Earnings call transcript: Asetek's Q3 2024 sees revenue drop, future growth in focus

Asetek reported a decline in revenue for the third quarter of 2024, with figures falling 19% to $9.8 million compared to the same period last year. Despite this, the company is optimistic about future growth, particularly in its liquid cooling business, which is expected to expand significantly by 2026. The company also announced a revised midterm revenue ambition, reflecting its strategic focus on innovation and expanding market segments.

Key Takeaways

• Q3 2024 revenue decreased by 19% year-over-year to $9.8 million.
• Gross margin improved to 42%, up from 36% in the previous year.
• Asetek signed a significant agreement for liquid cooling, securing $35 million in committed revenue.
• The company revised its midterm revenue target to $65 million, up from $50 million.
• Focus on high-end and mid-market segments with new product launches and innovations.

Company Performance

Asetek's performance in Q3 2024 was marked by a significant drop in revenue compared to the previous year. The company generated $9.8 million, down from $12.2 million in Q3 2023. However, it managed to improve its gross margin from 36% to 42%, indicating better cost management and pricing strategies. The company continues to face challenges in its SimSports segment due to tariff issues but is seeing growth in its liquid cooling products, which constitute about 90% of its business.

Financial Highlights

• Revenue: $9.8 million, down 19% from Q3 2023.
• Year-to-date revenue: $31 million, down 17% from the previous year.
• Gross margin: 42%, up from 36% last year.
• Operating income: -$2 million for the quarter.
• Adjusted EBITDA: -$0.7 million.
• Cash balance: $2.8 million.

Outlook & Guidance

Asetek has revised its midterm revenue ambition to $65 million, reflecting confidence in its strategic direction and market opportunities. The company expects growth to return in 2026, driven by an expanding liquid cooling segment. Asetek is also targeting a 25% adjusted EBITDA margin, highlighting its focus on profitability alongside revenue growth.

Executive Commentary

CEO André Eriksen emphasized the company's strategic focus, stating, "We always knew that going into 2025 would be a hard year," but expressed optimism for the future, noting, "Our liquid cooling business is set for growth from 2026 and beyond." Eriksen also highlighted the company's competitive edge, saying, "It is not just a price game. It is really also down to the quality and the services we provide."

Risks and Challenges

• Revenue Decline: Continued revenue decreases could impact overall financial health.
• Tariff Issues: Ongoing tariff challenges affecting the SimSports segment.
• Market Competition: Intense competition in the tech industry could pressure margins.
• Inventory Management: Efficient inventory management is crucial to support growth.
• Economic Conditions: Broader economic conditions could affect consumer spending and business investment.

Asetek remains committed to innovation and market expansion, with strategic initiatives aimed at capitalizing on its strengths in liquid cooling and new product developments. The company is preparing for increased working capital needs in 2026, focusing on inventory and sales channel management to support its growth ambitions.

Full transcript - Asetek (ASTK) Q3 2025:

Mark, Conference Operator: Hello, and thank you for standing by. My name is Mark, and I will be your conference operator today. At this time, I would like to welcome everyone to the Asetek Q3 2025 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. You can ask a question using the Ask a Question box on the webcast page. Thank you. Now, I would like to turn the call over to Peter Madsen, CFO of Asetek. Please go ahead.

Peter Madsen, CFO, Asetek: Thanks, Mark, and thank you, and welcome everybody to this Q3 2024 Asetek earnings call. My name is Peter Madsen. I'm the CFO. I have here next to me our CEO and founder, André Eriksen. Hello.

André Eriksen, CEO and Founder, Asetek: Hello. Good afternoon.

Peter Madsen, CFO, Asetek: Good afternoon. Our board met last night and discussed and transacted the earnings release, which we then sent out last night. We will go through a series of slides here. When I slide through here, we can see that on slide two, there is a disclaimer for forward-looking statements, etc. We urge you to read those at your leisure. With that, I will hand over the microphone to André.

André Eriksen, CEO and Founder, Asetek: Yeah, so let's dive into the quarter that we just passed, some gives and takes. Year-to-date revenue of just shy of $31 million, and an adjusted EBITDA of minus $0.7 million versus $37.1 million and $0.3 million same quarter last year. As most of you have realized by now, we signed a major agreement with a global customer for high-end liquid cooling, with a minimum committed revenue of $35 million over the first two-year term of the contract. We saw SimSports revenue of $1.3 million, stable versus Q2, and in line with expectations as the tariff situation continued to impact us and impair us, of course. We adjusted our group revenue for the year to roughly $41 million, with an adjusted EBITDA margin of a negative 3%-5%.

One thing worth noting here is that the dollar actually decreased 10% over the year, and since we have our OpEx in Danish krone, I would say the most part of this negative EBITDA margin is actually related to the dollar value. In return, we did increase our midterm liquid cooling segment revenue ambitions quite significantly. Talking a little bit about the new agreement, the reason why it's actually a little bit elasticity in the number is because it's actually a committed volume, and then with an ASP, of course, it turns into a revenue, but that's why it's estimated. It is a long-term agreement for our high-end solutions based on the Ingrid platform. We are, in this case, supplying both the liquid cooler itself, the plastic cap, the heat exchangers, fans, retail packaging, and all of that.

That means in return that we get a higher ASP, but of course, also at reduced gross margins, simply due to the fact that we can, of course, not charge, for example, 45% gross margin on a paper box that's a commodity. Although we make a little margin on it, it, of course, drags down the overall margin. We expect to begin shipping end Q2, start Q3 next year, and Q4 for the next products. We have two products. The customer is a globally leading provider of high-quality components and accessories. It's one of our earlier customers, so it's a welcome back, and we do expect this customer to reclaim their top-tier position within our portfolio. As I just alluded to in the beginning, the minimum volume commitment is estimated to be $35 million during the first two-year term.

Of course, since the customer has committed to this, then my expectation is that they are actually being conservative. At least I would if I were to commit to volumes with one of our suppliers, so revenue may very well be higher. Our guidance, of course, reflects the near-term challenges that we are facing. We have, and it's just the nature of OEM business, a couple of customers who reduced their short-term forecasts. Yeah, there's nothing major in that. Of course, it's always. Irritating when it's in this direction, but that's how it is to be an OEM supplier. Because of that, we have revised our guidance. I don't want to repeat it once more. I just read it up. We do expect, as we've said for a long time now, that growth will remain and come back in 2026.

Therefore, we have raised our midterm ambitions to $65 million, where we previously had $50 million. We aim to consistently achieve an adjusted EBITDA margin of more than 25%, which is consistent with what we've said before. I would actually like to go to slide eight. The current status on the business, the liquid cooling business, is that we are right now supplying three of the top five PC manufacturers globally. We had three new coolers started shipping in the third quarter, and we have seven new products that's estimated to start shipping in the quarter that we're just entering. We focus still on the high-end and the mid-market, and we also have a value version of the Ingrid technology platform, more for the mainstream market, that will be ready in Q4, also with revenue impact from 2026.

We always knew that going into 2025, it would be a hard year. I would like to take your attention to the right side of this slide. What I mean by that is that we had a couple of customers who went to dual sourcing. The impact of that, as you can see on the left side of the graph, is that we lost perhaps 250,000-300,000 units to these customers. We actually have been able to grow new customers and existing customers almost the same. At this point in time, we have shipped shy of 20,000 units. We have actually been able to fully compensate for the loss. It has been too much to also grow on top of that, but I'm actually quite happy that we've been able to offset that.

The ASPs, if and when they are lower, it doesn't really say much about the actual price of the product. Of course, it says something about the price, but what I mean by it is it's not price erosion. It's simply due to what the customer wants in terms of extra utilities, etc., shipped with the product. I believe we have a strong support behind our 2026 growth expectation. Of course, we have a committed customer contract. We have focused really hard this year on growing existing customers. We have a full launch of the mid-market and also low-end products later this quarter. I have to say that the main reason we have now seen just this year two customers come back is that there is an increased recognition of our quality. It's not just a price game.

It is really also down to the quality and the services we provide. Moving into the SIM side, simulator side of the business. Of course, the big headline here is still the tariff situation. That is actually handicapping us quite a bit. As I said on earlier calls this year, it has meant at least 50% of our revenue has gone because of that directly. Of course, our U.S. resellers, they remain cautious because of the situation. Like us, they are also awaiting clarity for the tariffs. The focus on mid-end products right now from the consumer is still above that of high-end products, I would say. On the Amazon.com sales, we actually still see a very nice growth. We are not really investing in that channel of our business, so it is actually nice to see that it is growing anyway.

I would say our direct sales in our own webshop is actually progressing quite nicely, and it is actually a little bit ahead of our internal forecasts. We are seeing a gross margin in the quarter of 27%. I will not read too much into that because obviously, to service the U.S. market, we had built inventory ahead of 2025. Instead of sitting on that inventory, we are, of course, doing some sales. We just did, and we will do that on Black Friday, etc., to get rid of that inventory and convert it into cash. Doing these types of sales will impact the margin. We launched our Initium back at Gamescom in August and presented it to the, let's say, SIM racing world here in October in Cologne and Dortmund, respectively.

I would say it has been a very nice welcome both by the media and end users that do recognize it as a new leading offering from a perceived strong brand with great products. We are seeing strong interest from our potential new channel partners and the channel partners we also did land. Our focus now is to convert it into real business. To begin with, we had built modest volumes, of course, because we needed to see that the production would run as expected, but also because of the relatively high inventories. We were not that keen on going flat out. The initial volume actually sold out immediately. We, of course, started up production again immediately too. We do have almost three months of time shipping from China and around the world. We will see products landing in our docks late this year, early next year.

On the Xbox console support, there is also progress. We are actually playing on the Xbox internally now, so we are almost there. The next thing there in the process is we need the official stamp of approval from Microsoft or Xbox. When we have that, we are able to start selling. With that, I will leave the bat to Peter to talk more about the numbers.

Peter Madsen, CFO, Asetek: Yes, thank you. If we look at this quarter with revenues of $9.8 million, then you'll see that it's a relatively low quarter revenue-wise. It is on par with Q1, sorry, of this year, and it's a little bit lower than the comparison quarter last year, Q3, 2024. If we look at the profit and loss statement starting from above, and then I'll try and work my way through. You will see that revenues at $9.8 million versus $12.2 million last year, that's down by approximately 19%. For the year as a whole, we are at $31 million versus $37 million roughly last year. That's 17% down roughly. That has to do with partly a reduction in the numbers of products sold, especially on the liquid cooling side. Liquid cooling is almost 90% of the business.

Of course, that takes the lion part of, or makes up the lion part of the profit and loss. We were 4% down in the numbers of quantity sold. That means that something else must have shifted, and that is the ASP, the average sales price, which has been down from $54.4 last year to $50 this year. On the surface, that's eight percentage points. Keep in mind, though, that as André also alluded to, a change in ASP in our case does not necessarily equate into lower gross margins. It is more likely, and that's also the case here, a shift in product mix. Gross profits, $4.1 million for the quarter versus $4.4 million last year. That's 42 percentage points this year and 36 last year. That's up quite significantly. We'll come back to that.

For the year as a total, we are at 44 percentage points for this year and 42 last year. I'll come back to that a little bit. OPEX, total operating expenses at $6.1 million versus a whopping $20 million last year. I can touch a little bit on the special items from last year, but if I take the liberty of excluding them just for analysis right now, then it's $6.1 million this quarter versus $6.2 million same quarter last year, and $18.5 million for the full year so far this year versus $19.9 million the same period last year. That is a reduction, and we're happy to report a reduction. We have also promised a reduction. For the quarter, it's 3% down, and year to date, it's 7% down. That is primarily, at least on the surface, driven by personnel cost.

Personnel cost is a very large part of our OPEX, and that has also come down by the same 3% and 7% as I just mentioned. However, we are in a quarter or in a time here where the dollar/danish krone exchange rate has changed quite significantly. The dollar has come down, meaning that the krone has been more expensive. We are talking about 10%-11% in FX currency delta. This point in time versus the same point in time last year. In addition to the actual savings in personnel cost, etc., you should also add, I do not have a specific number, but you should add a significant factor in for the changed exchange rate price here. Operating income for the quarter, $2 million in the negative versus $15.6 million last year, and $5 million for the year so far versus $18 million last year.

Foreign exchange rates, as I just mentioned, the dollar versus Danish krone has changed quite significantly. We are at, what, 6.4 or 6.45 at this point versus above 7 last year or earlier in the year. It has been relatively stable for a period of time, meaning that there is almost no foreign exchange loss or gain for the quarter and a relatively modest amount for the year so far. That means that the income before tax is negative $2.2 million versus negative $17 million last year and for the year $6.3 million in the negative versus $18.7 million in the negative. Just a comment on the special item under OpEx from last year. It is an impairment write-down based on, and that is a long, could be a long technical explanation, but I will spare you for that.

It was related to the relatively low stock price last year compared to our booked equity, and that meant that we needed to write down about $14 million on the assets, plus actually $4 million of deferred tax assets. A significant write-down last year, which, of course, we do not have a similar write-down this year. A brief comment on the gross margins. Yes, they have gone up to 42% this quarter compared to the 36% we saw last year. Last year, in addition to the impairment loss that I just reported about, we had a supply chain issue that we recognized and booked in Q3. It is a relatively easy comparison this year where we compare 42% this year compared to 36% last year.

However, if we look at the most recent numbers, you can see it has gone down just over the last quarter here from 45% to 42%. That is primarily driven by our liquid cooling business, where the gross margin is down from 45.5% to 43.2%, so a couple of percentage points. That is driven by the product mix changes that André also alluded to. Changing focus to the balance sheet. Focusing right in on the cash balance. We have just shy of $2.8 million in the bank. That is a reduction since earlier quarters. It is impacted by an increase in working capital, specifically around inventories where we are preparing for Black Friday and Christmas and year-end, etc., where we have to scale up working capital. The cash balance is in compliance with our loan covenants. The loan covenants are reduced when we enter into 2026.

As André also talked about, 2026, the beginning of, is sort of planned to be a turnaround time. For the business until we get the new. Larger customer up and running at some point early next year. Of course, that comes with a requirement for working capital when we move into that expansion of the business. On the liability side of things, we have an interesting bearing debt of DKK 20.5 million related to the HQ. It matures in 2028, and it is on mortgage-like terms. It's technically not a mortgage, but it's on mortgage-like terms. We are paying Danish krone CIBOR 3 plus 2.45, meaning 4.5% roughly as an interest on that loan. With that, I'll hand over the microphone again to André for a summary and outlook.

André Eriksen, CEO and Founder, Asetek: Yeah. Something I did not touch upon that I would like to do here is that the discussions related to a potential strategic transaction are still going on. Other than that, I got nothing to say about it. Our revenue this year remains impacted by the near-term market challenges. Specifically related to the US import tariffs, of course. We did launch our new product line successfully so far, and the liquid cooling business is set for growth from 2026 and beyond with new and returning customers targeting a wider market.

Peter Madsen, CFO, Asetek: Perfect. Thanks, André. With that, we will move into a summary question and answer section. We are taking questions via the web app. You should have the opportunity to type in your questions on your screen somewhere and hit send, and then we'll get them over here. We can see that some have already understood that. Why don't we just start from the top and work our way down here? Question number one, at which profitability requirement is your building? Sorry, I'm just translating from Danish to English as we go. At which profitability requirement is your building recognized? What's the status on refinancing over to mortgage? On the first part of that question, technically, classification-wise, the building is classified as a domicile, which means that we are taking it up at booked value.

If you're wondering how come the building is then written down, which it was last year in Q3 by $14 million roughly, that is back to the impairment test loss that we saw recognized last year. It had actually nothing to do with the building. We are not recognizing the building at market value. We just had to write down a significant amount of dollars. How should I say it? The obvious place to write down anything on our balance sheet was the building. That's why the building was written down. As far as the refinancing over to mortgage, it's an ongoing process. It's relatively slow, I have to admit. It has to do with the fact that the mortgage companies are looking at our profitability, which has been under pressure, yes.

As we see that changing in 2026, we hope and foresee a change moving forward in the mortgage plans. André, can you take the next one?

André Eriksen, CEO and Founder, Asetek: Yeah. What is driving the new Ingrid OEM interest, and how different is it from competition, and is it possible to reclaim some of the lost dual sourcing volumes with time? Starting from the back, that is exactly what happened with the new order. That was getting back or reclaiming revenue. In terms of how different it is from competition, I think that is too simplified because one thing is the product, yes, but I think what our customers are also realizing is the quality. One thing is the cost of a product, but the total cost, if the quality is bad, it does not really come down to product cost. I think we are significantly ahead on all parameters, being it quality or being it actually product performance. I also think we are somehow competitive from a cost perspective. Yeah.

Peter Madsen, CFO, Asetek: Very good. The next question, why do you not hedge US dollars versus Danish krone? Of course, that's a very obvious question to ask since the dollar has come down and thus the Danish krone has come up. It's a two-way street, though. If it goes the other way, then our eagerness to hedge would not have been so great. There is some natural hedging in the fact that we are selling some products in both Danish krone and euro. But true, we have never done hedging. That has been a business decision. Hedging also comes with a cost as a premium. If I go here, what are your cash flow expectations in 2026 based on expected liquid cooling growth, and how are you considering financing currently with cash on hand dropping in Q3?

We're not going to comment at this point on, or guide for that matter, on cash flow expectations. We've never done that, and I don't foresee us doing that. We are in contact with our banks. They also, as we see, a brighter future in 2026 than what we've seen in 2026. Our board, I can also assure that they are on top of this matter. Why is it so that the cash on hand, cash and cash equivalent for being a period of $3.2 million for Q3, when it was $7.2 million at the end of Q2, it seems like $4 million has disappeared from the company cash balance? Yes, you can say that.

That is, of course, a combination of the profit loss being a loss at this point, and then our inventory is being relatively high, and other working capital being relatively high in preparation for the year-end. I can tell you that we have, and André also actually said something about that, we have launched a campaign on SimSports, as we always do, and maybe we've been a little bit more busy doing it this year on inventory clean-out, etc. We are seeing progress there. André?

André Eriksen, CEO and Founder, Asetek: Are the sales discussions for liquid cooling and/or data centers still ongoing? I guess that refers to what I just said, that yes, the discussions are still ongoing.

Peter Madsen, CFO, Asetek: Very good. You get the pleasure of answering number seven here.

André Eriksen, CEO and Founder, Asetek: One is management still enjoying its job, and if so, what keeps you motivated? Two, what can be done to further enhance shareholder value in the mid and long term? I'm not enjoying my job every day, but I guess I am most of the days, and I can guarantee you if I no longer am, I will no longer be here, that's for sure. What can be done to further enhance shareholder value? I think in the midterm, we need now to execute on the new contract we have gotten and get back to the growth that we always used to have. Hopefully, shareholders and new investors will also recognize that. In terms of the long term, I would say that, as you all know, we invested $100 million into the data center space.

Someday, it would be nice to see if we could get something back from that investment. I would say that AI, of course, is hotter than ever. We just do not have the resources to go after it right now.

Peter Madsen, CFO, Asetek: Very good. One more question on cash flows, which I think we have given answers to. However, it also asks here to anticipate raising additional capital. The answer to that is that there are no such plans at this point. We are looking into 2026, and I think we share that vision with both the boards and the people around us. That is looking much more profitable than what we see today. With a profitable bottom line, if you take a look at our balance sheet, then you will see, I think you will realize that there's actually room for working capital financing in another measure than what we are doing today. Can I ask you to take number nine, André?

André Eriksen, CEO and Founder, Asetek: Yeah. In all of these calls, we get all kinds of brilliant ideas of what to do with the property. I would just say, with all respect, of course, we have been down all avenues. It is not like we never thought about a sale and leaseback or never thought about a mortgage. Thanks for the advice, but we are looking into all the possible venues.

Peter Madsen, CFO, Asetek: There is finally here, there is a technical question on a balance amount. I will certainly look into that and update if there should be anything to update. I have learned that I can hit a refresh button. I have done that a couple of times. That means that we are concluding this webcast, and we thank you for your interest in Asetek.

André Eriksen, CEO and Founder, Asetek: Thank you.

Peter Madsen, CFO, Asetek: This concludes today's.

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