Net Sales came in at SEK8.9m, -46% y/y, well below our estimated SEK18.0m (deviation -51%). Sales were mainly project-based, and the decrease year-over-year can partly be explained by “one-time” equipment sales in the comparison period. However, adjusting for “one-time” revenue in the comparison period of SEK5.2m, sales still decreased by 20% y/y. EBITDA came in at SEK-9.5m, corresponding to an EBITDA margin of -106% (EBITDA SEK-3.8m, EBITDA margin -23% last year). Thus, slightly below our estimate of SEK-7.4m. The main reason for the deviation is lower sales and marginally higher OPEX, which was partly offset by better gross margin. OPEX was slightly ahead of our estimate (deviation of 11%).

Gapwaves showed a strong order cadence with five orders relating to development projects worth SEK16.9m, slated for delivery in H2 2023. Two orders were from the tier-1 supplier Gapwaves started working with during Q1 2023, two from Hella and one from Sensrad. Each of these orders confirms that Gapwaves is progressing towards 1) developing the second-generation radar for Hella, 2) executing its Sensrad investment, and 3) adding the fourth tier-1 supplier as a volume customer.

According to Hella, the second-generation radar will be introduced to the market from 2025 onwards and used for enhanced environmental perception. The first-generation radar is complete and is expected to be presented on the market in 2024. We expect SEK8m in license revenue from Hella in the same year.

The rationale for investing in Sensrad was to move up the supply chain and supply customers with prebuilt imaging radar sensors rather than letting each customer design these independently, which may be outside their expertise. The order from Sensrad suggests this strategy is progressing.

The fourth undisclosed tier-1 de-risk estimates. We are encouraged that the fourth undisclosed tier-1 customer continues to place orders, as it is evidence that it is happy with the technology and Gapwaves’ team so far. Further orders by this customer de-risk our estimates somewhat as we presume this customer will become a high-volume customer by 2028/2029. Each successive tier-1 customer added supports our view that Gapwaves is well positioned as regulation pushes automotive radars to 77 GHz from the legacy 24 GHz. At these higher frequencies, waveguide antennas are a requirement. Compared to other waveguide antennas, Gapwaves Gapwaveguide antennas are easier to produce as they require less manufacturing precision and use simpler materials. Thus, Gapwaves can offer cheaper antennas at the same or better performance as competitors while still earning a sufficient return. We expect Gapwaves to add more tier-1 suppliers successively. However, we recognize that volume-related revenue from these is at least three to five years into the future.

Gapwaves has three main customers currently: Hella, Bosch, and Veoneer, and it is working on adding a fourth. We expect Hella and Veoneer to enter the volume phase in 2024 and Bosch in 2026. Hella and Veoneer have licensing agreements where Gapwaves earns a royalty. With Bosch, Gapwaves will be responsible for the production. As discussed in a previous update, we view controlling the manufacturing process as more attractive as the potential earnings are significantly larger. Due to both Hella and Veoneer being license agreements, its net sales potential is relatively limited in the near-term, although it comes with a high margin. Thus, we believe Gapwaves’ net sales will accelerate once Bosch goes live and believe this to be the primary catalyst in closing the current share price to our base case. We also acknowledge the potential upside from the Mobility segment (e.g., delivery robots). For instance, we expect better pricing and faster time to market for mobility solutions. However, this segment faces headwinds, and the upside potential depends on a shift in the financing environment.

Absent any large one-time payments, which the fourth tier-1 may provide, we believe it will be hard to beat our H2 2023 estimates due to headwinds in the Mobility segment and our revised belief that we will not see product revenue from “unaccounted-for” customers in the near-to-midterm. Thus, we reduced our H2 2023 estimates to SEK23m from SEK54m, resulting in a full-year 2023e of SEK37m from SEK77m. Gapwaves has press-released orders expected to be delivered in H2 2023 worth SEK16.9m.

We revise revenue expectations for product revenue within automotive. We previously expected some product revenue in the automotive segment for 2023e-2027e from “unaccounted-for” customers, i.e., customers outside of Veoneer, Hella, and Bosch. However, we now believe that these expectations are unlikely to be met. This is because it typically takes three to five years before volume production can begin, as customers must go through simulations, physical prototypes, and trials at testing facilities. Accordingly, we have zeroed out these expectations until 2027. However, we have also increased our Automotive NRE expectations by 25% 2023e-2030e as there is solid interest from the automotive sector for Gapwaves’ technology. Overall, we have lowered our automotive estimates by 44-0% for 2023e-2030e.

Weakness in the Mobility segment is expected throughout the year. Management has highlighted weakness in its Mobility segment for two consecutive quarters, and they expect continued weakness throughout the year. Thus, we have lowered our expectations regarding product and NRE sales over 2023e-2024e. Gapwaves’ antennas can be used in telecom for 5G applications, and we have continuously modeled some sales potential from this segment. However, the rollout of 5G mmWave applications has generally been slow, which management confirmed during its conference call. Thus, we also lowered these expectations. Considering everything, we reduce our estimate between 54-7% for 2023e-2030e.

Veoneer remains a known unknown. In our last update, we pushed out our ramp estimate for Veoneer till 2024 due to corporate turmoil with Veoneer’s assets being split up. Magna completed its acquisition of Veoneer on 1 June 2023. Thus, we expect more visibility going forward. Still, we remain aware that the timing remains challenging. Management has been optimistic about gaining further business within the Magna group once the acquisition is complete. Thus, we expect more tangible news from Gapwaves’ management about this going forward.

Given the pressure the automotive industry puts on its subsuppliers, we are more cautious about the long-term EBIT margins Gapwaves can achieve. Thus, we have reduced the perpetuity EBIT margin to 15% +/- 2pp on our bull and bear case. Previously, we assumed an EBIT margin between 20-27% in perpetuity with a base case of 22%. While not directly comparable, HUBER+SUHNER has achieved an average EBIT margin of 5.1% in its transportation segment since restructuring its segment reporting (2021-2022). Prior, the average EBIT margin for the RF segment was 13.6% (2013-2020). While we lower the perpetuity EBIT margin, we still acknowledge potential upside from the Mobility segment. However, we view this segment as more uncertain than automotive currently.

We have reduced our fair value range from SEK20-100 (base case of SEK62) to SEK15-61 (base case of SEK44) due to lower mid-term sales estimates and perpetuity margins. The lower mid-term sales estimates have a slight negative effect, while the lower perpetuity margins have a material impact on the fair value range. We acknowledge that Hella bought a 10% stake at SEK58 per share, adding one data point of what the industry values the technology at. However, this was completed in a different market environment.

Compared to peers, Gapwaves is trading at a premium on EV/S 2023e-2025e (only a 1% discount to our Group 1 peers on EV/S 2025e). While on the one hand, we recognize that the premium is hard to justify, especially compared to the international peers with proven business models and long-term profitability, on the other hand, we also recognize the groundwork Gapwaves is doing today will create long-term cash flows well beyond our forecast period (2023-2033). We have argued previously that these cash flows should be consistent and have long durations as the switching costs in automotive are substantial. Thus, we believe Gapwaves should be valued accordingly.

We expect Gapwaves share to close to our base case 12-18 months ahead of Bosch ramping volume production.