half of twenty twenty. A positive and hopefully pleasant surprise for our investors, Q3 demonstrated good year over year growth, strong gross margins and positive free cash flow. Specifically about our revenue in Q3, we maintained our momentum and delivered solid growth of 22% year over year in USD.
As we had been demonstrating all year long, Napatec's products have resonated well with our target markets and we continue to find ways to add new business on top of a solid foundation built with both existing and new customers. And the growth this year comes with the kicker of good rich gross margins that we are getting from our SmartNIC product sales. We racked up year to date gross margins of 71.4% so far in 2020. Gross profit was up 16% year over year. So when combined with our well managed expenses in 2020, we are generating strong positive free cash flow, positive EBITDAAC and EBITDA and positive earnings on a year to date basis.
In summary and in total, our Q3 results in 2020 were notable and significantly better than 2019. Let me show you just a bit more on the trends for these key results. Next slide, please. When looking at the year over year trends for Q1 through Q3 2020, the trends show how we continue to build momentum over 2019. Reported revenue in the 1st 3 quarters were significantly better in this period for Napatec over the last year.
Revenue is our number one priority, but cash is also at the top of our list of key results to watch as we keep building our business. We show in the same period of Q1 through Q3 in 2020 a dramatic growth and positive free cash flow over 2019, going from just shy of DKK1 1,000,000 in 2019, which was quite a positive surprise back then to DKK23,600,000 so far in 2020. Quality revenue growth combined with good operating cost structure is a major part of what we promised to our investors early last year, and we are well on our way to fulfilling our full year outlook for free cash flow. Next slide, please. On the earnings side of the story, you can see the progress we're making during Q1 through Q3 2020.
We delivered strong year over year and best ever EBITDAQ performance, which is a sign that we have the right investment strategy to manage today's costs and build for our future products. And of course, we need to underscore positive year to date earnings both over last year and over all prior years, which is quite a nice achievement as well. So we will allow our team to pat themselves on the back so far in 2020. Our performance for year to date 2020 continues to go well and we are on track to deliver within the ranges of our current updated annual guidance. But we are now 1 month into our seasonally busiest quarter of the year working diligently to meet and exceed expectations in every way we can.
We will reiterate our outlook for 2020 later in the presentation and we feel confident that we will deliver within our guided ranges. But with an abundance of caution, we do resonate with what we've heard from other industry peers and bellwethers that have already reported that they are seeing some softness with enterprise and government customers. We also see within our Q4 pipeline some of these customers are ordering later in the quarter than normal. We just like with the other companies reporting, we would attribute some of these delays due to the pandemic's impacts on part of our customers' markets. However, related to the earnings side and how we see revenue developing in Q4, we are confident about our ability to deliver and excel and finish 2020 with stronger earnings.
Next slide please. Now let's turn our attention to the broader market, how we're looking compared to the overall market and how we're working to expand within it. We will also cover a few cases of how our products are helping customers solve real world problems. Next slide, please. As a reminder to existing investors, a quick recap for our new ones.
Napatec sits at the crossroads of 2 major market forces. On the bottom of this slide is our physical addressable market where networks are built at massive scale on low cost commercial off the shelf servers. In every one of these servers, network interface cards or NIC cards must reside. It is the smart NIC which is what NapaTec designs and sells to be deployed in these servers that deliver the higher performance and value to accelerate applications that need extra horsepower. At the top of the slide is a growing set of critical applications across a spectrum of areas like cybersecurity, network monitoring, financial services, 5 gs mobile or cloud and edge infrastructure.
These application areas require more and more compute power to operate and perform faster and securely. The demand for higher performance compute for these applications creates demand for smart NICs. Napatek sits at a position where these two markets intersect. Our position is to play on the high performance part of this market where FPGA technology is needed to run those mission critical compute intensive applications faster, more efficiently, more securely with unmatched performance. That is where Napatek will focus its expertise to catch and grow future revenues.
As I did in the first half report, I would like to share with you how NAPATEC is faring within the overall NIC market. Next slide please. According to the industry experts, the total NIC market is expected to exceed $2,000,000,000 this year. The overall NIC market is divided into 3 major segments. The first is the basic NIC market, which is the lower cost part of the market that offers a basic fixed function NIC with no software or no programmability and is mostly used to connect servers to networks.
This is a highly consolidated part of the NIC market where Intel is the market share leader with nearly 90% of share. Along with Broadcom who together cover 97% of the basic NIC market. Napatec does not participate in this part of the market. The second one is the offload NIC segment, which is a more competitive NIC market dominated by ASIC based processors, which are designed for specific applications and specific systems providing more expensive simple offloading solutions but with little to no software programmability. This offers little in the way of flexibility for application acceleration.
NVIDIA is the market share leader here after consolidating Mellanox who is a long time player in the offload NIC market with over 45% of share, followed by other suppliers like Broadcom, Marvell, Xilinx primarily by way of their acquisition of Solarflare, Cisco and Silicom. Napatec's performance curve on the other hand is focused up market where the target market segments benefit from application acceleration performance and flexibility. Offload NICS solutions usually find their way into cloud and hyperscale networks where less CPU intensive horizontal offload solutions with low programmability needs will prevail. We don't speak for them, but NVIDIA combined with ARM and Mellanox focus on networking solutions by building a broad portfolio of products such as chips to build other components for switches and Ethernet adapters and the cables to plug them all in together. This includes several kinds of NICs built with ASICs, SOCs and FPGAs.
But even after the consolidation we have not seen anything new that has emerged within their solution that we haven't seen before or disintermediates us in any way or our advantages in the marketplace. There will be places where we compete for sure and some areas where we may overlap and a few other areas one could envision we could partner. We respect them and others in our market and we will endeavor to maneuver our solutions to capture our fair share of this market. And then there is in the 3rd bucket, the programmable NIC segment, often called the Smart NIC segment, which is where the highest performance solutions reside. These SmartNICs deliver ultra high speed networking functionality with the ability to be reprogrammed and enhanced with new software to meet the ever changing customer requirements for higher performing mission critical applications.
Napa Tech is addressing this programmable Nick market segment. I will talk more about this segment on the next slide. As reported in 2019 for the overall NIC market, Napatec broke into the top 10 market shareholder list. We are pleased to show that in the latest market share report for the first half 2020, we remain a top 10 player in the overall Nick market as reported by OMDIA in their most recent industry report and we've inched up to the number 9 position. We respect the good company we're sitting alongside on this list.
We sit alongside large market makers like Intel and Video or Broadcom, but we continue to perform as a nimble specialist with proven world class ability to serve the highest performing needs in the network application acceleration market. Now let's take a closer look at the programmable NICS segment for first half twenty twenty. Next slide please. Focusing further on the programmable NIC segment on this slide, we remind you that this segment is made up of a combination of 2 SmartNIC kinds of companies. There is one large self build player, namely Microsoft, who up to this point doesn't buy commercially but prefers to make the programmable NIC themselves for their own use.
And the other kind of companies are vendors who make smart NICs for companies to buy and deploy. That's where we exist. In this part of the programmable mix segment as reported in the just released report for first half twenty twenty, NAPA Tech can be number 3 amongst the vendors. From an FPGA perspective, Microsoft is the largest consumer of FPGA based SmartNICs, but given they are self build, excluding Microsoft, Napatec is the largest vendor making commercial SmartNIC technology with FPGAs sitting behind Marvell and Broadcom who use a system on chip or SoC solution to meet the needs of their target data center market. However, the FPGA makes up about 70% of the segment of the programmable NIC market.
Like the FPGA, the SoC brings high performance multi core processing power to the SmartNIC. Although some and both are programmable, the technology advantage of the FPGA over the SoC is that the FPGA's array of programmable blocks allows for greater levels of programmability with less limiting factors. This makes the FPGA more highly deterministic, guaranteeing higher performance. Our core competency is built and focused on our world class expertise building software that runs on the FPGA sourced from both Xilinx and Intel to provide best in class application acceleration solutions for cybersecurity and network applications. We share this rapidly growing market with SoC NIC providers and we may compete with some of them in overlapping engagements.
And we are working hard to leverage the power of the FPGA with our software to target new use cases that require acceleration of CPU hungry virtual networking apps such as those deployed in 5 gs mobile networks. So as new reports are published for key periods of our fiscal year, we will report on our progress from time to time about how we're doing in the overall and in the SmartNIC segments. But let me show you where this is all heading. Next slide, please. Looking at the combined number through 2024 for all SmartNIC segments or all NIC segments, you can easily see that the relative size of each of them is changing.
Notice that the programmable NIC segment in orange at the top of each of these bars is today the smallest of the 3 major segments, but it is expected to grow and to be the largest segment in just a few years. By 2024, this programmable NIC segment is expected to be 2,300,000,000 markets alone within the $4,500,000,000 overall NIC market. This market is growing due to the need for higher performing application acceleration in a number of target market segments and it's growing fast due to the overall ports expected to ship combined with the higher revenue per port this segment can command. As reported by OMDIA who published this report, the sub segments of the programmable NIC market are coming to light and we at Napatec will leverage our core competency to address those parts of those sub segments of the programmable NIC market and find the best ways for us to grow. The reason why it's important to show you this today is to assure our investors that we are indeed in a growing market with plenty of headroom and plenty of space for NapaTech to grow and to thrive.
Next slide, please. So how does Napatec grow within this fast growing programmable NIC market? In an oversimplified way, we want more smart NICs that little card we build to deploy in as many servers that big box as possible that are used to solve network application acceleration solutions that we are targeting. We will design SmartNICs that deliver network application acceleration solutions in the cloud and the edge, 5 gs mobile, cybersecurity, financial and now the emerging virtual networking customer application segments. Our solutions will keep getting faster to serve the growing demand that comes from the increased network speeds from 25 gig to 100 gig and beyond.
And if we do our job, the investments by our customers will be justified because we will improve the TCO of the 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 the overall cost to deploy and operate. Next slide please. As I've shown you over the past quarters, here are some of the latest logos from customers buying Napatec products. All of these logos represent customers from all over the world that ordered Napatec FPGA based SmartNICs in Q3 alone.
The logos on the right side bought products from us specifically in Q3 punctuated by a growing list of end user customers in the government and defense domains, financial services and cybersecurity, while the logos on the left are customers who bought Napatec products in the prior quarter too. Here you see large steady recurring customers like CorVel, Cisco, IBM, Polystar, Nokia, Airbus and Toyo Corporation who bought from Napatec in the Q2, too, and some even in the Q1 as well. The key trends leading these customers to NapaTech are that they do not compromise on SmartNIC performance and we deliver. These customers expanding their data centers or deploying new mission critical apps that need the horsepower that we provide to accelerate those apps. And they are all satisfied with NapaTech to place us into service in some of the most mission critical parts of their deployments.
I would like to now give you more detail about a few key case studies. Next slide please. Let me first start with a case study that we recently published with a company called Exelio. Excellio is a company of innovative cybersecurity experts building innovative storage array products providing their customers with a high speed real time monitoring and forensic analysis solution that solves key network and cybersecurity operational challenges in commercial enterprises and in the defense industry. The challenge they were looking to solve was that their customers needed to capture, store and replay massive amounts of cyber security data to improve the security of their operations.
From a technical perspective, they needed 100 gigabits per second of 0 packet loss for more than 60 minutes with nanosecond accuracy. The solution was found with Napatec's SmartLink SmartNIC Link 100 hardware running our market leading link capture software. Exelio tested, qualified and designed this Napatec SmartNIC solution into their product called Packet Express allowing it to operate at those high speeds providing lossless right to disk capabilities and significantly improving security for their customers. We are proud to be designed into this solution from Exelio serving enterprise, aerospace and defense customers and we look forward to helping them thrive in their market with our market leading SmartNIC solutions. Next slide please.
The second case study I would like to highlight is one we also published recently with a company focused on the mobile network signaling firewall space. We cannot mention our customer's name, but they are a provider of mobile signaling firewall solutions to over 900 telecom operators worldwide. Signaling firewalls play a critical role authenticating users and providing secure access to their services within the 3 gs, 4 gs and 5 gs mobile networks and must be very well secured. The challenge was solving this requirement with in line processing speeds of 100 gigabits per second which is not done easily in software alone. Therefore, this solution supplier wanted to use the hardware acceleration we could provide with our FPGA based SmartNIC hardware combined with our newest and latest smart Nick software that provides line rate 101 100 gigabits per second flow aware and inline processing for millions of simultaneous user sessions.
Napatek SmartNIC Link Inline Software was put to the test running on both our Link 40 and Link 100 SmartNIC hardware components and our solution performed exceptionally well and was designed into this solution initially targeting a large telecom supplier requirement. The result is that this company now can offer a higher performing, more secure signaling software signaling firewall to their customers in the 3 gs, 4 gs and 5 gs markets. We are excited to be designed into this solution targeting the mobile network operators for a couple of key reasons. First, we look to grow our revenues from this initial OEM engagement by about $2,000,000 to $3,000,000 over the next 3 to 5 years. And secondly, what makes me very happy is this is a major design win for our one of our newest products, our faster in line solution that we've been working on since early last year, which brings me to the next topic about our plan of attack.
So next slide please. We've been focused on a 3 pronged plan of attack since 2019 and into this year. It is the basis of our growth strategy focused on our unique core competency, leveraging our expertise in FPGA software, building new growth product lines and application acceleration for virtualized networks and cybersecurity solutions. We've been making good progress on all three of these attack vectors. The first is built on our FPGA based SmartNIC leadership with our current packet capture solutions.
We've been enhancing this really ever since last year. This part of our business is rich with opportunity and remains stabilizing foundation for growth now and into the future. The first case study that I reviewed with Exelio is based on this part of our attack plan. The second one is we are evolving our SmartNIC leadership and packet capture to address new higher growth areas for in line use cases, including cybersecurity applications like next gen firewalls. We are essentially supercharging our FPGA solution for new firewall applications.
The second case study for accelerating and securing the signaling firewalls in the telecom market that I just reviewed is centered around this part of our attack plan, so we are making progress. Thirdly, we have been working hard building an innovative approach to accelerate virtual switching in order to find ways to win emerging opportunities in the edge, cloud computing and 5 gs mobile space. As I mentioned last quarter, we have lab engagements where we are engaged with lead customers and working hard to land our first key design win in this part of our attack plan. Our benchmarks for this product indicate that our performance is truly market leading. Next slide, please.
Let's finally get into the financial details. I would now like to turn the call over to Heine Thorsgard to review more details about our Q3 2020 results. Heine?
Thank you, Ray. Slide 20, please. Revenue in Q3 was up 15% to $44,400,000 compared to $38,700,000 in Q3 'nineteen. The Q3 revenue was impacted by weakening of the U. S.
Dollar and in USD the growth was 22% quarter over quarter. For Q1 to Q3, revenue was up 22% compared to last year and amounted to $141,800,000 Gross margins in Q1 ended at 70.1 percent and for the period Q1 to Q3 at 71.4%, down 3.2 basis points compared to last year. Staff costs and other external costs amounted to $25,300,000 in Q3 compared to $29,700,000 in Q3 'nineteen. For the period Q1 to Q3 of 2020, staff costs and other external costs amounted to $86,300,000 compared to $91,400,000 last year. EBITDAQ in Q3 amounted to plus $5,400,000 compared to plus $1,900,000 in Q3 last year.
And EBITDAQ for Q1 to Q3 of 2020 amounted to plus $14,900,000 compared to minus $4,400,000 same period of 'nineteen. Staff costs transferred to capitalized development costs in Q3 amounted to €2,500,000 compared to €3,300,000 in Q3 2019. For Q1 'twenty three, the amount was $8,700,000 compared to $9,500,000 in the same period of last year. EBITDA in Q3 amounted to €8,000,000 and EBIT amounted to €2,300,000 compared to EBITDA of €5,200,000 and EBIT of minus €800,000 in Q3 'nineteen. EBITDA in Q1 to Q3 of 2020 amounted to $23,600,000 up $18,600,000 compared to last year and EBIT amounted to $6,400,000 up $20,000,000 compared to last year.
Once again the revenue for the period was positive and amounted to $900,000 for Q3. Slide 21 please. Net cash flows from operating activities amounted to $14,800,000 compared to $900,000 last year. For Q1-twenty three, net cash flows from operating activities amounted to 32,800,000 dollars up $21,500,000 compared to last year. End of Q3 net working capital was $6,600,000 compared to 20,900,000 dollars end of Q3 'nineteen.
Net cash used in investing activities in Q3 amounted to $3,400,000 compared to 4 point $1,000,000 in Q3 'nineteen. And for Q1 'twenty three, net cash used in investing activities amounted to $9,200,000 compared to $10,500,000 last year. Free cash flow in Q3 amounted to plus $11,400,000 compared to minus $3,900,000 in Q3 'nineteen. For Q1 'twenty three free cash flow was plus $23,600,000 up $22,800,000 compared to last year. Cash and cash equivalents end of Q3 2020 amounted to $70,700,000 compared to $53,100,000 end of Q3 'nineteen.
Now back to you, Ray.
Thanks, Heine. Next slide, please. Those are some good financial details. Let's turn our attention to our published outlook for 2020. Next slide please.
We continue to carefully assess our opportunities 2020 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. As a result, we are reiterating our prior stated guidance for 2020 that we updated in our Q2 presentation. Let me give you a little bit more detail. Despite the financial impact that the global pandemic has had on foreign currency exchanges, especially from the USD to Danish kroner and the potential slowness of the business as we roll into Q4 from several of our customers that we mentioned earlier. We remain committed to our prior guidance and we are reiterating that our expected revenue will be in the range of DKK 185,000,000 to DKK 205,000,000.
We are reiterating our gross margin guidance to be between 70% 72% for the full year of 2020. We are focused on cost optimization and maintaining our product value even during these turbulent times. We are reiterating our guidance on our operating expenses in 2020 to deliver in the range of DKK 120,000,000 to DKK 125,000,000. We are doing well here and we are building the leverage that we intended for earnings in 2020. We are reiterating our guidance on transferred capitalized development costs showing that we are doing well with our guidance range of DKK 13,000,000 to DKK 18,000,000.
And we are reiterating our prior guidance for depreciation and amortization in the range of DKK 20,000,000 to DKK 25,000,000. With performance in the middle of the guided ranges, EBITDAAC would be DKK 16,000,000 and EBITDA EBIT would be DKK8.9 million. As we have stated before, we remain vigilant about the impact being felt across many of the markets today due to the COVID-nineteen pandemic. Like what some of the larger industry bellwethers have already reported, we are not immune to these potential impacts and we have seen some changes to a few customers buying patterns which we believe are due to impacts from the pandemic. But we have done a very good job managing this and we continue to view the risks associated with global pandemic on the operations of Napatek to be low.
With respect to 2020 and our longer term aspirations, we have communicated our 3 year aspirations to grow between 20% 30% with gross margins around 70% and a growth of cost well below our revenue aspirations of somewhere around 7% to 10% operating cost growth. As we finish 2020, we will schedule a Capital Markets Day coincident with our Q4 and our FY 2020 results presentation to provide more depth and details about our growth goals in the market. Next slide, please. So in conclusion, investors are looking for growth companies that have what it takes to be viable and deliver results for years to come. We are striving to be that kind of company deeply rooted in what we do best building FPGA based smart NIC solutions that solve real world problems today, accelerating applications and improving the economics of the data center.
We have delivered a combination of stability, growth and earnings. Our new investments will expand our potential into new parts of the market that we know very well, just like the case studies that we just reviewed today. We will work hard to access that market and grow within it. And while making smart decisions, earning our customers trust and delivering results to our investors. You can be assured that we are a team of technology professionals who really do strive to improve our spot in the business world, solving real world problems that don't just go away, but are solved with technology and expertise that we bring to the market.
And in doing so, we build a good prospect for investment for our investors. And we will always strive to give you a realistic view of what we can achieve. And then we're committed to go find a way to beat it. So now we need to go get that job done. Next slide please.
So I'd like to invite Chyna Thorsgaard to join me to take your questions. We already have a few that are written in. If you would 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 our phone numbers on the screen where an operator will answer your call and place you into a queue. Please keep your questions to 1 or 2 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
All right. Thank you, operator. We do have about 4 or 5 questions written in so far and some of them have some common themes. So I will just try to cover all of those and we'll check back with you in just a moment to see if there's any live calls in there too. Couple of questions regarding our annual guidance and visibility into our pipeline for Q4 as picked up in the conversation that I just presented.
So let me comment a little bit about Q4. 1st and foremost, we're reiterating our guidance for 2020. And if you recall, at the last IMS, we actually did not raise guidance for our revenue given the significant changes in foreign exchange from USD to DKK. And we kind of considered that a bit of a revenue raise at the time. But we are carefully monitoring 2 significant situations as we go into the end of the year.
The first of course is foreign exchange and the impact that has on our ability to produce the earnings from a DTK perspective. And we're also watching the news as it unfolds from other bellwethers and significant players in this market regarding the impact to their customer base related to COVID and also very carefully watching our customer pipeline as well to see if there's any significant changes in customer mix or changes in buying behavior. So we're still pretty early in Q4. We still feel very confident about our ability to achieve our annual guidance. Also think it's a little bit too early in Q4 to make any changes to our guidance at this point in time.
So we're reiterating our guidance And we feel very, very positive about our ability to deliver on the earnings and cash flow side of the business. But we are acknowledging that there are some changes in the enterprise domain related to COVID. And although we haven't seen a change in customer mix, we're seeing good progress with some lab engagements that we have regarding our latest product development. Our pipeline is looking good and strong for Q4 but with an abundance of caution we're watching things carefully see if there's any changes related to customer buying behavior associated with COVID that others have been talking about and also watching the foreign exchange very carefully. So one thing that we've developed over the last couple of years under my leadership is a lot of trust and transparency about setting guidance for this company.
So we believe it's just very important for us to communicate at this point in time that we're seeing some of this coming just like others in the industry, although we're not in a position to make any changes to guidance. We feel pretty good about where we stand on that. There was I'll just keep going on to some of the questions here and then I'll check back with the operator in just a second if there's any other live calls. Is there any visibility that we can provide into FY 2021? What I had just mentioned is we will be putting together a capital market today at the end of Q4, provide better visibility and obviously provide outlooks for how we intend to perform in 2021.
We do have visibility into the pipeline into 2021 at this point in time for certain types of customers. We have 2 kinds of customers, end user customers and OEM customers. Obviously, end user customers develop in a shorter period of time. So, we have lower visibility into that space, but we are relying pretty heavily on how we're reading that market from an industry perspective. On the OEM front, customers that we already do business with, we do have an indication of some pipeline for 2021.
And we feel pretty confident going into 2021 at this point in time, although we don't have that completely figured out at this stage of the year. We check back with the operator. Any live calls before moving on to the next text question?
Thank you. Currently, we have no audio questions.
All right. We do have another question regarding how we see the competitive front right now and really related to the fact that we're seeing any significant changes on the competitive side. Well, obviously in our marketplace, we're seeing significant consolidation and other companies partnering with significant players in this space to gain access to the market. But overall from a competitive perspective, we're not seeing any significant changes. We're not seeing any new entrants and we still feel very strongly about our competitive advantage, our unique ability to achieve our results using our unique core competency in software on the FPGA.
And we've been holding our own in this marketplace and looking for ways to exceed in certain areas. So from a competitive perspective, we're not seeing anything significant. I did comment about NVIDIA specifically. I've had a couple of questions related to NVIDIA and how we see NVIDIA. So I wanted to make sure I covered that.
We're not even after the acquisition of Mellanox and the soon to be acquired ARM company, we're not really seeing anything new. They're focused on a very broad portfolio of solutions which includes SmartNex as a part of their business and they do they are focusing on telco, cloud and enterprise like we are. But we will probably compete as we normally do head to head in certain areas. We probably will overlap in some areas where we don't compete and certainly there's the prospect of potential partnerships there. So from that perspective, we don't see any significant changes in competition.
And furthermore, just a tidbit question on this regarding the competitive nature of the FPGA versus the system on ship or the SoC. We feel pretty good about our competitive advantage in this space. We compete in the Spartan NIC area, in the programmable NIC area against Broadcom and Marvell. We haven't seen any competitive differences there. They obviously leverage the microprocessor chip that they have access to and that happens to be a system on chip, which is a reprogrammable solution.
But we feel very strongly about our position with the FPGA. The FPGA has some technical advantages that allows us to provide detailed capabilities down at the line rate so we can really impact the data as it's moving across the FPGA with a high degree of flexibility. And therefore, we have less limiting factors and more deterministic outcome on performance. So thanks for that question on the competitive nature of the marketplace, but we feel pretty good about where we stand and we're not seeing any significant changes. And might I add, our advantage with software on the FPGA is what we believe is a significant position of lead and also a barrier to entry.
It's going to take a competitor quite some time to recreate what we have. So we feel pretty confident about our position there. I do have another question regarding our gross margins. Can you provide more granularity on why your gross margins are much higher than your competitors such as compared to Silicom or Ethernity? And I can't really speak to those guys, but I will tell you this, our gross margin is really based on a couple of significant factors.
First, we strive and obviously design our hardware solution to be as cost effective as possible. The real secret to our success on gross margin is related to software. Our software is really where we get our value so that we can price competitively for the solution that we provide. And also it's a good sign that our customers are not requiring significant discounts to acquire our software and hardware combined to solve their application acceleration performance requirements. So we feel pretty good about our gross margin.
And as I had mentioned, with our aspirations over the next 3 years, as we had mentioned at our last Capital Markets Day, we expect our gross margins to remain nice and strong and that will continue to feed our ability to grow earnings and profit and cash flow for this business. Operator, any questions live?
There are still no questions registered on the audio teleconference.
All right. I guess that pretty much covers the gamut of questions. And so I'd like to go ahead and thank all of our new and existing investors for your interest and support of Napatec. I think as we have done before, we continue to be available for your questions offline as well and look forward to meeting some of you guys in some special meetings as we go through the week. I want to thank our employees also for a job well done so far in 2020 and we look forward to finishing this year on a very positive note.
So thank you very much operator. We're ending the call.