Net sales came in at SEK 7.0m, -77% y/y, well below our estimated SEK 13.0m (deviation -46%). We believe sales mainly constituted orders Gapwaves had press released for the quarter. Moreover, we believe the delivery of the SEK4m order from Hella, slated for H2 2023, will be delivered in Q4 2023. We had estimated SEK2m in Q3 2023 and SEK2m in Q4 2023. The decrease year-over-year is mainly due to Gapwaves earning a one-time licensing fee from Bosch in the comparison period, and ultimately about two-thirds of the previous year’s revenue was “one time” in nature. EBITDA, excluding results from associates, came in at SEK-9.6m, corresponding to an EBITDA margin of -137% (EBITDA SEK 6.3m, EBITDA-margin 20% last year). Thus, slightly above our estimate of SEK-9.8m. The main reason for the result is a lower OPEX and slightly stronger gross margins. OPEX was below our estimate by -26%. While OPEX exceeded our expectations, we expect Gapwaves to invest in its organization to support additional customers and supply chain management.

Sensrad, a minority investment for Gapwaves, is expected to introduce commercial products by the turn of the year, with Gapwaves expecting deliveries in Q1 2024. Sensrad is not consolidated into Gapwaves, so we expect it to have little effect on the income statement. However, it is an indication of the investment moving forward. Gapwaves can acquire an additional 30% of Sensrad by 30 June 2024.

Gapwaves offers 77GHz radars. Segmenting the radar market by frequency band, Yole predicts that the W-band (75GHz–110GHz) will grow at a 27% CAGR, reaching USD10.4bn from USD3.1bn between 2020–2025. The standard has been 24GHz radars and is used in legacy cars currently. However, due to interference with the telecom spectrum and other considerations, 24GHz radars will be phased out, and the only allowed frequency band for automotive radars will be 76-81GHz.

The performance between Gapwaves and traditional antennas is insignificant at the current 24GHz standard. However, At the new regulated frequency ranges, waveguide antennas are required. We believe this regulatory requirement will be a significant tailwind for Gapwaves. Compared to other waveguide antennas, Gapwaves Gapwaveguide antennas are easier to produce as they require less manufacturing precision and use simpler materials. Therefore, Gapwaves can offer cheaper antennas at the same or better performance as competitors while still earning a sufficient return. Thus, we believe Gapwaves is in pole position in the automotive radar market.

Gapwaves recently also introduced its Multi-Layer Waveguide (MLW). This antenna design offers several advantages, including a fully metal-based design, allowing for higher production flexibility and customization as no special tooling is required and the possibility to recycle the antenna. It is also significantly thinner than Gapwaves’ previous antenna, removing size limitations.

Gapwaves has three main customers currently: Hella, Bosch, and Veoneer, and it is working on adding a fourth. The fourth and undisclosed tier-1 customer appears to be getting closer to an agreement with Gapwaves. We expect Hella and Veoneer to enter the volume phase in 2024 and Bosch in 2026.

We have made some medium-term adjustments to our estimates. Namely, we pushed out the scale-up of the mobility segment due to current headwinds, lowered the expectations for the telecom vertical, and reduced near-term NRE revenue expectations within automotive. Ultimately, this reduces our estimates between 27%-4% between 2023-2023.

Due to interest rates increasing, we have increased our risk-free rate from 2.5% to 3.0%. Compared to peers, Gapwaves is trading at a premium on EV/S 2023e-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 have reduced our fair value range from SEK15-61 (base case of SEK44) to SEK15-58 (base case of SEK43) due to lower mid-term sales estimates and a slight increase in the risk-free rate. 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.

We expect Gapwaves share to close to our base case 12-18 months ahead of Bosch ramping volume production. Other catalysts include a firm agreement with the currently undisclosed tier-1 customer.