Ensilica (LSE:ENSI) — Final Results

0:01 Good afternoon, and welcome to the ENSILICA PLC final results investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and could be submitted any time via the Q and A tab situated in the right hand corner of your screen. Just click Q and A, scroll to the bottom, type your question and press send. Company may not be in a position to answer every question received during the meeting itself. However, the company review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, we'd like to submit the following poll. I'd now like to hand you over to Matthew Weather, CFO Ian Lancashire, CEO and

0:31 Mark Hodgins, Executive Chairman. Good afternoon. Good afternoon, everybody. Welcome to our presentation on the 2022 ENSILICA financial results. My name is Mark Hodgkins. I've been with ENSILICA since May 2016. I'm a chartered accountant, formerly with Grant Thornton and Ernst and Young. I've worked in business for the last twenty five years outside of the profession and most recently as CFO's AIM listed Truckwise Designs PLC.

1:01 On my right is Ian Lancashire, CEO. Thanks. Thanks, Mark. I'm I'm an electronics engineer by training. I started my career at one of the great British companies, Plessy. It's actually Siemens, PLC radar, and then moved into semiconductors in, 1996 working for Hitachi, and then Nokia developing ASICs. In 2001, I left Nokia to cofound in Silicon. I've led the company since then. I'll hand it over to Matthew. Hi. I'm Matthew Webby, CFO to SILICA. I'm one of three chartered accountants on the

1:33 board and have held senior finance roles at a number of blue chip companies in a range of sectors including Unipart and British American Tobacco. For eleven years before I joined ENSILICA, I was CFO and Group Secretary at PV Crystalot Solar PLC, a main market listed supplier of silicon wafers for solar cells.

1:52 Ian, no to Mark. So I'm just gonna start off by giving you a sort of quick overview of ENSILICA before we get on to the results proper. We believe that ENSILICA that we we we would like to be the premier application for specific chip making in Europe. We believe we have got a good foothold in this market already. We've been designing and supplying customized customized chips for about twenty years now. We've got a global client base, experienced management team, and 130 employees across five locations worldwide.

2:27 We've addressed four high growth markets, and those markets are automotive, industrial, healthcare, wearables and satellite communications. We believe we're positioned to capitalize on the big opportunity for ASICs in the semiconductor space. We're experts in complex mixed signal chip supply, which is a proven model to scale and has delivered returns in the past.

2:56 All right. Thanks, Mark. I'm very pleased to update you on our strong operational progress since IPO in May, where we raised just over 6,000,000. Part of this progress is we've strengthened our global pipeline sales pipeline, resulting in building a sales pipeline of over $350,000,000. We'll provide more details on that later in the presentation. An automotive ASIC we designed is now in volume production with 700 ks chips sold and 2,700,000 chips in our forecast for the next twelve months. We've also expanded the scope of our agreement with our global satellite communications customer.

3:46 This is a majority funded NRE and associated royalty income when the Constellation is launched. Building on our previous success in recruiting and integrating design teams, we added a Bristol based team. Along with the team, we acquired DesignFlow IP used for advanced node system on the chip sock implementation. And lastly, but not least, we've won a design contract worth over $30,000,000 with a major industrial OEM. Again, I'll cover most of these in more detail later. This is a reflection our revenue as you can see from the numbers, our revenue is up and also our operating profits are up. I need to thank our talented team who've worked hard to deliver such positive results.

4:44 So we work under what's commonly called the fabless semiconductor model. In this model, we manage the process from design, manufacturing, packaging and logistics. We outsource some of the elements, such as wafer fabrication to companies like TSMC and global foundries and packaging to companies like ASE in Taiwan. We also have test and qualification partners to support these elements of the work. The fabless model for mixed signal chip companies is a proven model for growth and profitability and used used by companies like Nordic, Semiconductor, Dialog, Wolfson, and Cambridge Silicon Silicon radios. The the sales cycle usually takes six to twelve months, and that's phases one to three here. Phase three is a funded development of a specification where we agree the specification of the chip with the customer. The first chip is usually available within twelve to eighteen months from the start of the design phase. But depending on the market, it will take two to five years from the design, start to full scale production.

5:57 It it then generates predictable revenue revenue for several years, even decades for some industries. For fifteen years, we did purely consultancy, which is steps one to to eight shown here, which is around designing the chip. In 2016, we started to focus on turnkey design and supply adding steps nine and ten. We now have all the relevant skills in place and we have chips in production production now. The market for semiconductors was estimated to be $600,000,000,000 last year and set to be $1,000,000,000,000 by the end of the decade. And there's no sign of this abating. Custom chips are used for by all leading OEMs to differentiate their products. These OEMs include companies like Siemens, Square, Continental, Apple, Google, Microsoft, to name just a few using custom chips. ENSILICA has expertise and key IP in addressing a number of the highest growth markets in the semiconductor sector.

7:05 The first being automotive. The automotive market is driven by the growth in the EV and new safety features, greatly increasing the semiconductor content of each car. We already have three automotive Tier 1s as customers and we have others in the sales pipeline as you'll as you'll see later. The other sector is the industrial sector. It's it's another key area where the use of semiconductors is going up. This is driven from what you may have heard of called industrial IoT or, industry 4.0, the the fourth industrial revolution. This requires sensors and AI to improve productivity, efficiency and safety. We now have one of the world's largest industrial OEMs as a customer.

7:55 The third market is the healthcare market. This is the where you use wearables and patch devices

8:03 monitor people. This requires custom semiconductors to get the required battery life and the sensor interfaces. The company has deep knowledge and IP related to vital signs and biosensing. Our sales pipeline has two opportunities with large healthcare device suppliers, and we have developed what's known as an application specific standard part targeted at vital signs monitoring that is now in the prototype evaluation stage. The fourth market is the satellite communication market, which is growing massively and now being integrated with five gs standard. One example of this is the integration of satellite communication into the iPhone 14, where it uses satellite for emergency connectivity.

8:57 The satellite broadband market is a large consumer of ASICs and, the antennas used in that called phased arrays, use hundreds of, hundreds of ASICs. One example of this is that the Starlink, satellite terminal uses over six forty ASICs. We've developed a chip for satellite terminals partly funded by ESA and it's currently under evaluation by a number of customers. All of these markets are high know how, high growth markets and ENSILICA is well positioned to take advantage of them. I talked about the sales pipeline earlier. It's really it's an all time high and the demand for chips is increasing. There's a shortage of companies with our level of mixed signal expertise and RF expertise to to deliver them. We have three chips released for production, and we anticipate long term revenue from these.

9:57 So, also have four chips which are in the design stage. So, going back to that flow diagram, that's between four and nine. Below is a snapshot of our sales pipeline. It demonstrates we have strong traction traction in all of our focus markets. The opportunities are spread, across the segments with their largest opportunities being in the healthcare and communications opportunities, with the largest lifetime value.

10:30 I'll hand over to Matthew to talk through the financial highlights. Thank you. As, Ian previously highlighted, our turnover has increased by 77% this year. So that's now worth 15,300,000, up from 8.6 in 2021. We make adjustments as exceptionals for IPO costs in 2022 of 700,000 and in 2021, a write down of impairment on fixed intangible assets of 2,000,000. After adjusting for those items, our adjusted operating profit is up 900,000 between the years, and our adjusted EBITDA is up 1,000,000 from last year. Under our business model, we capitalize those parts of our development costs, which the customer does not cover.

11:24 In 2022, we capitalized 2,200,000, which was up from 1,700,000 the year before. Ahead of the IPO, we tied it up the intangibles and wrote off the 2,000,000 I've just spoken about in that year. So that the intangibles now focus purely on those design and supply chips and ASSA application specific standard part projects that we have currently. This leaves capitalized NRE at the end of twenty twenty two at 8,500,000. Looking at our funding initially, before we started to change the design and supply model we're now operating in, in 2016. We use cash reserves to fund the business. In October 2019, we took an unsecured loan from Keckel BNP of 3,400,000 and that is to be repaid by 2027.

12:25 And COVID, like everyone else, hit us. And so we took out a CBIL loan in 2020 for 2,400,000 to be repaid by 2026. The results of that with our cash of 5,700,000 from 6,000,000 of IPO costs I'm sorry, IPO funds and the convertible loan out of just short of 1,400,000. We finished the year with 5,700,000 and 600,000 of net cash compared to 1,400,000 of cash last year and 4,700,000 of net debt. Looking at the income statement, what is very pleasing this year is to see that our focus strategic design and supply focus has greatly increased and is now more than our consulting agency and IP revenue.

13:25 The legacy income for consultancy and IP grew 26% from 5,780,000 to 7,300,000 and represents 48% of our turnover rather than two thirds in the prior year, whereas our strategic design and supply NRE and wafer sales sorry, and and supply, is nearly three times as large as it was in 2021 at 8,000,000. Our gross margins have increased from 24% to 33%. That 9% growth in gross margin has come mainly from being able to accept higher margin projects and increasing utilization of our engineers in 2022.

14:14 In 2021, we were hit by COVID. And in order to keep our engineers busy and occupied and retain them, we undertook lower margin work. This was reversed in 2022. Going forward, as supply kicks in, we would expect margins to continue to increase. When we look at admin expenses, those have increased in the year as we geared up towards the IPO. So we have now sort of restructured and have a full board, a full time CFO, more sales, sales director, and other admin staff. We would not expect to see a similar increase in admin expenses going forwards.

15:01 A key point to note is in this business, we receive an r and d tax credit each time, each each year. And so the the tax number is a credit. It is reduced by a deferred tax charge. Hence, the reason it's it's lower than the, the tax credit, which would have be which is 1,700,000 this year and was 1,100,000 last year. I'll move to the balance sheet. Oh, hello. Hello. Okay. Yeah. We're right. Sorry about this. Just losing the screen. The balance sheet, I wanna talk about sort of the biggest numbers on our balance sheet. So intangible assets are our single biggest biggest number. As I said, we capitalize those parts, which we the screen is going very strange.

16:02 We capitalize those parts where the customer doesn't pay for the the NRE, and that left that finished the year at 8,900,000. Sorry. 8,600,000. You I hope you're still seeing what Just to confirm, we're seeing the balance sheet as we stand. Okay. Yeah. We're we're not slightly slightly freaking me out, so I do apologize for that. Sort of as we go down the balance sheet and the sort of the current assets, corporation tax recoverable has dropped from 2.2 to 1.7. That 2.2 was actually two years' worth of corporation tax recoverable 2020 and 2021.

16:47 Due to the IPO process, we were delayed in submitting our 2020 claim and cash receipts from both years was received in 2022. Our claim for 2022 of 1,700,000 is expected to be received in around December this year, and that's cash from HMRC. Cash, as I've previously spoken about because of the IPO proceeds was 5,700,000 compared to 1,400,000 last year. Borrowings is reducing because we are are both both loans are on a repayment basis. And then a key point to note is our deferred tax provision has been reduced because as part of our IPO, we crystallized employee share options.

17:38 They did very well and there was a notional gain and there was a gain to them. And under corporation tax rules, we were allowed to claim an allowable deduction for corporation tax purposes only, so not a loss on our p n on our income statement, but that created losses, which we will be able to carry forwards of around 12,000,000, which stopped us having to which will stop us having to pay tax for a while in the future. It allowed us to increase the size of our r and d tax credit reclaim and to create a deferred tax asset, which offsets the deferred tax liability caused by capitalizing intangible assets. If I then move oh, our capital reserves has obviously been shaken up by those options becoming exercised as shares and then the IPO.

18:33 I then move to the cash flows. Yep. That's fine. So working capital movements in the year of two point four million include the reversal of the deferred tax liability of 1.1 as well as increased working capital as a result of our greatly increased revenues.

18:54 The tax receipt in the years in the year includes the two years years worth of R and D tax credit receipts. Investing activities on here are mainly due to the capitalized development costs. Financing activities include net cash receipts from the IPO and the 1.4 convertible loan notes, and that's offset by the capital and interest payments on our loans. So overall, this gives us an increase in cash of 4,300,000 compared to a decrease of 750 k in 2021.

19:31 When we look at our strategy for growth, it's to leverage the strengths we've gained in our selected high growth markets. Additional capital will allow us to scale the group's successful mixed signal fabless model to fully exploit market opportunities, and we will look to develop our internally funded application specific standard parts as a further driver of growth. As well as organic growth, we will look to expand our opt offering through m and a activities, whether the acquisition of people, as Ian will talk about in the Blue Wireless case or other opportunities. I'll now hand back to Ian. Thanks.

20:18 I mean, as I mentioned earlier, we further developed our sales network. This includes recruiting a new VP of sales based in Germany. This is a new appointment for us. So Peter was previously working for Renasas Semiconductors who were acquired by Dialogue Semi. Peter brings many years of experience in running global sales team and has already helped improve the size and quality of our opportunities. Peter appointed two x Dialogue sales reps, QLS now covering

20:47 North America and Cedar Technologies covering the Nordic Region. We're already seeing a pipeline of opportunities coming from from these new, sales rep appointments. This adds to our existing sales reps, CEMEX covering Israel, who are strong in RF and satellite communications and Logic, who are UK, UK based and cover automotive and industrial.

21:12 We now have a German entity in SILICA, GMBH, and we've recruited, two additional sales and sales support staff in Germany. Germany, as everyone knows, is the heartland of industrial and the automotive sector, and it's important to have people on the ground there.

21:34 So, in July, we announced the award of an ASIC supply contract by one of the leading industrial OEMs. Well, mean, I should really say the leading industrial OEM. This was a great achievement for ENSILICA, firstly obtaining preferred supplier status from this quality focused OEM, and it's a credit to our operations and engineering team as there's a high barrier to entry for working with this

22:03 type of customer. This award helps underpin ENSILICA's position as a leading European chip supplier. It's worth, 30,000,000 over three years. The NRE element has started already with several 100,000, already invoiced.

22:20 The the customer will start taking production parts in our financial year 2024. So this is relatively a quick time to revenue as this product is a derivative product from an existing product, which is part of their flagship product range. We expect to see further invitations to bid for ASICs from the customer in the course of next year. In the past, we've had great success in recruiting and integrating design teams, the first being a team in Oxford in 2016. We recruited team in Sheffield in 2020 and then a team in Brazil in 2021.

23:07 In July this year, we added, a team of a team of engineers from a customer called Blue Wireless. We, along with the team, acquired advanced known digital design flow IP from them.

23:20 The digital content of mixed signal chips and RF chips are growing and that this team will help us address these types of applications using the smaller technology nodes. We now have an office in Bristol, and we will take advantage of the talent pool in the in the Silicon Gorge, as they call it. We're we're also partnering with Blue Wireless to deploy their gigabit communication modem IP used for applications such as five gs backhaul and, virtual reality to customers.

23:55 I'll let Mark. So just to wind up the presentation before we take some questions, we've obviously had quite a decent financial year 2022, and that underpins our 2023 momentum. We've got a good order book where we've got some good pipeline, opportunities to address, and we believe that also underpins our momentum. So we feel that we're well placed to take account, and to capitalize upon the opportunity in the silicon, semiconductor

24:26 industry that we find ourselves addressing at this present time. So that's the end of the presentation. I'll hand back to Paul and we can get on to the questions. That's great. Fantastic. Thank you very much indeed. Thank you for the presentation. Ladies and gentlemen, do please continue to submit your questions using the Q and A tab situated just on the top right hand corner of your screen. Just while the team take a few moments to review those questions submitted today, I'd like to remind you the recording of the presentation along with a copy of the slides and the published Q and A can be accessed via your investor dashboard. As you can see guys, we have had a number of questions submitted throughout today's presentation. Thank you to everyone who submitted those so far. Mark, if I may just ask you to read out the question where appropriate to do so just ask one of the member of the team to answer it, and I'll pick up from you at the end. Thank you. Okay. So the first question is from John W.

25:12 And the question is, is GaN the future of chips, not silicon?

25:16 How do you differ from Sandrel? Okay. I think there's sort of two distinct questions there. I mean, the compound semiconductors, GaN, gas and other more exotic processes, I mean, they have their place, and they're generally used for high power, high frequency applications. But, I mean, our our focus is on CMOS. And, I mean, they do say if you can do it in CMOS, you will do it CMOS because it's a, it's a lot cheaper and often a lot a lot power. So they do have their place for particular applications, but, you know, not the ones that we're, we're on the whole addressing. And, you talked about, sundry, how do we differentiate? We have things in common. We both started off doing design services roundabout at the same time, but, we're very different as in, they're addressing the digital markets, and we're addressing the mixed signal markets. And as I've mentioned before, sort of the fabulous mixed signal model, it's a proven

26:20 model, and it's also an area that requires a lot more IP and know how, particularly around designing having design elements you can reuse from one design to another. And you'll see that in our as Matthew said, our balance sheet investment over the years as a considerable amount of IP investment that we've made.

26:46 The next question is from David S. And the question is, how is the supply chain impacting you? Yes. So, I mean, we've really just started full scale production. We've managed to secure the chips that we need from the wafer suppliers and the other assembly capacity. So it mean, has been hard work. You get some wafer allocation, and then you work with work with the foundries to make sure that the customers have the chips that we need. But we are expecting to see that pass. And if anything, there's going to be some overcapacity in the foundries in the coming years.

27:32 Thank you. The next question is from John W. And the question is, is your customer base rather too concentrated presently?

27:42 Shall I answer that? Yes. I think we are quite a small company and our our customers are quite big in relation to us at the moment. However, as we win more contracts, gradually that concentration dissipates. And each year, we become less reliant on single customers. I'm not saying we're at the end of that challenge yet. But if you look forward two, three years, we expect the business to be far less lumpy and far less reliant on single customers. The next question is from David S. What is the size of the forward order book and the visibility?

28:18 Where do you see margins in the short term? Can you hear that? So, so the the order book, I think sort of have just upgraded their note, today or those who don't get it, you have to, ask them for it, but it's sort of that's that's assuming around about the sort of the just over the £19,500,000 mark, and a lot of the vast majority of that is very visible. And there was a small amount that isn't, but a lot of that would be on design services type work, the consultancy aspect, which we tend to use to flex our engineers' time when we have extra.

29:05 We would expect gross margins to increase going forwards. That will be driven partly by supply where margins will tend to be above 40% for supply and sort of nearer to 100% for royalties. And we are we will continue to make sure our utilization is high and we are taking higher quality work and that will be aided by having this great strength in our sales capabilities so we can pick those customers that deliver that higher margin and where we are able to reuse a lot of our existing IP. Okay. The next question is from Rob B. And I think we've just answered it. The next question says, on the gross margin, can you say what is a sustainable level of margin over the medium term? I think we just answered that, I think. So I'll move on to the next one.

29:57 Rob B, Cost pressures, you have been hiring for growth. Can you talk about employee expense inflation and your ability to hire and retain key skills? Thank you. Ian, do you want to have a go at that one? Yes. Mean, has been wage pressure in the market. But I mean, with engineers, you know, I mean, you have to pay them the market going rate, but also give them interesting interesting work. So we we've had no problem with with employee retention. I mean, we work we work on some leading edge projects that, keeps our, keeps our engineers excited, and we have good pay and benefits packages. So, you know, as I said, we have to be conscious of it, but, we don't have any issues in that area.

30:51 And the next question is also from Rob B about capacity. You have a very healthy pipeline. If, say, a £50,000,000 order came in, could you and the founder partners ramp up quickly? I think the short answer to that is we've just done that. We just won a big contract, not quite £50,000,000 but quite a big contract, and we've been able to take that on. I guess if we took two or three on at the same time, it might be a bit of a struggle. Yes. I mean, in terms of engineering capacity, there's in terms of foundry capacity, I mean, you design it if you're designing it now, it's going go production in two to five years' time. So there's no problem booking that foundry capacity given they're adding additional amounts in terms of engineering capacity.

31:37 It's always a good problem to have recruiting more engineers. Thank you very much. You've covered off all the questions we've had through, Mark, and thank you very much indeed for that. And of course, any further questions do come through the team. We'll have the ability to review those. And we'll publish all responses where appropriate to do so on the investment company platform. Ian, perhaps if I may, just before redirecting investors to provide their feedback, which I know is particularly important to you, if I could just ask you for a few closing comments, please? Can I just say something before we do? I think Ian misspoke during one of the bits about the big contract we've won, and he said it was a $30,000,000 order over three years. I think he meant seven years. Seven years. Okay. Okay. Just one. So sorry. Yeah. Yeah. Yeah. I I said we we've had strong perform performance in year 2022, and, yes, underpinned the momentum for 2023.

32:30 We're very pleased we've successfully delivered on ahead of market expectations. And we're really looking forward to 2023. As you've seen, there's lots of market opportunities. Semiconductors isn't really now counted as critical industry and the use of the semiconductors is really not a basically, I think there's a great opportunity for in silica and with our markets we're addressing and our high level of know how and traction in those markets. We just had another question. Is silicon it's from John W. Is silicon reaching the end of the road as to what's possible? Mean, silicon always move I mean, silicon always moves forward. I mean, we're it's currently at three nanometers. I mean, most of our designs are actually using mature technology. So we're we're able to address most silicon applications using mature mature technology.

33:34 So I I mean, I think that sort of question, I mean, obviously, pushes latest AI engines and latest processes going into mobile phones and computing, but really doesn't affect us to that extent. That's fantastic. Thank you. Thank you very much for taking that last question. Of course, if any further questions do come through, we'll be able to pick those up as well. Ead, thank you very much indeed for wrapping up. Mark, Matthew as well, thank for today's presentation. Please ask investors not to close the session. Should be automatically redirected to provide your feedback in order the management team can better understand your views and expectations. This will only take a few moments to complete. 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. That concludes today's session.

34:23 Thank you, and good afternoon to you all.