Gapwaves AB (publ) (GAPWB) Earnings Call Transcript

Welcome to Redeye and this live Q where we have Gapwaves presenting today. We will have both CEO, Jonas Ehinger; and CFO, Nils Mosko, presenting the quarter, followed by a Q&A session. [Operator Instructions]. But without further ado, I hand it over to you, Jonas.

Thank you, Rasmus. Good to be back here, and I'm happy to join Redeye for today's presentation of the second quarter report that was published earlier today. So like Rasmus said, we'll go through a summary and make sure that we have enough time to discuss your questions. And also, I'm sure Rasmus had some questions related to the second quarter report. So first, for those of you that are new to Gapwaves, we're a tech company located in Gothenburg, founded in 2011. And our main application area right now is for radar antennas, especially within automotive. But we're really a waveguide technology company. And this technology can be used in various other areas, primarily for wireless solutions in higher frequencies, such as in automotive radars that are utilizing higher frequencies to get better performance also. And within automotive, we're considered a Tier 2 supplier. So we develop, design production and set up production and deliver antennas for our customers that are Tier 1 suppliers. Some of the names of such companies are surely familiar to you. And our customers supply their customers, the car manufacturers. They are called normally in this industry OEMs, and they supply these solutions to several OEMs. We're listed on NASDAQ since 2016. And I'll discuss some of the other applications later in this presentation. So fundamentally, for Gapwaves, we're active in a growing market with strong market potential. Requirements on active safety features in cars are increasing, and there are legal requirements and also regulatory requirements for how these sensors are going to work and how these functions of the cars need to perform in various conditions, driving the need for radar sensors, which we see clearly in our increased production volumes. Our technology is unique worldwide. It's well protected in patents over 45 patent families as of now. And this is far more mature now than just a lab product or a lab technology. We have to date produced more than 2 million antennas with Gapwaves technology. A majority is right now under license production, but it's still our design, our production processes, our design production capacity together with a customer, HELLA and contract manufacturer, Frencken in China. Our business model is asset-light since we don't build and maintain our own factories. We contract with select partners that we prequalify for this type of production and scale up. So turning to Q2 and the report that was published earlier today. The main thing in that report, and we're very happy to report that. It's a fundamental, very fundamental milestone for Gapwaves development going forward. It's the completion of the high-volume start of production in China for Valeo. Most of you probably know that we started production for Valeo already last year in Gothenburg, but this is the high-volume line that will scale up significantly over the coming years. As I mentioned, more than 2 million antennas have been produced by the end of the quarter with Gapwaves technology. That's a solid proof of how well this technology and our products can be industrialized and scaled up. We've also added and strengthened our supplier base through the partnership with AT&S from Austria, providing layers for our MLW antennas. And during the quarter, we're also entering into new application segments or market segments beyond automotive radar. So coming back to this big milestone and achievement during the second quarter, where we transitioned from pilot production in Gothenburg, running at well over full capacity for the last 9 to 12 months. And now we're ramping up in the next step and the next phase with high-volume production in Chuzhou in China together with Frencken at their facility there. This volume ramp-up that now takes -- that now starts will accelerate heavily going forward. And that will take time to get into several millions of units per year. We estimate that this process will take around 2 years with successively increasing volumes month by month and quarter-by-quarter. And it's not only an important milestone now, it's also an important statement to other customers and validating Gapwaves in terms of its technology, but also the production processes and our ability to set up and manage and scale up this production for our customers, especially in automotive. And looking at the numbers in the second quarter, like to invite Nils to discuss this and also summarize the numbers from the Q2 report.

Thank you, Jonas. And as you have seen, revenue came in at SEK 13.1 million. That's SEK 11 million lower than last year. In general, that reflects the lower project revenues and the fact that the product sales does not yet offset those lower project revenues. Also good to keep in mind that last year's figures were affected by production equipment sales of around SEK 7.7 million and the booking for a council project, which was booked in Q2. On EBITDA, there's a couple of reasons for the lower EBITDA. Firstly, there's a higher start-up cost for the launch, for example, travel to China, et cetera, freight cost, et cetera. Secondly, we are in a launch phase. So as we increase volumes, the per unit cost will decrease. And thirdly, it's a mix effect on the revenue side. Project sales are profitable and of course, more profitable than high-volume product sales. But of course, they are also a bit more volatile in their nature. Cash flow -- total cash flow came in at minus SEK 22.6 million. That includes a partial repayment of our loans or trade finance loans of SEK 10.8 million. If we go to the next page, there's a breakdown on the revenue mix. And as you can see, the yellow part on that slide shows the revenue from -- in the last year from production equipment sales of SEK 7.7 million. Stripped out for that, the year-on-year comparison looks a bit more fair. What it also shows is that we are transiting from the revenue mix from project revenues to product revenues, and this will continue over the next quarters as production will ramp up. And in the end, or in a couple of quarters, product revenues, product sales revenues will dominate and be the most important revenue source for us. Yes, Jonas.

Thank you, Nils. And turning over to some other news in the report. We were very happy to now finally be able to announce that one of the customers for Valeo since 2025, actually, is Geely, Geely Group. So Valeo has been supplying its radar sensor to Valeo since last year. Geely is already the second largest automotive group in China and it's also growing rapidly in the global market. I think it's making the top 10 globally already. in terms of volume and revenue. And that Geely is a customer for these radar sensors with our antennas is an important statement to the value that Gapwaves products are providing to Valeo and to Valeo's customers in this solution being competitively strong also in the volume segment, not just in the high end or premium car segment. And we have expectations to see these volumes to Geely and within the Geely Group to grow in the coming periods. Looking beyond automotive, we partnered up in a joint development contract with Gotmic for a new application area called packaging, where our waveguide technology is used not specifically for antennas, but to provide wireless or low loss solutions when it comes to power amplifiers, specifically used for communication solutions. And this is like prior in the system before satellite dishes, et cetera. This is a growth area, and we see a lot of potential in this going forward. The first customer of Gotmic is an American defense group. We've not been able to disclose the name of that group. So we see quite a bit of potential going forward here with Gotmic, but also with other customers in these segments going forward. Another growth segment is in-cabin radar and with coming legal requirements and regulations for in-cabin sensors to detect presence of animals or passengers or children in the car. And obviously, cameras have been used for this, but also have some drawbacks in terms of integrity, but also not being able to see through blankets and material. And we're very happy to be able to partner with Acconeer and Vinnova to do some initial research exploring this market and the application of Gapwaves high-performance antennas in this segment. Also important in the report is the status of Sensrad. We've unfortunately seen some headwind for Sensrad in the quarter, specifically with weaker development in sales due to delayed orders and also not being able to add new customers to the existing customer base. And we've also seen a changing market segment or market condition with new players entering into the field during the second quarter. And of course, Sensrad and its Board are taking measures to adapt its business and focus its business accordingly to the market situation. And at Gapwaves, we follow our investment, of course, through regular assessments. And for the second quarter, this resulted in an impairment adjustment. Nils, do you want to add anything on that specific part?

I think you covered it all. The impairment has been done on the equity part of the holding. And yes.

Good. Looking forward, so Gapwaves outlook, it's really important to distinguish the quarter from the longer-term outlook. And nothing has changed in the market outlook for Gapwaves. Our volumes are growing. We have very solid customers that are now scaling up together with us. Like Nils mentioned, we're going through a revenue transition, going from more research-focused development type of revenue dominating in the revenue mix to product sales that will become the larger and dominant and importantly, more stable type of revenue going forward. In terms of production, the ramp-up will continue. So we expect -- it's not a surprise to anyone at this point that both Valeo and HELLA production will continue to scale up. And we're, of course, continuing with our supply chain development, looking at other regions than China-based high-volume production also. New growth drivers that we want to highlight is, of course, the drive towards autonomous vehicles, Level 4 or robotaxis, but also automated freight vehicles. There's quite a bit of momentum in those segments right now. And the growth segments that I highlighted earlier in the presentation within defense, packaging, but also in cabin radar. So near term, our main priorities are, of course, to continue this ramp-up and scale up in volumes where we will see significant increases in volume -- significant increases in revenue from production and product sales. The business development is very important for us in establishing gap waves in new segments. And of course, we're continuing expanding within automotive. We have a number of well-progressed customer discussions that have been ongoing for quite some time. In spite of the general market pressure, especially in automotive, these dialogues have progressed, although slower than we had hoped, but they're still there, and we're making progress, and we're getting into a good position with those to add to Gapwaves going forward. And as an indication, I normally show this also, but look at the volume increases that we have seen, and this will continue also. In 2025, we were already at just over 800,000 antennas. This year, we expect to be above 4.5 million antennas produced. And for next year, we expect that number to be accumulated over 10 million antennas. So it's quite a massive ramp-up and scale-up that we're going through, and we will see the results in the coming years. I think that's the short summary of the report. I hope you have time -- had time to read it. But now we're open for questions and hand over to you again, Rasmus.

All right. Thank you very much for that presentation. [Operator Instructions] I'm going to start off with, I think there's some confusion with how the ramp-up of your customers are going? And how much of the revenue is product related versus project or production equipment related essentially. So can you just try to give an illustrative example of how we should expect the progression of volumes to develop over a life cycle essentially.

Over a life cycle with an automotive customer, typically, initially, there is a development revenue and it could take up to a year to get to a point where Tier 1 decides to freeze the design and push the start button for making it into a product, and that's the start of an industrialization phase, typically 1.5 years, maybe 2, depends on the Tier 1 and for which market and type of antenna, of course. After the industrialization phase, then you go into production phase and you start going through start of production and then you ramp up. We are talking about the high volume type of antenna and radar sensor like a corner radar. Those volumes will be massive. So that ramp-up phase is around 2 years, like we indicated in the presentation.

All right. And if you just spend a little bit more time on the ramp-up phase, like how -- if you look at like, let's say, peak volumes, how much of -- as a percent of peak volumes do you see in this initial ramp-up phase? Is it quite a steep curve? Or is it more gradual over these 2 years essentially?

Yes, it's quite a steep curve. I mean we're talking about massive numbers here, Rasmus. I already indicated in PV communication that the high-volume line set up for Valeo has a maximum capacity of around 10 million units per year. And we're starting at essentially 0 at start up production and then ramping up. And what we're looking at is a time window around 2 years. And of course, the capacity of the line is designed according to the capacity or volume needs of Valeo, although I'm prohibited to give exact numbers and exact months or quarters for specific volumes for Valeo for obvious reasons.

All right. And you have had this major development of moving the production away from your pilot line into the high-volume manufacturing in China. As this progression is happening, you were running the pilot line well above capacity. And so now that you are transitioning, are you winding down the pilot line and ramping up the high-volume production. So like how should we think about the net volumes essentially?

The net volumes will increase. The high-volume line and production taking place in China is so much bigger in absolute numbers than what the pilot line in Gothenburg can produce. It's two entirely different concepts. The Gothenburg line is a pilot line designed to be very flexible for various types of antennas in sizes and complexity, whereas the lines in China are dedicated for high volume. So in terms of absolute numbers, you will not see any impact of us reducing the production and going back to prototype and small volume production in Gothenburg.

All right. So we should not expect an air gap essentially as this transition is happening. If we stick on this topic a little bit more, if you just think about the pilot line was obviously also in a little bit of a ramp-up phase, we can say. If you just compare the ramp-up in the pilot line to what you see now in the high-volume production. Like if we go month by month, is it -- are we talking about like a 10x higher volume, more like a 5x at the same stage of the process essentially?

The pilot line was running well above its intended capacity for the last 2 quarters. So -- and the outline is starting from 0 in the quarter, of course. So -- but very quickly, very soon, the volumes in the high-volume line in China will overtake well the pilot line volumes. So we're looking at least 10x going forward, but over that time period, that ramp-up time period. And again, we're prohibited to go into specifics per quarter or month in terms of volume supplied to specific customers.

All right. I was just trying to get a sense of at the same stage of the process, how much bigger are we talking, but maybe you don't...

Much bigger. Much bigger, Rasmus.

All right. All right. So you confirm that Geely is a customer now with -- I assume that is within the Valeo customer or Tier 1. And they have a have been on the road since 2025. Can you go into which brands or what car models that this relates to?

We can. We don't really have that visibility on -- because platforms in -- within Geely are being shared between different brands. But as we understand it, these curves that Valeo have been supplying the RADAR sensor to since last year are not available yet in Europe or in Sweden. We think it's Geely dearly branded cars. But as soon as we have more detailed information and gets approval to communicate this. We will, of course, share that information. But I think the important message here is that it is Geely. And we now Geely on quite a few brands, including Volvo, Polestar, Sika, Lincoln Co and others. So obviously, that is a pretty positive indication on future growth opportunities with Valeo and for Valeo with Geely.

All right. And given this platform that you're on, do you have a visibility on the term -- the volume potential essentially within the specific...

No. Yes. No, we've been trying to look into that. And I think both Valeo and ourselves have limited visibility on the volumes of the platforms and what components they share between the different variants of the platform. We know that this is a platform which has some different variants within the Geely Group. So right now, it's too early to say.

All right. And Valeo recently also made an order that signal that demand is being pulled forward. Can you go in a bit deeper into what that implies for you and the ramp-up curve essentially.

Essentially, it's to allow us to accelerate volumes this year far beyond what was planned and contracted. And that's -- so that PO concerns additional volumes this year for the second part -- the second half of this year. And obviously, Valeo has this demand from its customers. We think there will be other OEMs supplied during the fall. So we will try to communicate that as we get clarification and approval.

All right. And you gave some guidance here on 2027 volumes that they would reach or you estimate more than 10 million units. Could you give any details if that is primarily HELLA-driven or Valeo driven considering they are in a ramp-up phase? And how we should think about that essentially?

The majorities as we have communicated, every time we provide these numbers still with HELLA because the HELLA production started in Q1 2024. So they're way ahead in their ramp-up. But in the coming years, the volume majority will be overtaken by the Valeo volumes.

All right. Cash flow in the quarter was about -- negative free cash flow in the quarter was about negative SEK 11.5 million. Now that you have made investments into the flex line and so on in Q1, I believe, if I'm not mistaken. What do you expect -- how do you expect the cash flows to develop in the second half of the year?

Nils?

Yes. I'll take it. I mean the -- you're correct. We had the Flex line investment in Q1. Those investments are done. We don't foresee any CapEx there. for the Flex line. We are still in the ramp-up phase. So I think it's fair to say that trade working capital we'll be building up with fluctuations from quarter-to-quarter, of course, you can have a time the invoices directly for quarter end, but trade working capital will be built up as we grow volumes, of course. In general, I think CapEx-light model is important to have in mind when modeling our cash flows. We it's always a commercial discussion whether we take the CapEx or not, but we get paid 1 way or the other and the big CapEx comes or CapEx investments come when you set up a new production line I would say trade working capital increases as volume grows. CapEx, I would assume to be relatively low in H2.

All right. Perfect. We have received quite a few questions about your capitalization. You have about SEK 50 million as cash. I also believe you have a few loan facilities outstanding. Could you maybe provide what is the total liquidity that you have available? And how comfortable are you with the liquidity situation here?

So we have -- you're right, we have a trade working capital facility with a bank in Sweden, which will help us to -- through the ramp up of production and volumes. And then we also signed in conjunction with the with the capital raise last year, we signed a loan agreement and that is around SEK 15 million that we have SEK 50 million cash at bank as of end of Q2.

All right. So it sounds like you are fairly well capitalized essentially. If you move on to Sensrad, I think it came a bit of a shock too many people, the development we have seen there. And first of all, I'm a bit curious what has happened within Sensor ad from 1 quarter to another, like it seems to be quite a rapid development here, so to say.

Yes. Like I said in the presentation, we've seen during the quarter -- second quarter, lack of sales essentially delayed orders from customers and not being able to bring in new customers to compensate. And also, there's been changing market conditions, not only in terms of delays, but also I'm sure everyone has seen that Arby's now entering the market, and of course, urban and sensor are discussing how to coordinate this in the best way. So there's been a rapid development during the quarter.

All right. And have Sensrad lost any customers within this period? Or is it merely that orders have been delayed and more competition has entered.

Not that we have been seeing in reports or information provided by Sensrad. So to our knowledge, from an owner and Board perspective, we haven't seen any lost orders. There is primarily delays and yes, changed time lines from Sensrad's current customers. We strongly feel that not being able to win new customers, it's also on a market indication in that segment. So...

Sorry, could you clarify that last bit?

Yes. And part of the market condition that the changed market condition that we see during the second quarter is also the that we haven't or Sensrad haven't been able to add new major customers as expected earlier in the year. and we're assessing why that is and also the company is adopting and making sure that it has the right focus towards the right market segments.

All right. And I believe earlier when we have spoken about Sensrad defense has been one of the segments that it gained some traction within. Is that still a market that you feel is a core market for them going forward?

For unmanned or autonomous ground vehicles, yes, but defense is a wide area. It can be drones or anti-drone systems, communication, et cetera. But Sensrad niche and where they've had the customers is smaller ground vehicles that operate autonomously and unindependent from any communication or GPS systems. And that's where we still think that their focus should be.

All right. That makes sense. You have about SEK 19 million or so in outstanding receivables to Sensrad. Do you feel that -- by given that you are writing down the state within the parent company at Gapwaves, do you feel that there's any risk or challenge that they might not be able to pay you back this amount over time and potentially require more capital from you guys.

Nils?

We don't guide on what capital needs they have, but they are working on, as Jonas mentioned, they are working on adjusting the business accordingly. And we believe they will be successful together with us and the owner -- the other owners. And therefore, we kept the receivables on the balance sheet. So it's a different assessment between the equity side and the receivables.

All right. That make sense. And if you go back to Gapwaves and the Q2 quarter was a bit of a disappointment in terms of sales. This is partly explained by the product equipment not being sold in this period and also the amount of projects essentially. Should we think as you are ramping up the volumes for your product, should we think of Q2 as a froth? Or should we expect to be a bit similar developments in H2 essentially.

Yes. Well, it's -- yes, Nils.

I think a base the launch phase, as Jonas mentioned before, in the launch phase, it's a matter of quarters, not weeks or month. I think that's really important. And it's a normal transition going from a very designed project focused company to a company which sales products. And that ramp-up will take more time. The thing with project revenues is they are -- they come in chunks and they are a bit more volatile. You never know when they come and how fast they can canceled as you have seen, for example, in Q2 last year. So I think it's -- when modeling it, I think it's fair to say it's if you just look isolated at the Valeo case, this will take quarters, not months. Jonas, want to add anything?