Ensilica (LSE:ENSI) — Audited results for the financial year ended 31 May 2023

0:01 Good afternoon, and welcome to the ENSILICA PLC investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time by the q and a tab situated in the right corner of your screen. Just simply type in your questions and press send. The company may not be in a position to answer every question it receives in the meeting itself. However, the company will review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Mark Hodkins, executive chairman. Good afternoon, sir.

0:34 Good afternoon, everybody, and thank you for coming to our financial year twenty three annual results presentation. We hope in the next few few minutes or the next hour or so that we can shed some additional light on how we have performed in our first full year as an AI listed company. We're gonna begin by I'm gonna begin by asking Ian to introduce himself, and then we'll get into the presentation. Hello, everyone. I'm Ian Lankier, CEO of ENSILICA. I'm an electronics engineer by training. I started my career in one of the great British

1:05 companies, PLC that's became Siemens PLC. I moved into semiconductors in the mid nineties working for Hitachi and then Nokia developing ASIC. So I I co founded ENSILICA in 2001. I've actually met Mark in in 2015. I'll hand over to him to introduce himself. Thank you, Ian. So I'm a graduate of Manchester University, qualified charter accountant for quite a long time ago now, and I've been with ENSILICA initially as non executive chairman and more recently as executive chairman since May 2016.

1:39 Formerly was a partner with both Grant Thornton and Ernst and Young in m and a latterly, but retired from the from the profession in 2005 and since then, been managing engineering businesses, both private and public, until I joined full time with ENSILICA just about a year ago. Thanks so much.

2:00 Okay. Thanks. So I'm to just give you a summary of the company. ENSILICA was established in 2001 initially to provide design consultants used for semiconductor companies. So those are companies with their own semiconductor design team. I mean, we had clients like Nokia, Panasonic, Sony. But, you know, we we also work with mixed signal companies like Wolfson and Dialog semiconductors, so we really saw the value of the mixed signal semiconductors. In in 2016, you know, short after that, Mark, we we worked on migrating the business model from a consultancy model to a fabless ASIC design and supply model. In this model, the cost of designing the ASIC is shared with the client.

2:45 But the upside for this is that it brings in long reoccurring revenue streams from when the chip is in production, that comes from either the sale of the chip or in some cases, a royalty stream when the chip is produced. So today, we we have three chips in the supply stage. This includes a high end automotive chip for for SUV vehicles that hit production in June 2022, and the estimated revenue for that is 40,000,000 over six years. We have six chips in the design stage, and this included in in industrial ASIC, which is expected to it's production in the end of next year with an anticipate anticipated revenue of 30,000,000 over over seven years.

3:38 The other the other chips will be in production between sort of, like, you know, early twenty five and and onwards. So as I said, we have a very strong pipeline of chips for for production. As well as those as well as that pipeline, we have a strong order book and, you know, a a sales pipeline with a lifetime value of over 350,000,000. Near term capital, we still use the consultancy business. An example of this is a recent announcement last month, 2,400,000 on high end design consultancy contract. So highlights of the year very quickly. I'm very pleased to be able to say that we beat expectation on all lines in 2023.

4:25 So revenues were up 34%. Operating profit was up 18%. EBITDA, which is key measure, I understand, was up 50% and was ahead of what we announced in April when when we said we were gonna do better. Profit after tax is up quite a lot. EPS, no one cares about it anymore, but I do, and that's up a lot. And importantly, cash was good at the end of May. To put that in context, at the end of last week, cash was 2,300,000,000. And so in summary, what what I'd like to say is we've exceeded our IPO expectations. We've exceeded our in year upgrades. We've developed a strong sales pipeline, which we will talk a bit more about in a moment. We've kept regular contract contact with all our shareholders through the year with regular contract updates, and we've made significant progress as ENS just highlighted on the development of our supply revenue streams.

5:25 So let me just take you down through sort of some of the the highlights of the the the the year ending 05/31/2023. So, yeah, in June, just shortly after our IPO, which was in which was in May, we had a automotive ASIC that we were developing into production. The initial supply revenue expectation for that was $2,025,000,000 over seven years. And in in July, we won a major contract with the leading European industrial OEM for factory automation ASICs. And that contract was worth over, you know, 30,000,000 over seven years, and the NRE was fully funded by the customer. I mean, this is a really great market. I mean, there's a, you know, a a lot of destruction going on with

6:15 AI and additional cybersecurity features, meaning that there's a lot of ASIC ASIC redesigns. So in December 2022, we secured two new contracts with an existing customer worth 3,600,000. And then in February February twenty twenty three, we we won a $55,000,000 satellite broadband contract awarded by the European Space Agency. And this is to address the the lower orbit satellite market. So actually, user terminal market, which is a a large consumer of millimeter wave and mixed signal mixed signal ASICs. In March 2023, we stretched our balance sheet through a 2,000,000 raise where we at at 70 p, which is 40% premium on our on our 50 p IPO price.

7:12 We have talked about further consultancy work at 2,400,000 consultancy contract. And in in April 2023, the communications ASIC we were developing, we had increased the scope of our work, and, you know, that that led to an increased revenue up from 5,000,000 to 15,000,000, which comes from comes from royalties. So the the the automotive ASIC that we've talked about was launched in in June at the beginning. We had an upgrade on that where it was being it was being designed into additional vehicle models with the with the same OEM. So the supply revenue from that is, you know, then up from 25,000,000 to to 40 to 40,000,000.

8:02 Okay. Back to the numbers and just go through those. As we've already said, revenues are up by 20%. Gross margins are better this year, and you're gonna see that happen quite a lot over the next two or three years. It won't be quite so dramatic next year as as this year, but as we get more supply revenues, the margins will start to move upwards, and we expect to get up to around about 45 in due course. Not not not this year, but in due course. Need to bear in mind the tax number, that's a credit. We are a great beneficiary and grateful beneficiary of, an r and d tax credit. And in this current year, just finished, the claim will be 2,200,000. The reason it shows as a lesser number there is we do pay some tax in India, which nets off, and there's timing differences as well, the deferred tax. So that's what goes in the bill cap. But the cash effect, as you'll see when we get to cash today, it's at least 2,000,000.

8:59 Probably not probably after tax is high because of of the tax credit. It's it's certainly so big. And the EBITDA, very strong, up 50%. We're going to start showing you on a regular basis some analysis of our revenues. So in the last year, our chip supply started to grow. You'll see this grow a little bit more in 2024, '25 and '6 and and onwards. So we're quite pleased that it's shown some growth as early as this after IPO. The NRE has increased. That reflects the number of chips that we've got in in development. Ian mentioned just now we've got six in in design. So the revenues that are associated with the fabless model rose from 8,200,000 to 11,000,000.

9:49 And then the consultancy revenues. We're keeping that business going. We're not looking to grow it particularly, but it is a very useful generator of cash flow. The demand for the our services is high. It allows us to be flexible with our staff, and it smooths out the the revenue line and the cash flow line. So you can see that continuing in the future, but as a percentage of the total, consulting revenues will decline.

10:16 And then moving on to the balance sheet, the big number there, of course, is the intangible assets, which is the capitalized development costs. Those represent six, eight, nine chips in total. Each of those chips have been assessed by management as being viable and have good revenues attached to all of them in the future. Our calculations have been worked over by the auditors in great detail. In fact, they tell you it's pain in the neck, But they've done a very good job, and they are satisfied that the carrying value is realizable. You can see the cash there, 3,000,000. It looks down from last year. Bear in mind in in in 2022, we actually completed the IPO just a few days before the year end, so that's the IPO cash sitting there. Not surprisingly, we spent the IPO cash. We have generated some of our own as well. So that's why cash is down. We're quite pleased to have 3,000,000,000. And as I've said at the end of the month the end of the week last week, cash balance was 2,300,000,000.

11:17 Debt is 4,100,000. That's down by 800,000. We're in line with all our repayment schedules. We met all the all the demands as and when due. The lender is bank at National Credit Bank, very satisfied with our performance. We have a very good relationship with them, and we will continue to pay that in in accordance with the the amortization schedule that we we committed to back in 2019. And just to sum up there on the cash net debt cash situation, we've got net debt at the moment just over 1,000,000. Last year, it was net cash. Bear in mind, last year, we had all the cash from the IPO sitting there, so that's why it's moved the way it has. We're hoping to reduce that net debt position quite significantly in the future and as quickly as possible.

12:07 So just go on cash flow. Not a lot to say there. You can see just explain the tax receipt number. It looks very high in last year. That's because pre IPO, we needed to convert both 2021 and 2022 accounts to IFRS 16, which meant it took longer, and we delayed submitting our tax returns because we haven't signed off the account, we couldn't we couldn't submit them. And then we submitted two very quickly in succession. So we've got two years tax received in in last last year in cash terms. The investing activities, it's all about capitalization and development costs to do with our customers' chips.

12:54 Okay. So now just covering the progress since the start of you know, the financial year from 06/01/2023. So in August, we we announced that the satellite broadband chip had a lead customer. So that that was the the the one I mentioned where we had an award of 5,000,000 from from ENSILICA towards the development of this chip. And this relates to a proprietary satellite broadband

13:20 chip. The contract as well as including funding towards taking the chip to production also included the first 50,000 units. We expect further upside this from from the both these initial customers and and and other potential customers as well. So in September 2023, we won another high end consultancy contract for the development of a sort of next generation advanced node networking chip. And, you know, said, you know, we use the consultancy business for generating near term cash flows as well as sort of making sure our, you know, the technology we're working is is, you know, is close to the cutting edge. So in September 23, we won a 7,000,000 e mow e mobility sensor ASIC contract.

14:11 So e mobility is around as as well as EVs, electric vehicles. It covers two wheelers, e bikes, e scooters. So, you know, a a very you know, a a vast market's growing. So so this was a contract. The NRE was a 100% funded by customer, and we accept expect supply revenue for that to commence in mid in mid twenty twenty five. So the, you know, the outlook, we started the financial year 2024 well. I mean, that's supposed supported by existing contracts as well as new business momentum. We've got a strong pipeline and order book, which, you know, underpins our confidence. And, you know, the board believe the company's well placed to

14:57 deliver on the significant growth opportunities within the semiconductor market. So so, you know, we've had a success successful year. We're pleased with the results we've we've delivered on the commitments at the IPO. We've established a good position within the for focus sectors, and that's also about it. As a reminder there, you know, we have a 40,000,000 plan contract for for automotive ASIC, another another design win in e mobility, which is in that in that same in that same sector. Industrial, we're very well placed. We have one of the world's major OEMs as a customer with a $30,000,000 contract in there plus plus another ASIC in that in that contract in that sector. And for the satellite comms, you know, we've got contracts combined value of 18,000,000 plus our own our own chipset to

15:56 to address that that growing market. In the health care sector, we've developed our own chip, which is being evaluated by by several companies. So, you know, we will continue to execute the high end consultancy to strengthen our near term cash flow. So, you know, we have a a healthy pipeline, and we're, you know, we're in a good position to and to deliver on our market forecasts. Okay. That concludes the formal presentation, and we'll now move on to answering your questions. Mark, Ian, thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions by using the q and a tab, which is situated on the top right hand corner of your screen. But just while the company take a few moments to read those questions that have been submitted today, I'd like to remind you that recording of this presentation with a copy of the slides and the published q and a can be accessed via investor dashboard.

16:50 As you can see, we received a number of questions throughout today's presentation. Mark, Ian, if I could just ask you to read out those questions and give responses when it's appropriate to do so. I'll pick up from you at the end. Okay. First question is from Simon w. The question is, are you not in a crowded market with big players? If so, what gives you an edge? That's why I take that. Yeah. Yeah. I mean, there there are obviously a lot of big semiconductor companies, and I mean, lot of those are chasing the big digital chips. I mean, I mean, our edge is about you know, it's around mixed signal, you know, millimeter millimeter wave beam forming on one side, which

17:26 is our, you know, around our RF and comms work in the in the satellite area. And the other area is around, you know, mixed signal sensing chips, things like vital signs sensing control of chips. So we have a real, you know, a a real a real edge in that area. Also, things like high integrity ASICs where there's there's things like functional functional safety, cyber security, and so, you know, we we you know, semiconductors is you know, has niches, and we we address some some of those niches which are really driven by the megatrends in the semiconductor industry. Okay. The the next question is from Marcus a.

18:13 How much of future revenues can you see as you announce new deals? Are there any capacity in limitations as you grow? Can I answer the second part of the of the question first?

18:26 We have sufficient capacity to deliver twenty twenty four's numbers and probably 2025 as well. However, one of our limitations is always going to be getting good engineers, and there are not are not enough good engineers in The UK. So we are always on the lookout for good engineers, and we'll take them when they become available. You will have noticed that we have a design center in Brazil. That design center was set up when a team of mixed signal engineers became available, and they work as a as a design center for us connected to our server in The UK. So that is our limitation, but we have sufficient capacity to meet the numbers that are in the market which you see. And and in terms of how much of your future revenues can you see,

19:15 I don't want to be too specific, but we can see currently about 55% to 60% of this year's earnings or revenues already and about 40% of 2025. As as we go forward, obviously, that percentage drops, but we can still see about 30% in '26 numbers of which have not been released and and won't be released until end of the financial year. So that's roughly what it is, but that percentage will grow as the supply revenues grow themselves. So as we put a new chip into production and supply, our visibility on revenues improves all the time. So if you ask the same question in two or three years' time, those percentages will be much higher. Does that I hope that answers the question. So the next question is from Paul l, and it is, is intangible investment all internally generated or are external components too included?

20:13 What's the split? Provide some details on any external. It does include some externals, but we would not want to disclose that because that's commercially sensitive. But, yes, it does include some externals. But by far and away, the largest portion of the capitalized amount is direct labor of our engineers. So the next question is sorry. Not too far. It's Simon c. It's a competitive market. What are customers seeing in ENSILICA over others, for example, in the recent e mobility contract? Yeah. So I mean, that's it. You know, that's a mixed signal sensor chip, so that's right on the right on target for us It included things like automotive qualification, functional safety.

21:03 So very much tick tick tick the boxes there in terms of a good fit. We've done similar chips similar chips before. So, you know, we we very much had a a competitive edge on that. Okay. Next question is from Paul L. When you say 100% funded by customer, is that predevelopment payment or staged through the development process? I think, generally speaking, it's staged through the development process. But but we do have a good upfront upfront payment in terms of the, you know, the initial kickoff payment and then stage stage milestones. Next question is from David s. It says, good afternoon. Thanks for the presentation. When do you expect to be self funding from operating cash flows? That's a really good question.

21:55 Partly that depends on how much growth we we we we take on. I would expect certainly by '20 end of twenty twenty five, we would be getting close to that situation. So not that far away, really. Eighteen months, maybe. I'm just checking I've answered the question. I think I've answered the question. Okay. So David s, can you please clarify that anticipated supply revenues are based on customer volume projections rather than contracted value. They're based on Sorry. Just a button there, Ian. I think we've just momentarily lost your audio. If I may, I can just quickly request control just to see if I can bring your audio back.

23:13 Ian, if I may, if I can just request control just to take control of your Ladies and gentlemen, please do bear with us. We're just reconnecting in into the room. Hi, Ian. We yeah. We can hear you. Please do carry on. Mark, Ian, we can hear you. Please do carry on.

24:05 Hello? Yeah. Hi. We can hear you, so please do carry on. I think you're just at David s's question there. Sorry about that, guys. The technical problem. We're a tech company, remember. Given the WNS, given the customer funded development contributions, should we expect your long run chip supply margins to differ from established published players 60% plus gross margins? I think in the long run, you they will probably match 60% for the supply. That doesn't mean to say that the whole p and l account will be supplied by sorry. Didn't say that very well. There are elements to our our revenues that are not supplied. They will be of lower margin, and so we blend it below that. But you can you could see the the supply revenue the supply revenues being done at a margin of 60%.

25:01 Yeah. Could be that. Yes. So David s again, could you please discuss the cost of development of an ASIC and trend insane? What is the typical node for your chips? I mean, the tip I'll start with the typical node from the the chips. I mean, it it could be from sort of a a 100 and a 130 nanometers to 16 nanometers. So it's quite I mean, that's mean, that's quite a range, but also the the development costs for those could range from, you know, 2 to $3,000,000 up to, you know, up to tens of billions of dollars for a high for a high end ASIC. And, I mean, the the interesting thing about analog and RF is that the there's no benefit in scaling with the technology.

25:57 As long as the technology is is fast enough and frequency you're operating, you don't have to scale. So where you have to move into the the later node technologies is when you're when you're using lots and lots of digital digital logic. I think that's all the questions. Perfect. Mark, Ian, thank you very much for that. I think you've addressed all those questions you can from investors. And, of course, the company will review all the questions submitted today, and we'll publish those responses on the investor meet company platform. But just before redirecting investors to provide you with their feedback, which you know is particularly important to the company, Ian, could I just ask you for a few closing comments? Yeah. I mean, thanks for attending today, and we appreciate you attending the presentation and your interest in in in in silica. Yeah. I hope it's improved your your knowledge of the the company, and we we we look forward to talking to you again shortly.

26:50 Perfect. Mark, Ian, thank you once again for updating investors today. Could I please ask investors not to close the session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This will only take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of ENSILICA PLC, we'd like to thank you for attending today's presentation, and good afternoon to you all.