Napatech (NAPA) CMD 2019 summary

2019 operating update

• YTD revenue MDKK 116.6 ($17.6M), +124% reported and +63% adjusted vs MDKK 52.2 ($7.7M) in 2018.

• YTD gross margin 74.6%, up 23pp reported and 5pp adjusted; improvement reflected lower hardware costs and price stability.

• YTD operating costs fell 19%; cost structure declined to MDKK 91.4 from MDKK 119.8 in 2018.

• Q1-Q3 free cash flow improved to MDKK 0.9 in 2019 from MDKK (93.0) in 2018.

Market outlook

• Overall NIC market projected to grow from $1.7B in 2019 to $3.7B in 2023; programmable NIC market from $386M to $1.6B.

• IHS Markit forecast CY18-CY23 programmable adapter revenue CAGR of 50% and total Ethernet adapter revenue CAGR of 19%, reaching $3.7B in CY23.

• Data center compute demand expected to accelerate, driven by AI, data analytics and connected devices; server shipments forecast at ~7% CAGR.

• Edge server count projected to double in 2023 vs 2019; 25GE and 100GE expected to represent 73% of adapter ports by CY23.

• FPGA-based SmartNICs projected to lead technology options, representing 60%-70% of deployments in 2023; more than 20 companies had entered the market.

Growth strategy and aspirations

• Three-year aspirations: revenue CAGR 20%-30%, margins around 70%, operating-cost CAGR around 7%-10%, and software-only revenue growing from <1% to 10%-15% of revenue.

• Continue FPGA SmartNIC leadership in packet capture while expanding into cybersecurity and 5G mobile, and developing virtual switching solutions for new markets and revenue from 2020 onward.

• Packet capture growth forecast at ~10% CAGR; cybersecurity at 30%+ and virtual switching at 80%+, with growth tied to new addressable markets and NFV.

• Network management historically represented about 70% of revenue; new product growth planned through FPGA software expertise and application acceleration.

• Napatech LINK hardware and software positioned to improve leading application performance by up to 40x, with line-rate, low-latency networking from 1 to 100 Gbps and beyond.