Good morning, and welcome to Smartoptics' financial result presentation for Q2 2024. Slightly different format today. We are doing this remote from Stockholm, so we hope that technology is with us as we go through this presentation. As usual, I will start by discussing the highlights of the quarter, a few of the financial metrics that we normally talk about, and a few comments to those. So, Q2 2024, it is a quarter that's very, very similar to the quarters that we have behind us, Q4 and Q1 in this year, Q4 of last year, obviously, and Q1 of this year. What does that mean?
Well, it means that we are, to a large extent, still relying on revenue from our classical home market, smaller, service providers and enterprise, and we are not seeing, any major projects materializing in the quarter, which is the main cause of the difference, between this Q2 and last Q2. If we go back in time, about a year, I would describe Q2 of last year as the last of the good, the good market quarters that we were operating in, where we had, a larger project in, the EMEA region, of roughly $2.5 million.
In addition, it was the last quarter where the company moved into the quarter with a significant backlog, partly caused, well, of course, related to the large projects, but also partly caused by the delivery problems that we had 18-24 months ago. So in Q2 last year, we went in with roughly half of the quarter in backlog, which is not the case and which has not been the case for the past, certainly three quarters. Where, as we have discussed previously, we are to a very large extent booking orders and converting that to revenue within the quarters.
Which is, of course, made possible by superb lead times, and also the fact that the majority of the revenue is, or really nearly all the revenue is smaller projects that we can deliver really, really quickly. So, yeah, so clearly no major improvement in the macro around us. I'm not going to comment that further. There are probably people on the call who are better suited to do that, but one thing is clear, we haven't seen any major major differences that is kind of driving an improved investment behavior. Looking at the performance, financial performance of the company, I'm quite okay with that.
We are still producing very good gross margins above our long-term targets, and we are also producing EBITDA and profit, which is, of course, below the expectation that we have. It's something that we're, of course, working on improving, which will improve as revenues come back, of course. But still acceptable, and still good enough for us to continue to invest in the company, continue to invest in people to a large extent, and to capture future growth. As you can see in the report, and Stefan will comment more on that later on, we have a fairly stable and flat OpEx, both compared to last quarter and a quarter a year ago.
So what's happening here is as we are recruiting new people into the company, of course, we're doing some other actions like less dependency on consultants and things like that. So yeah, and as we continue to invest now in the near term, I'm expecting some of that to go on, too. So there will not be any dramatic changes in the OpEx number over the short to medium term. Having said that, the market for us out there is phenomenal at the moment. There is the access to qualified people with good domain competence in the optical space has probably never been better.
So, and given the fact that our belief in the market ahead of us is unchanged, more or less, we still see the same reasons for growth. Going forward, those two put together makes this period in time an excellent period to invest in the company and in our market. So all very good. A few words around that, returning to growth and what are the drivers for a growth acceleration going forward? Well, you know, macro is one thing, and I think here we have to rely on the analysts around us and the industry in general, talking about better macro driving investments at a higher pace from the second half of this year.
We are not doing any different analysis or any analysis over and above what we're hearing on that side. What we are doing, though, is, of course, looking at Smartoptics and what is over and above the market becoming better and the macro situation becoming better, what reasons do we have to believe in returning to growth within short? And those are listed on this slide. So one thing that we've been talking about for some time is, of course, our large account strategy. On top of our core markets growing, the enterprise, the smaller service provider, and not to forget our device business, we are continuously working on capturing a number of larger opportunities.
We see very good progress in that side. In Q1, we talked about two new customers. One of them, a service provider from the U.S., who had placed the first order. The other one was a cloud service operator, global one, where we had signed a contract. We have now captured the first purchase order from them, a project that is going to be delivered here shortly. And we have conversations around the next three, four, five geographies where investments are needed, so good, good, good progress on that. We're also seeing finding ourself in...
As we progress these accounts, we have now come to a point where we have a couple of very good opportunities, where we are in final rounds of vendor selection, so clearly things that may happen in the coming second half of the year. The new thing I think today, compared to a quarter ago, is that we not only are we talking about Americas here, but also EMEA. We have a couple of very good opportunities in EMEA here that can materialize in fairly large revenues within short. I should also mention that, yes, we have such conversations in APAC too. But for the most part, we're talking about Americas, and the new thing is EMEA.
Right, so, activity level, this is something that we have talked about and talked a lot about in quarter one. And to begin with, I should say that Americas is unchanged. We still see very good conversations going on, lots of them. High resource utilization on our pre-sales team. Those are the architects, discussing, network designs and, creating bill of materials and so on and so forth, for our customers, in America. New thing is, that I think what we talked about as early signs of improvement in EMEA in Q1, I think we can clearly say that, that EMEA has improved now, and the situation is somewhat similar to the U.S.
Of course, looking at the left side of this slide, the fact that we are in advanced conversations around bigger projects in EMEA, obviously, then we can say that EMEA has improved. LatAm still contributing very nicely to the revenue. And looking into the second half of the year and onwards to next year, we are seeing quite significant projects out of the LATAM region, too. A good thing this quarter is that it is absolutely one of the top quarters in our APAC region. I will come back to that and talk about where that revenue is coming from. But clearly, good to see progress in APAC, too.
Our new products, that we see as, as clearly, clearly a way for us to become much more competitive in kind of the upper end of our addressable market, the most advanced, the biggest networks, with our 34-degree ROADM product, and equally important, our latest release of our SoSmart Software Suite 5.0. Those products have been released. Very similar to with our previous products, we did receive orders for both the 34-degree ROADM and the new software suite ahead of release, and that is unusual in our industry. Our industry is normally. The normal situation is that you go through some sort of tender. You do quite a lot of qualification testing, lab testing before you see orders starting to flow.
And I think with Smartoptics, we've always received orders for our products ahead of release, which is a very positive sign and a very good proof point that our PLM organizations are steering the roadmaps in the right way. We are producing products that are relevant for the market when they are released. And just a reminder, these products, well, what do I mean by making us more competitive at the high end? Well, it means effectively that it will significantly increase our relevance in regional networks, which leads to larger customers and larger projects. Last but not least, on this slide, we're talking about AI traffic driving growth going forward.
When we talk to industry analysts, they kind of see AI as really three phases. Where the first phase, building up huge data centers, where the cluster AI clusters for training of the models, that's been going on for quite some time now. It is really a large data center play, driven by the biggest consumers of bandwidth on the planet right now, the hyperscalers and such. Phase II is what's gonna happen when you grow out of data centers, and also when other organizations, not only hyperscalers, but really all organizations are investing in their models and building up data center.
If we're seeing the classical, the classical data center phenomenon, such as lack of space, lack of power, but also redundancy, and with all compute technologies, over a very long time, the same thing is happening, that you start to break this apart, utilizing several data centers instead of one or two. Yeah, and that will drive demand for data center interconnect, which is a large part of what we do, connecting data centers to each other to ensure communication between between machines effectively. So that's phase II. That's something we're anticipating more demand for data center interconnect services across a broad range of customers in the future.
Last but not least, it is kind of when AI is no longer consumers sending text strings into a computer and getting text back, which is not really driving that much bandwidth. When we see video services, people producing video services and a lot of video content and things of that nature starting to be distributed around the planet, it's really another Netflix and YouTube, this time probably on steroids. 10 billion people sending five-minute videos across the planet. So that's really an additional driver to the ever-growing demand for bandwidth that we have been talking about. There is no reason whatsoever to expect that to slow down, rather the opposite, accelerating as we go forward.
So that's good news. And a reminder there, whatever grows in terms of bandwidth consumption, it's always good for Smartoptics. So yes, positive there. So good reasons to believe in a return to growth over and above the world coming back to a better investment climate in general. I wanna take you through a few slides looking into the revenue and break that down and look at what's going on in the company. And we can see, I did mention earlier that Q2 is very similar to Q1. And indeed it is to a large extent the difference from last year. The problem, if you so wish, lies in the EMEA and lack of larger projects in the EMEA. Americas is down a little bit.
Please, remember what I talked about earlier, that Q2 last year, we were moving into the quarter with a very large backlog. We are not doing that anymore. That will return when we see the bigger projects coming on board again. That's when we will see bigger backlogs coming into the quarter and more predictable growth as a consequence of that, of course. But okay, Americas is down a little bit. I do not think that is too dramatic to be honest. Clearly, EMEA with a bigger revenue drop is clearly where the major impact is. Here we're seeing, as I discussed earlier, that APAC is looking quite good.
Second-best quarter ever for the company, and a reminder there, our best quarter was a couple of years ago, where we delivered a very large data center project to an Australian bank. This time it's Australia and New Zealand driving about half of the revenue growth here and other geographies driving the rest. So, not only Australia and New Zealand, although that particular geography is very good in this quarter, about half of this revenue, to be precise, but also other APAC geographies performing rather well. Looking at the product mix, well, obviously, we're seeing exactly the same phenomenon. The larger projects will be in solution, software, and services. That's where they were a year ago.
And it's really, it's really the same drop that we're seeing in the solutions revenue in the quarter. So, so EMEA and larger projects to a large extent. I will hand over to Stefan to take us through the balance sheet and working capital and some more financial details.
Thank you, Magnus. We see a strong balance sheet with equity rates of about 61%, compared to 60% last year. We have non-current assets of $7 million, compared to $6.9 million last year, and it's mainly related to capitalized development costs, tangible assets, and leases, and deferred tax assets. Current assets amounts to $32.8 million, compared to $33.5 million last year. It's mainly inventory and trade receivables. And the cash position is $5.1 million, compared to $2.9 million last year. And it's a reduction from $11.5 million in March this year. And that is mainly driven by the dividend of $4.4 million, and that we have a net operating cash, a negative impact of $1.9 million .
On top of the NOK 5.1 cash, we have NOK 7 million available in credit facilities. Our non-current liabilities is NOK 1.5, compared to NOK 2.8 last year, and consists of lease liabilities of NOK 0.9 and long-term loans of NOK 0.6 to Innovation Norway. That will be fully repaid in Q3 of 2026. Current liabilities, excluding deferred revenue, amounts to NOK 9.4, the same as last year, and it's mainly AP, tax liabilities, and personal-related liabilities. Deferred revenue amounts to NOK 6.8, up from NOK 5.4 last year, and it's a result of larger revenue share from business area, software, and services. The working capital amounts to NOK 17.3, compared to NOK 19.4 last year.
There we see the inventory increased to NOK 14.6 from NOK 14.1, which is a result of that we have shorter lead times compared to earlier. But we still have forecasted periods where we have commitments to buy goods. Trade receivables decreased to NOK 17.2, down from NOK 17.9, and we still have a trend that we see that we are invoicing later in the quarter, why we keep trade receivables up a little bit. Trade payables are down to NOK 3 million from NOK 4.3. And in this quarter, we did earlier purchases of inventory, resulted that a lot of those has already been paid end of quarter.
Net other short-term liabilities increased to NOK 11.5 million, compared to NOK 8.3 million, and that is related to increase of deferred revenue and tax liabilities. The revenue decline of 23.5%, down to NOK 13 million from NOK 17 million, is due to we had a strong Q2 last year, as Magnus mentioned, and we are now missing larger projects in EMEA. We have a stable high gross margin of 47.3%, compared to 49.2% last quarter. The EBITDA is NOK 1.0 million, compared to NOK 3.2 million, and the drop of NOK 2 million is mainly related to revenue, of which the revenue drop is NOK 2 million, and the difference in gross margin is NOK 0.2 million.
We are flat on OpEx, even though we are growing in full-time equivalents. We had, from 105 to 119 employees, but we are converting consultancy costs. That's why we have the stable OpEx still. We have a negative cash flow from operations of $1.9 million this year, compared to $1.6 million last year, and it's coming from the lower revenue, but still we are profitable. We have consumed some cash for inventory and for, mainly, and as well, a little bit of accounts receivable. Thank you.
Thank you very much, Stefan. So, looking at our long-term ambitions, I'm going to reiterate what we have been saying in the past two quarters, that we have no reason to change our long-term ambitions. We see good opportunities ahead of us. We are still targeting our $100 million in revenue in 2025 and 2026 timeframe, with the financial metrics that you see to the right in this slide. Now, what I have said, and what I'm gonna repeat is, of course, 2025, are there projects out there that could take us to $100 million already next year? Yes, there are.
However, that would kind of be goalpost moving in on everything, I would say, to use a reference to sport. Everything has to be phenomenal to—for that to happen in 2025. So I'm quite pleased that when we originally set this target five years ago, that we did range it a little bit. So 2026 is, assuming that the market comes back now in the second half of the year, and that we can return to growth, these ambitions still feel achievable for us. So very good. So with that, we have concluded the presentation part, and I believe there are some questions.
Yes. We have the first one from Christoffer Wang Bjørnsen at DNB. Kristoffer, please unmute yourself and ask your question.
Good morning. Can you hear me?
Yes, we can hear you.
Great. Yeah, so, I think, focusing on outlook, you know, looking back on Q1, you were quite confident that Q1 was going to be the bottom, if I heard you correctly back then, but now you don't really seem as certain as that this is the bottom. You're still seeing high activity level across Americas and EMEA, but you're not really seeing that converting into revenue. So, you know, what are you seeing, like, among your customers? Anything in the backlog that gives you confidence in growth returning, and at what point?
Okay, yeah, I think what you may be referring to is, as we saw quarter one being up compared to quarter four, and I was speculating whether or not Q4 last year was the bottom. I don't think we have the answer to that yet, and I don't think I called it out at that time. It was just a discussion that it may very well have been that case, and we will see whether that is true or not. Do I have something in my backlog that is kind of telling me anything relevant about the two quarters? Well, we have never really been discussed that other than, you know, I can reiterate that we are moving into our quarters with a fairly low backlog.
Certainly lower than wanted, and certainly lower than we would expect in a normal market. So backlog is one thing. The other one is pipeline. You know, looking at the projects that we are currently working with, do I have things in my pipeline that makes me believe in a return to growth? The answer is a clear yes. We have to convert them. I cannot give you a timeframe on exactly when that's gonna happen. But we have a lot of projects in our pipeline, where I rate our win probability as very high. So yes, I have good reasons to believe in the return to growth.
I think, you know, you noted in the press or in the presentation that you're in final rounds of vendor selection from larger accounts in both EMEA and the Americas. Can you just help us
Yeah
understand what is like, you know, typical timing on those? And, you know, larger accounts, how big opportunities and orders are we talking about?
Well, I think those are opportunities that kind of look like the bigger projects that we have had in the past. It's not... Well, you know, we've had two kinds of large projects. One is the kind of BT Wales, Vodafone Ireland, Irish government projects. Very large projects that is gonna produce revenue over time, but not to the same extent. The other large projects, typically Crown Castle, where we have returning, recurring revenues coming year after year. And I mean, these are both more similar to the latter here. So service providers and data center operators, where we see potential for build out over a very long period of time.
As I said, we have projects in our pipeline right now, where we are in the final phase of vendor selection. What does that mean? Well, it means that we have been working with them for a significant amount of time. And then it's about, you know, closing the deal at the end of the day. And I cannot really speculate in how much time that's gonna take. Hopeful that we will have good news in second half of this year, as previously communicated.
Okay, I'll jump in the back of the queue.
Okay, thank you. Next question is from Markus Heiberg at SEB. Markus, please unmute yourself.
Thank you. So, yes, I can just follow up a bit on the revenue trajectory here, because if you can discuss the seasonality of your business, once again for us, because, of course, Q2 is normally substantially better than Q1, from the past, say, five years. Why do you think we didn't really see that this year? And, are there reasons to think that Q3 will break that normal pattern, that normally Q3 will be slightly lower than Q2? Is the reason to think that maybe Q3 this time will be a bit better than Q2?
And in relation to that, maybe on EMEA, because you say that's clearly improved, but in your revenues, EMEA is down quarter-over-quarter in a quarter that typically is better than Q1. Some bit more flavor maybe could be helpful.
Yeah. So when I talk about EMEA improving, I'm talking about activity level, number of conversations, number of opportunities, and projects that we are working with. And I agree with you, it has not yet resulted in major revenue, which is obvious from looking at this report. And I guess the most important part of your question there is related to Q3 and onwards. Yeah, you know, Q2 and Q3, there have been cases in the past where Q3 has been on par or better than Q2. Can that happen this quarter? Well, you know, it's—we are about 12 days, sorry, 15 days into the quarter, and it's way too early for me to speculate.
But if you put a very big maybe in front of what you said, because I believe that's how you asked the question, can we believe that maybe Q3 is better than Q2? Yes, maybe. That can certainly happen. We have opportunities that can make that happen. But it's a bit too early to talk about it in any detail. Was that an okay answer?
Yeah. Yeah, maybe also a bit more on, on the current quarter that we have behind us, because Q2 is, is normally a, a seasonally high level, but, but it didn't really materialize from, from Q1. Is there anything in the seasonality that... So, so, so that would imply that the market is actually getting worse in Q2, right? Because normally Q2 is better than, than Q1, but that didn't really happen. Or is that the wrong interpretation of the seasonality of your business?
Well, yeah. You know, I mean, clearly the market is not great in Q2. We can, we can conclude that, and I agree with you that Q2 should be a little bit better. I think it's related mainly to... And if we look at what happened in the second half of the quarter, you know, did we have opportunities that we were working with, that we thought was going to close to make Q2 better? Yeah, we did, absolutely. They didn't materialize. We haven't really lost any projects or anything. Things are taking a longer time to close and to materialize, clearly. Is that worse in Q2 than Q1?
Well, maybe a little bit, maybe a little bit, that we had a little bit better traction at closing deals at the second half of Q1 compared to the second half of Q2. If you ask me in six months, I think it's gonna be easier to answer the question related to what we have discussed earlier here, Q4, Q1, Q2, which was really the bottom in this market. I don't know the answer to that yet.
That's under-
To an extent, to an extent, yeah, coincidence and, and, you know, things that can happen in a softer market. I don't think seasonality is forever and ever broken. I think it will continue to be, Q1 the smallest, Q2 or Q3, the, the second highest, and Q4, clearly the highest quarter.
It's yeah, fine. Thank you. Final question for me for now is on the industry consolidation that you're seeing and some structural changes in your industry. And maybe you can shed some light on how you see the opportunities or are there any threats from the, particularly the recent announcement some weeks back, that... From your perspective?
Yeah.
It'd be interesting.
So, right. So if I may take a step back to over the years, as we have been discussing what is the strategy of Smartoptics, we've always had three major elements of our strategy being: you know, fill the gap in the market caused by consolidation, the lack of mid-sized players who can do innovation in simplicity, who can do innovation at the edge of the network, and things like that. Second one being the open and disaggregated trends, someone who can really rely on that. And the third, a major element of our strategy is to grow our addressable market by strategic development of hardware and software for our customers. And this one is spot on. Number one, the gap is getting bigger with every consolidation that happens.
So, what used to be, well, I guess, number two and three in the relevant markets is now the number two, and fewer competitors out there and clearly a larger gap to be filled, meaning more opportunity for us. So I cannot see anything negative with what was communicated some time ago, two-three weeks ago. Rather the opposite. It's probably a good thing for us.
Great. So thank you.
Thank you very much. Do we have any questions on the portal?
Well, we do have one more from Christoffer Wang Bjørnsen at DNB. Kristoffer, please unmute yourself.
Yeah, cool. Thanks. Yeah, so just sorry to kind of bug you on this again, but so the high activity level in, like, exiting Q1 and through Q2 in places like EMEA means, you know, kind of you're knocking on doors, you're engaging, people are interested, and you haven't lost any opportunities. So what are they telling you? Are they telling you, you know, "Likely, we'll put this in Q3," or just trying to understand the dynamic there. Yeah, we're just trying to understand the dynamic there. You have, like, over 300 different active buyers, according to the statistics you shared, was it one or two quarters ago? So, you know, couple of examples, what are they telling you? You know, they saying maybe Q3, or are they saying, like, "We're so worried now, it might be next year?" I don't know.
I'm just trying to understand, because it's really difficult to gauge the outlook here.
Well, I think we have everything in those conversations. Honestly, we have everything in those conversations. Absolutely, we have the maybe Q3s out there. I mean, we have the ones who are communicating with us in a very, very careful way, wanting to make sure that they don't overpromise to us, much like I don't wanna overpromise anything to you or our investors. So there is a little bit of everything in those conversations. But what I can say, as I've already mentioned in this call, are there such larger opportunities that may close in Q3 or Q4? Well, let's isolate to Q3. Yeah, sure. Those opportunities are out there. They may slip to Q4, I don't know, but they can materialize in Q3.
Thanks.
Thank you.
Okay. So we have one more question from Øystein Lodgaard at ABG. Øystein, please unmute yourself and ask your question.
Thank you very much. So just a couple of questions from me. The first, a bit to follow up to Christoffer's question here. Can you tell us these customer dialogues that you are in, which type of customers is it? What regions are they mostly, like telcos in the U.S., or can you give some more flavors?
Sure. So, right now, I would say if we isolate, I said EMEA and the U.S. Let's take three examples then to illustrate that. We have a European service provider talking about building a larger network to connect certain larger data centers in certain larger cities in Central Europe. That's one example, service provider. We have a data center operator owning and operating hundreds of data centers around the world, selecting platforms for data center interconnect for future growth. That's another example. It's a U.S.-based company, but certainly with a global footprint.
We have larger service provider customers in Americas that kind of belong to the Tier 3 space, but being bigger than just a local ISP, connecting many ISPs together in different... So kind of state-level networks that are going to be built. So that's a third example of such a customer. And with all these, it's not only one, it's a couple of them in each category.
Okay, thank you. And on the gross margin, the gross margin is a couple of percentage points below what we've seen in the last few quarters, while the mix between the different segments stays roughly the same. Can you give us a comment on this? Is there some extraordinary items that affected this in Q2, or can you give some more flavor on the gross margin?
We have a really small effect, on, on, you know, one time, but it's, it's not really, relevant to discuss, I believe, in any major detail. I think it's, it's just natural fluctuations, you know. Sometimes we're a bit more aggressive, to, to win our deals, and, and, this, this may happen. And this is, I think, in line with what we have talked about, that we have never raised the long-term aspiration on gross margin. Why is that? Well, that is because we wanna continue to be the challenger in this market. We want to be aggressive, we want to win market share, and we want to win new customers. And, and therefore, we are cautious in, in, in promising too high growth margins.
Great. And last question from me. We've seen, of course, the recently, another two large competitors going together. There's now basically four players in your industry dominating, well over 90% of the metro DWDM market. Means it will be very tightly consolidated in the top, and I guess less focus on the smaller customers. Will that—I guess that opens up a big opportunity for you. Will you change anything in the way you work or how you do business, or just continue to do the same and, in response to those, that increased consolidation?
No, well, you know, I think, as I said earlier, it is a very good time to invest for us. We see good opportunities ahead of us. We see access to qualified people with good domain competence, partly related to these acquisitions. Probably right that when these acquisitions occur, there are people out there on the street looking for new opportunities. We can capture some of that. So positive from that standpoint. And then also, you know, I don't wanna kind of comment too much on our competitors' strategy, but I can say in general, in general, the bigger you get, the more you have to focus on the tier ones of the world, right?
And that opens up opportunities for us in the tier two space and down, which is a very, very big market compared to our revenue numbers. So yeah, no, good, good for us, I think.
Thank you. That was all for me.
Thank you very much.
Good. We do have a question on the portal. It's from George Liesho. "Regarding pipeline and potential larger accounts processes/vendor selection processes, during the year, have you lost any potential customer wins, or are you still in the same discussions as you were entering the year?
Pretty much, yeah, the same discussions, yes. And a few new ones, of course, but no major losses.
Thank you. That was the last question that we had today.
Then, thank you very much for attending and listening in, and have a great summer. See you shortly. Bye-bye.