Net Sales came in at SEK6.7m, -39% y/y, below our estimate of SEK10.0m (deviation -33%). The weak sales are mainly attributable to a slowdown within the mobility segment and delayed orders and revenues related to production equipment compared to last year. EBITDA (excl. ACI) came in at SEK-13.2m (EBITDA (excl. ACI) SEK-9.0m previous year). This is below our estimate of SEK-12.2m. The main reason for the deviation is lower sales, partly offset by lower OPEX and higher gross margin. OPEX was 9% below our estimate.

At the end of Q4 2023, Gapwaves received its most significant order to date from Hella worth EUR1.5m. The order is expected to be recognized as revenue during 2024.

After the quarter ended, Gapwaves announced it strengthened its partnership with Frencken Group and received a EUR2.0m order for production equipment expected to be delivered in 2024 and H1 2025. In the new collaboration, Gapwaves will outsource the production to Frencken Group while Gapwaves retains the supply responsibility towards its tier-1 customers. We view the partnership as an indication that Gapwaves is moving towards its production model (what we have labeled as “fab-lite”) and view the production equipment order as a de-risk to our estimates for 2024e and 2025e.

Gapwaves also received a fourth follow-up order from the undisclosed tier-1 automotive supplier after the quarter ended. The tier-1 supplier has commissioned a new project from Gapwaves to design, develop, and produce its waveguide antennas. The first order, valued at approximately SEK1.8m, received in the initial phase of this new project, is expected to be delivered in Q1 2024. This order forms part of a development project that is projected to reach a total value of around SEK3.7m and be completed by the end of 2024.

We estimate Gapwaves has disclosed orders worth SEK35m-40m to be recognized as revenue in 2024e and H1 2025e. Our total net sales estimate for 2024e is SEK49m.

Gapwaves has a 30% stake in Sensrad, which uses Gapwaves’ antennas for its 4D dynamic imaging radar named Hugin. According to Sensrad’s press releases, it has started shipping the Hugin imaging radar to a prominent American global manufacturer specializing in autonomous transportation.

Gapwaves contributed SEK4m to Sensrad during the quarter and can purchase an additional 30% stake based on certain terms before 30 June 2024. While Gapwaves has a solid net cash position of SEK89m, which we expect to last until break-even, potential financing needs for Sensrad may weigh on the share.

We do not make formal estimates for Sensrad but adjust Gapwaves enterprise valuation to incorporate the ownership in Sensrad.

Gapwaves has three central contracts within automotive. Hella, Veoneer, and Bosch. Gapwaves also has an undisclosed tier-1 supplier placing prototype orders. Gapwaves has two types of agreements currently.

The first is a royalty agreement where Gapwaves earns a royalty. The second type is a supplier agreement, where Gapwaves is expected to produce the antennas. However, Gapwaves will outsource most of its antenna production to a third party, such as Frencken Group.

Typically, Gapwaves works with its customers to develop the radar using Gapwaves’ antenna technology. The development phase normally takes five years and involves simulations, prototype testing, etc. Gapwaves earns non-recurring engineering (NRE) fees and revenues from production equipment during the development phase.

See Gapwaves’ description of its automotive business model below.

We have adjusted our estimates for Veoneer and Hella.

On 1 June 2023, the Magna Group successfully concluded its acquisition of Veoneer. Previously, we anticipated Veoneer would ramp up in 2024. However, according to Gapwaves’ latest forecast, the expected ramp-up for Veoneer is now delayed until 2026e. Consequently, we have adjusted our estimates for Veoneer to reflect this revised timeline. Given that Veoneer operates under a royalty agreement, the impact on our fair value range is considered negligible.

Gapwaves has a licensing agreement with Hella for its first radar generation. We expect this to ramp up during 2024e. Hella is also developing a second-generation radar with Gapwaves technology, which Hella said will be available in 2025. We had previously expected this to also be through a licensing agreement. However, according to management, Gapwaves is expected to be a Hella supplier.

The fab-lite model is more attractive than the royalty model because it yields higher gross profit per unit despite lower gross margins. To commercialize its antennas, Gapwaves initially had to accept royalty deals, as tier-1 suppliers lacked trust in the company’s supplier capabilities. Thus, we view Gapwaves supplying antennas for Hella as a testament to tier-1’s trust in Gapwaves’ supply capabilities.

We have adjusted our estimates for Hella to incorporate the supply terms for future generations. Specifically, we expect Hella’s mix to slowly move towards production units rather than licensing. We expect 2% in 2026e to be production units, reaching 10% by 2030e. A faster-than-expected shift in the mix will have a material impact on our estimates and fair value range.

We expect the pricing for units sold to be SEK12.5 per unit with an annual price decline of 2% between 2026e and 2030e. Gapwaves believes the current market pricing for corner antennas is between EUR1-2 per unit.

Below are our estimates in more detail:

Since we have changed the mix between royalty revenue and product revenue, the gross margin and gross profit have changed accordingly. Specifically, we have reduced our gross margin assumptions but increased our gross profit estimates. See the table below for further details.

Based on our revised estimates, we have increased our fair value range from SEK15-58 with a base case of SEK43 to SEK17-62 with a base case of SEK44.

Gapwaves trades at a premium versus peers, which we believe is justified based on the automotive contracts that will convert to volume production within the next few years.

We expect the following may catalyze the share: