Earnings call transcript: SmartOptics reports strong Q2 2025 growth, stock surges

SmartOptics Group AS, a technology company with a market capitalization of $144.66 million, reported robust financial results for Q2 2025, with revenue increasing by 43.7% year-over-year to SEK 18.7 million. The company's stock responded positively, surging 17.33% following the announcement. According to InvestingPro analysts forecast a remarkable 76% revenue growth for FY2025, with additional ProTips and detailed growth metrics available for subscribers.

Executive Commentary

CEO Magnus emphasized the importance of AI, stating, "AI is many things to us. It is a massive contributor to the underlying demand for the company's products." He also highlighted the company's goal to "double to triple our market share in relevant markets," underscoring the company's growth ambitions and competitive positioning.

Risks and Challenges

• Tariffs are currently impacting margins by 2 percentage points.
• Costs per employee have increased by 14%, potentially affecting profitability.
• The slight decrease in revenue from the APAC region may indicate challenges in that market.
• The company faces competition from established Chinese vendors.
• Macroeconomic factors and geopolitical tensions could impact global operations.

Q&A

During the earnings call, analysts inquired about the impact of tariffs on margins and the company's strategies for AI implementation. Management expressed confidence in reaching its SEK 100 million revenue target and highlighted the potential for growth in software and service revenue.

Full transcript - Smartoptics Group AS (SMOP) Q2 2025:

Magnus, CEO, SmartOptics: Good morning, everybody, and welcome to SmartOptics financial presentation q two twenty twenty five. Since we are in July, it's online only today. I hope that's acceptable. I'm here in Rome, and my CFO, Stefan Carlson, is in Stockholm. He will participate in a while.

And we also have a moderator to take care of the questions that come in through the portal and from our analysts. Again, welcome. I will move straight into the first half of twenty twenty five and quarter two. So of course, it is a remarkably strong quarter. I'm super happy with the results in this quarter.

We have a lot of reasons to be very happy. We live in a megatrend, a the ever growing demand for bandwidth. We can see clearly that this megatrend has a new best buddy. It's called AI. We're clearly seeing AI starting to influence our business in several ways.

That is something I will come back to and talk about later as we introduce our new strategic objectives for the company. It is the strongest quarter ever in the company and a record high growth as well. We're also seeing our underlying demand being super strong, and that's something that we measure on a day to day basis looking at our order intake in the company. Now order intake is not an audited number and it is not a number that we are presenting in general, but I want to give you a flavor of what we have been looking at over the past three quarters. Order booking was about SEK 19,000,000 in Q4, it was about SEK 18,000,000 in Q1 and now it's about SEK 20,000,000.

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That is of course super strong and it indicates a really good momentum. I'm also very happy with the first half result with 29% growth. This is probably a better measure to look at the company over longer periods and a little bit of market education here. It is difficult for us to steer the revenue recognition into a particular quarter. And I have to say in this particular year, it could very well have been that Q1 was four or five points higher and Q2 four or five points lower because we did have revenue recognition very early in April.

So when analyzing SmartOptics, please use a little bit longer timeframes for your estimates. So overall, very good results, partly driven by the fact that we have a breakthrough in the company. We have won and been selected and received an order and delivered to hyperscale organization. It is a data center interconnect application in California for a subsidiary of the hyperscaler. Now to clarify a little bit around this, the purchase order and the agreements such as purchasing terms and conditions and the code of conduct and things of that nature is with the mother organization, the application is within the subsidiary.

This is, of course, a proof point and a very strong sign that SmartOptics can be relevant for the largest and most demanding customers that we have in our business. It is way too early to say what does this mean in terms of future revenues and our possibilities to get into the main applications of hyperscaler in question. We haven't even started to work on that. Priority is right now to have a very satisfied customer and to deliver above expectations, then we will start working on scaling this business. So we will come back to that at some point in the future.

It's a good proof point and it's a very good sign that we have achieved this in the quarter. This is affecting U. S. Revenue, of course, in a very positive way. The order is around $2,400,000 so a sizable order, but not unique for the company.

We have had several orders in the past of that size, and we are working on many opportunities of that size. So in that sense, it's not unique. The U. S. Is delivering all the way through the quarter, and we will come back to the details of that, but very, very strong momentum in The U.

S. And it is also our main investment areas that we have been investing in for the past five, six years, optical solutions, software and services that are driving the revenue in the quarter, and that's very positive. That's very positive because I think that's where we will build future shareholder value to a large extent in the company. Increased revenue is also driving an increased rebound in EBITDA and EBIT margins. And this is despite an impact a negative impact by tariffs in The U.

S. It's around two percentage points on all of our margins that you see here. Stefan will come back to the details later. So in the middle of summer, we feel it's a very good timing for us now to start looking ahead, to lift our eyes above the current horizon and our $100,000,000 revenue target and start looking at what are we working on a day to day basis and what are we planning for in this company for the next period, which is 2026 to 02/1930. The reason why we are talking about this now is that we have come out of our annual strategy update where we have redefined and introduced a number of new growth areas potential growth areas for the company.

We want to start talking about them. And I think also, I have to admit that given where we are, given the momentum in the company and given what I just said specifically around order booking, I would say that although we're going to reach our $100,000,000 target, it is no longer a meaningful way to run the company. It is simply a too low target to take any effective decisions and investments on. We have to look ahead, and that is why we're introducing new targets today. So I will come back to that.

I will break down the revenue. There we go. So the normal deep dive into the revenue numbers starting with geography and plus 80% in Americas where a part of that was the large project that we delivered in the quarter. Below that, it's obvious that Americas is delivering in every aspect this quarter. And whatever fears we had in the April when we presented our Q1 results related to U.

S. Trade policy, those are really those uncertainties are really reduced at this time. We will not talk more about that in any detail in this quarter presentation. I think we have learned over the past months here that it is really quite meaningless to try to stipulate and guess what is going to happen next. And it's also quite obvious to us that whatever tariffs are there, the underlying demand for bandwidth, the growth in AI and the demand to renew and renovate networks to cope with future traffic demands is much stronger.

Hence, the demand is there and things will continue. EMEA, a little bit up, not a strong quarter in EMEA. There are two things to say about EMEA. And I think EMEA has changed a little bit where we have moved from being very dependent on many smaller deals, enterprise, etcetera, we still have them. They go up and down between the quarters, mainly up in the past couple of years, of course, as you have seen.

But we are also seeing a new phenomenon in EMEA where we have a similar situation to Americas and The U. S. Where we have lined up a number of really large accounts that we are now in the final phases of business development and sales processes. So that's new and that's very promising for EMEA that we can see also large account traction becoming a reality in EMEA. We're also seeing new revenues from new parts of Europe, Middle East and Africa, namely Africa, and I will come back to that a bit later.

The other thing I want to say is that my European sales team was instrumental and deeply involved in closing the large project in the quarter, the hyperscaler account. So kudos to my EMEA team, well done. Really, really good work there, guys. Yes, so APAC, still although a little bit down, I've said over the past quarters here that we are seeing meaningful revenues coming out of APAC. We have traction in APAC driven from certain geographies.

And to a large extent, associated with hyperscale investments and the data center growth in the region where we are becoming a very attractive alternative to Chinese vendors, which are generally not welcome in that environment. This is not hyperscalers buying from us in Asia. This is our customers connecting huge bandwidths into the cloud environment driving business for us. So APAC is there and it seems to be there to stay, and it seems to be worth investing more in is what is the conclusion that we have come to in our strategy work, and I will talk a little bit more about that shortly. Looking at products, as I said, remarkable growth in business areas, solution, software and services.

Those of you who have followed us over the years know that these business areas are tightly associated with each other. When we sell solutions, we sell software and we sell service. And if we don't sell solutions, we rarely sell software and service other than renewals and repeat business, of course, which is an instrumental part of this. On the Software and Service, we're seeing new phenomena in the company. Our SoSmart software platform is now contributing in a very meaningful way to our revenue.

It is great because it's increasing the recurring revenue in the company, but it's also a new phenomenon out there when we are winning business because of the quality and the features and the look and feel of the South Smart platform. This has not been the case in previous years. The main reason for Smart Optics to win a deal or win a new account has always been that we are a very cost effective, lean company that can solve huge bandwidth problems at a lower cost than competition. From now, it is cost efficiency and it is features and the look and feel and the general design of our software platforms that makes customers choose smart optics. And that's very, very nice very, very nice position for us to be in, and it's an investment area that you will see we will increase our efforts in the future.

On optical devices, which we have pinpointed as an area that we want to grow a little bit faster going forward, it's an area where we did not well, I would say that we have probably underinvested in over the years. We have started off our investments about six months ago. It's a long punch list of actions that will be implemented over time here. We are not quite there yet to see all of the results of that. For sure, there will be more coming out of business area optical devices.

Having said that, we're seeing growth. It's the best quarter of the five quarters that we are presenting here, and it's a very stable revenue stream and a stable business. It's also a business that we use for other purposes such as cross selling and up selling solutions, software and services. So a very valuable business for us that we intend to grow faster going forward. I will hand over to CFO, Stefan Carlson, to take you through the financial details.

Stefan Carlson, CFO, SmartOptics: Working now. Yes. So thank you, Magnus. Happy to see you all here and happy to share this great report with you. Revenue increased by 43.7% to 18.7% compared to 13%, which as Magnus mentioned, is strongly driven by Americas growth to 12.3% over 6.9% last year.

Gross margin, 8.6% compared to 47.3% last year despite the impact we have from U. S. Tariffs. In Q2, we, in revenue, have some compensation for tariffs in Q2 compared to in Q1, where we didn't have that much compensation since we had old orders that executed on in Q1. The EBITDA is $2,600,000 compared to $1,000,000 and is an increase by 1,600,000.0 of which $2,900,000 is related to revenue increase and a slightly margin increase.

1,300,000.0 is an increased cost of MTG benefit expenses and other operating expenses. The increase is 27% to 6.5% compared to 5.2 And that is driven by organizational growth, annual salary increase and FX impact mainly. Full time equivalents grow with 11% from 1.19% in Q2 last year to $1.32 in Q2 this year. And then cost per employee grow by 14% from Q2 twenty twenty four, and that is mainly then related to annual salary review of 4% and FX impact of 4% and increased sales commission. The FX exposure in employee benefit expenses and other operating expenses is mainly 70% is based in SEK and NOK, 20% in dollars, while we have revenue and COGS predominantly is U.

S. Based. The EBITDA margin is then 13.7% in the quarter compared to 7.8% last year. Operating cash flow the cash flow from operations in the quarter was minus 0.5% compared to minus 1.9%. We see a net increase of trade receivables in Q2 of 1.5.

The inventory has increased with 1.9 from Q1 twenty twenty five to a large extent driven by an FX impact in the revaluation of the inventory and that we have additional product parts to support our tariff situation. Trade payables based on high purchases consequently increased by 0.8 in Q2. So over to the balance sheet. We have an equity ratio of about 53% compared to 61% last year, and we see it shrink when the company balance sheet is growing together with the company. Noncurrent assets is $8,800,000 compared to 7,000,000 last year and consist of capitalized development expenses, tangible assets, leases and deferred tax assets.

We have part of it is a new ERP system of 0.6, which we will amortize from Q3 and over five years' time. Current assets is $38,100,000 compared to 32,800,000.0 mainly inventory that is 16,800,000.0 and trade receivables of 19,800,000.0 The cash is now 3,100,000.0 compared to 5,100,000.0 last year, and it's down $6,800,000 from last quarter, and that is mainly related to dividend of 5,700,000 We have available credit facilities of 7,400,000.0 and we are comfortable with the current cash levels we have. The non current liabilities is SEK 400,000,000.0 compared to SEK 1,500,000,000.0, of which lease liabilities is SEK 0.3 and borrowings 0.1. Current liabilities, excluding deferred revenue is 12.5, and it's mainly trade payables, tax liabilities and personnel related liabilities. We have a deferred revenue of 10.7 compared to 6.8 last year.

The working capital amounts to 15.7 compared to $17,300,000 last year. The inventory has increased to $16,800,000 from 14,600,000.0 and was $14,900,000 in the last quarter. As I mentioned, we see an FX impact here of around 5% and the additional product parts we have to support the tariffs situation. We have an ambition, of course, to keep the inventory on a low and stable level. And we are not satisfied with the current levels, but are as usual monitoring and working with the levels.

But despite the high levels, we see a very low risk with the inventory we have on hand. Trade receivables increased to $19,800,000 compared to 17,200,000.0 up from $18,400,000 last quarter. We have had good collections in Q2 and high sales end of the quarter. The trade payables increased to 7.7% over 3.1% last year and is related to high purchases late in the quarter, and we have the sixty days payment terms in general while we build up these levels. Net other short term liabilities increased to 13,200,000 over 11,500,000.0 mainly related to increase in deferred revenue.

And then we have a small portion of tax liabilities of 200,000.0 Thank you. And back to Magnus.

Magnus, CEO, SmartOptics: Thank you very much, Steph. Okay. So as I mentioned in the introduction, today, we have been working as we normally do in the spring, renewing our strategy, our strategic ambitions. And what is different this year from previous years is that we have started to model out what this will look like in the next slightly longer period, twenty six to two thousand and thirty. And you will see here that we have a number of new very, very interesting new growth drivers that we want to introduce as a day to day priority in the company to continue this journey going forward.

Of course, we are going to focus on our core business and expand our core business very much in the same way that we have been working with that over the past years. So this is related to a focus on our traditional network and data center operators, government and defense and enterprises becoming more and more relevant there, increasing our traction. The applications remain data center to data center communication and metro and regional networks. And primarily in the business area optical devices side, we are now starting to look at new and scalable go to market models. We have a palette of alternatives in front of us that I think will be very positive.

The first part of the new strategy on business area devices was mainly related looking inwards, how can we improve how we deliver products to customers and what products we are delivering, etcetera, etcetera. And now it's time to start looking at how we can scale revenue through more scalable go to market models. So there is an element of strengthening and expanding the core of what we do. And what we have identified this year is really a number of new growth drivers where three of them have come a very long way, and we already have focus on those. Those are committing to the majors.

I talked in Q1 about us dipping our toes in the tier one segment. We are now seeing that we can win business with even with the largest accounts on the planet in the quarter with the order from a hyperscale organization. In parallel, we are also working with a couple of new very, very large accounts looking at how we can meet and exceed their expectations. This is related to our products, but it's also related to the company as such, how we conduct our business, what certifications we have. There is a lot of work to be done here and I think to name one area that I believe is going to be instrumental in any business we do going forward is of course cybersecurity.

We have a good and solid cybersecurity framework in the company. However, we have to certify ourselves towards ISO standards and other standards to prove this to customers. It's typically such an area where we have a little bit of work to do. But there are other areas too. But really committing, preparing the company, preparing ourselves, preparing our products to be a relevant player for the largest customers of optical transport equipment, data centers, hyperscalers and network operators.

That's a it's a very work that I'm really looking forward to leading the team through, and I have very good hopes that we can do it. If we go to the right there, leverage software automation and AI, this is probably the most important piece of our 2025 strategy work. AI is many things to us. It is a massive contributor to the underlying demand for the company's products and the demand for bandwidth. We're seeing that, that will only increase as we go forward.

That's number one. Number two, it is an opportunity for us to create revenue streams in the company That's within the SoSmart platform, and it's outside the SoSmart platform. These are new softwares and new ways to deal with data that ultimately helps our customers to optimize their OpEx. And they are prepared to pay for that to us, for those type of tools and that type of data. So that's number two.

And number three is, of course, the internal efficiency that we can do as a company to drive profitability and to become a leading player here. And I'm not talking about creating a small AI team of architects working in their corner with their things. I'm talking about creating an AI driven company across all functions, across everything we do and quite frankly, all the people in the company will be affected by this. I think this opportunity has never been there before. And I'm sure many of you have heard other CEOs talking about requirements going up as you approach, as for instance, dollars 100,000,000, you need this, you need that.

I'm confident that by using these type of tools, becoming more data driven, we can avoid falling into any OpEx rat hole that we would have seen in front of us several years ago. The potential is really large. We are a company that can do this. Not every company will be able to do this because you do need skills. You do need to have the right software people in the company who can lead this transition.

And SmartOptics is very well positioned with the competence we have within the company. So my belief in this is rock solid for the future. The third area that I talked about a little bit earlier is expanding into new geographies and really expanding our efforts in certain geographies. I have talked about Asia, how we have seen traction in certain markets and where we are now talking to larger and larger accounts about more and more projects and deals. Africa is also interesting.

We have in the first half of twenty twenty five delivered networks in South Africa, Namibia and Kenya. There is a growing demand for Internet services for data centers. We're seeing peers in the market, Internet exchanges and operators putting huge efforts into certain parts of Africa to capture that growth. We are going to do the same. And I will remind you that as the world is, to a large extent, driven by hyperscalers building data centers, the alternative to build networks with Chinese equipment is way, way smaller today than it was three, four, five years ago.

So SmartOptics can be there as a really interesting alternative to African customers to scale their networks to meet the demands. That's interesting. South America is another market where we have seen a lot of traction in geographies like Mexico, Colombia and a few others. But South America is a big market and the same type of phenomena is happening there, which puts us in a much better position to capture new revenue and new business today compared to only a few years ago. So on all those three, we are well on the way.

We have started initiatives in all of those areas, and we will continue to invest and to work hard to materialize that. The last one, M and A, to explore M and A as a vehicle for additional growth and accelerated growth. That's an area and I've learned that when a CEO talks about exploring M and A, the expectation is that you have candidates lined up and that an M and A is imminent. That is not the case in Smart Optics. We will do that in the same way that we do everything in Smart Optics, namely create a plan, scrutinize the plan, improve the plan and then execute on the plan.

So this will take a little bit of time. But the difference in mindset now compared to a year ago, where we said that nearly everything in our business plan is related to organic growth is huge. We want to start looking actively at this as an opportunity for the future. All in all, this is all about gaining market share and creating new revenue streams for the company. We are setting new targets on ourselves to double to triple our market share in relevant markets.

We are, as you know, addressing a next generation optical networking market consisting of metro optical networking and IP over DWM. It's about a $6,000,000,000 market. When we work a little bit with those numbers and remove the things that we believe are out of scope, it is still a very big market that is growing at a very healthy pace. And we want to double to triple our market share in the relevant markets. So right now, here and now, when we look at this, it means roughly somewhere taking 2025 revenue and probably a bit more than doubling it and a bit more than tripling it.

But that's the sort of numbers that we come to when we do our mathematics. We also want to maintain our EBIT target going forward to measure ourselves against mainly EBIT margin, and we want to stay with our 13% to 16% EBIT margin goal. This is, of course, driven by the scale of the company to a large extent. As you see, for instance, in this quarter, when the revenues come, we are also more profitable. But it's also related to building a completely different company in the sense of using data, using automation and using AI as key tools to drive profitability in the company going forward.

So I'm very enthusiastic about that opportunity. We will talk more about this as time goes by and hopefully clarify the arguments and explain more in a deeper way and better what we're doing in all these areas. So stay tuned for that. It's going to be a story that will develop from now on into the future. With that, I would like to hand over to Mr.

Pad Boormann, if there are any questions.

Pad Boormann, Moderator, SmartOptics: Yes. So we have our analysts on the call. If we start with Christoph von Bjornsson from DNB. Can I give if you can unmute yourself and ask your questions?

Christoph von Bjornsson, Analyst, DNB: Yes. Good morning. Thanks for taking my questions. So a couple here. So you said the tariffs had a two percentage point impact on the gross margin in the quarter.

And I think you said in the past that you would take the hit now and then it will kind of bake it into the price going forward. So does that mean we should kind of see an incremental upside to the gross margin percentage points into Q3 and onwards?

Magnus, CEO, SmartOptics: I would say potentially, yes. We started that journey early in this quarter or rather late in Q1 to build in compensation for tariffs. And as you know, we're doing it in a couple of different ways by changing prices, changing discount levels and so on and so forth, even charging for tariffs in certain cases. I think, yes, you will see an increasing effect of those efforts going forward.

Christoph von Bjornsson, Analyst, DNB: And then two quick ones. On the OpEx side, you highlighted the exposure to the SEK and NOK versus the USD and stuff. But I'm just like your average headcount was up 10% year over year, but your OpEx was up almost 27%. So is that just the currency effect movements? Or are there been any other kind of non underlying or non recurring elements driving the OpEx level up a lot more than headcount growth in the quarter?

Stefan Carlson, CFO, SmartOptics: I can comment on that. As I said, we have 11% is growth related, 14% is average cost per employee related. And there those 40%, we can break down into 4% is salary increase, annual salary increase, 4% is FX And then there is the main driver is the sales commission part there as well. In this quarter, we also had more marketing expenses than we had in Q2 last year. Last year, we had some hits on marketing in Q3 instead, which I foresee was the top in Q2 now.

Christoph von Bjornsson, Analyst, DNB: All right. Thanks. And then one final quick one for me on the hyperscale win. Congrats on that. I think just can you expand a bit on what kind of made you call out this being kind of a part of the organization or like a subsidiary of the hypers I understand that this is kind of a it's it's coming the order is coming from hyperscaler, but is this kind of is this kind of not part of their public cloud offering and more or less something internal?

Or just, like, what makes this kind of different? What kind of drove you to kind of say that this is related to a subsidiary, so to say?

Magnus, CEO, SmartOptics: Yeah. No. So so it is the application is, as I said, a bunch of data centers and a lot of data center interconnect using our most modern products and 400 gig in our software and service offering. It is a software product that they are delivering. It is not the main cloud infrastructure of the hyperscaler.

But as you point out, the order is coming from that organization, meaning we have gone through agreeing on the terms and conditions, code of conducts, etcetera, with the hyperscaler procurement organization. So in theory, we are now or in practice, we are now a supplier. And we shall see what this means going forward. As you know, Christopher, the hyperscalers are very large companies owning a lot of related businesses. So I'm sure there is opportunity there.

Christoph von Bjornsson, Analyst, DNB: Right. Thanks. I'll jump at the back of the queue.

Magnus, CEO, SmartOptics: Perfect. And then

Pad Boormann, Moderator, SmartOptics: we have questions from Markus Hayberg at SEB as well.

Markus Hayberg, Analyst, SEB: Thank you. So I appreciate the longer term perspective on the new targets. Of course, it was quite short term nature, 2026, but we're still that's a year ahead of us. Have your confidence changed on 2026 over the past few months? Or should we still think of SEK 100,000,000 by 2026 as a target?

Or how has your confidence changed?

Magnus, CEO, SmartOptics: Yes. No, it hasn't changed at all. So I will repeat what I've said over the years. The reason why we haven't changed it is that we feel that the opportunity to reach it is there. The opportunities are out there.

It's a question of speed and execution more than anything else. And if I may go back to what I said about the last three quarters and particularly the order intake that we have seen, you can see that, okay, we are not there, absolutely not. But we're kind of closing in on it in a very solid way, in my opinion. So no, we haven't changed at all. Of course, we did have the four bad quarters from Q4 twenty twenty three through to Q3 twenty twenty four.

And that has, of course, added some time onto this. But we remain confident that we will reach this target. And I mean, internally, of course, we have it as a near term target. So yes, but it's That's good to hear. Yes.

Markus Hayberg, Analyst, SEB: Thank you. So and then moving on to your new target. I think you mentioned that if we two to 3x your 2025 revenues and a bit more than that, then we will sort of get to the number that you are aiming for if the market develops as you think. But you also mentioned here in your slides that Signal AI, they expect 6% annual growth. So obviously, for them, 2x to 3x something that's growing 6% per year, I would get to a higher number.

So how do you reconcile that? Does it mean that your relevant markets are expected to be more flattish than the overall market? Or how should I think about this?

Magnus, CEO, SmartOptics: Yes. When we do our mathematics here, we look at a little bit more details. And I'm sure we will continue to develop our thoughts here and come with more and better data. I mean the main difference is if you look at the growth in our market, there is a large element of hyperscalers growing their internal networks. And I think in that business, there are things that are not addressable to us.

As for instance, I mean, in theory, we can very well sell our line systems into a hyperscale organization. We feel we have products that should be relevant for them, if not now than in a couple of years. It is more questionable as an example whether they will buy optics from us. They probably won't. They have it's a completely different business model, where even some hyperscales are talking about building their own optics.

And the same goes for software, certain parts of the software that is a no brainer for a Tier two data center to use, but not necessarily in the bigger hyperscale environment. So yes, so that is the reason, I think, why we need to be a little bit more into the details here. And as I said, I promise we will come back with an updated view of this. We just want to set the scene here and now that the end goal of Smart Optics is not $100,000,000 And for that matter, the end goal of Smart Optics is not two, three times the market share. It's higher than that.

But we have to do something in the midterm here to have something to steer against and to take our decisions upon.

Markus Hayberg, Analyst, SEB: Thank you. And a short follow-up on that because, of course, if Tier one hyperscalers seems to be a bit out of scope, then you announced now a global hyperscaler. But is it fair to assume that this is a Tier one hyperscaler but with a Tier two application? Is that the right way to think about this win?

Magnus, CEO, SmartOptics: Yes. I have never thought about that in that particular way. I mean, we have products that can be relevant for a hyperscaler, but it's not all our products for sure. So, yes.

Markus Hayberg, Analyst, SEB: That makes sense. So final one for me is just on how we should think about the rest of the year here. Of course, the seasonality typically, Q2 is a very good quarter. It should be a bit slower maybe into Q3 Or rather that we are in now a recovery phase that Q3 could actually be better than Q2? How should we think about the seasonality?

It's the final one for me.

Magnus, CEO, SmartOptics: So generally, Q3 is a weaker quarter than Q2. There has been some exceptions over the years, but I think you should expect I mean, Q2 and Q4 are the big quarters typically. So yes, we are very early into Q3 now, so it's very difficult to make any good estimates even for us. But I mean, what we can say is that compared to one year ago and given what I said about order backlog, of course, we have a much better sorry, order booking, we have a much better backlog now than we had a year ago. This is also a number that we typically don't talk about, but it is significantly better.

So it feels good, but it's too early to give details.

Markus Hayberg, Analyst, SEB: You.

Pad Boormann, Moderator, SmartOptics: Okay. Then we have received We questions the have four questions from Euston Spitalen. The first one, it's about M and A. When evaluating M and A opportunities to accelerate scale, what are the quantitative criteria for an acquisition, specifically in terms of revenue, profitability, technology synergies and market share? And how will you mitigate the integration risk to ensure that an acquisition actually contributes to shareholder value given that many M and A transactions historically fails to create value?

Magnus, CEO, SmartOptics: Okay. So thank you for the questions. Those are extremely relevant. And probably two questions that have kind of led us in the past not to think so much about M and A. I'm confident we can do it.

We need to do a plan. We need to thoroughly make up our mind on what is it that we really want. The first question question was kind of indicating to me that we would just go and buy a competitor. That's not necessarily the case. We will look broader at M and A.

We will look at bolt on technologies and other segments as for instance, in the software area to continue our efforts in AI automation and so on. So I think those questions are precisely what we are going to work on now for a while and then start to talk about.

Pad Boormann, Moderator, SmartOptics: Good. The next question also from Osten is you pushed the 100,000,000 targets forward by one year. What has fundamentally changed in the market since you last gave this forecast that we should now trust you to revise the ambition to multiply market share two to three times and aim for a 13% to 16% EBIT margin. What specific risk factors from the past have you eliminated? And what is the actual detailed road map to achieve these new targets, especially giving a market CAGR of only 6%?

Magnus, CEO, SmartOptics: So I think what has changed, if we start there, it is really very obvious that we had a period from Q4 'twenty three through to Q3 'twenty four where we saw clearly that no large investments were happening in our industry. And that affected us, I would have to say, in a minor way compared to the peers in the market, especially if you look at the smaller peers in the market, they declined much more than we did. So it was a market phenomenon related to macroeconomics, things like higher interest rates and inflation and so on and so forth. We have since three quarters now seen a return to growth roughly at the same level as we have had in the company for well over five years ahead of that bad period. So that is the reason.

When we look at what has changed in a positive way, I think then we have to turn to Smart Optics and look at the customer dialogues that we are conducting right now, the customer traction that we have had over the past years, including this quarter with the major win that we have just discussed. And I can assure you, if you knock on the doors in Silicon Valley at the hyperscalers and similar organizations And assuming that you meet the right people who are involved in this type of business, they will know who SmartOptics is and they will know what we do, which was not necessarily the case when we set this target. And please also remember that this target was formulated in 2021. Actually, it was formulated a few years before that and we called it our BHAG at the time. So I think on the negative side, what made it take a little bit longer, I would say, a period in the history with low growth in the industry and in our market.

And on the positive side, SmartOptics traction and also the vast broadening of our product portfolio, making us relevant for way more applications in bigger and more advanced networks. That is what you see on the positive side. When it comes to why should we grow to these numbers in a market that is only growing by 6% per year, I think I will also refer to the past six years. And if you look at our average growth versus the market, we have clearly gained market share over a very long time. And let's see now when the market share numbers come out for 2025.

We typically report this once per year because one quarter is a little bit bouncy to talk about. But I'm confident that will continue. That is really my strong proof points, traction in the market, the way we are known today and versus a few years ago and the products that we offer.

Pad Boormann, Moderator, SmartOptics: Good. And then a tariff question. You claim the tariffs impacting margins by approximately one percentage points in Q1 and two percentage points in Q2. This is a significant negative impact. What concrete measures have been implemented beyond passive observation to reduce this tariff burden?

And what is the expected residual tariff impact on margins in the second half of twenty twenty five and 2026?

Magnus, CEO, SmartOptics: So the measures that we have taken, the big one is that we have transferred and this is related to the optical device side now that I'm talking about, the 18% of our revenue where we have had a significant part of the portfolio being made in China. We have transferred that out of China. We're not quite done with that yet, but we are very, very close to having an alternative set of products that are made in Malaysia, Thailand or Vietnam. And I think that initiative is more important than the tariffs because eventually, it doesn't really matter what tariffs that are put on these type of products. They are needed.

The ever growing demand for bandwidth will not go away. But I think the bigger geopolitical hesitation from our customers in The U. S, in Australia, in parts of Europe and in places like India to buy non made in China is much stronger than the tariffs. So this makes sense for the long term to use other geographies for production of the optical devices. There is no doubt on that.

So that's a big one. The other big one is simply increasing our prices, and we have different ways to do that. We have the discount sandbox that our salespeople are allowed to operate within. We have elements of new pricing, of course, as a result of these new list prices. We have situations where we are charging tariffs as a line item to certain customers.

So the idea is that we should go towards zero fairly quickly here impact of the tariffs. I'm sure that will not happen in Q3, But certainly, the slightly longer run, we should see this coming down to zero. And it's a little bit difficult to measure also because in Q1, we had very little compensation. All of the actions that I talked about were negligible in Q1. In Q2, we had come quite a long way with the tariff compensations.

But it's harder to measure the tariff compensations than it is to measure the increased cost of the actual tariff. So it's a little bit difficult to track.

Pad Boormann, Moderator, SmartOptics: Okay. Then we have the final question from Euston Spitalen. It's about AI. You appraise AI for efficiency and new revenue. But given AI's history of significant investments in both capital expense and time to reach maturity.

What is the concrete ROI calculation for the AI effort? Detail down to which line in the P and L the AI benefit will actually appear and when? What existing resources are being allocated away from other areas to fund AI? And how do you ensure that this does not just become a new satisfactory cost items before real value is created for shareholders?

Magnus, CEO, SmartOptics: Okay. So I will start with the second part, where we this initiative started about one year ago when we formed our AI architecture team. It was very small at the time. It's really it was really one person that we moved out of the regular R and D to focus 100% on the broader question of AI in the company. What we have done since then is a series of workshop involving about 20 very influential people in the company to build a roadmap for internal tools, external tools, monetization of AI and a few other areas.

Remember, an important part of AI is to have control over your data and also to produce, in our case, the data that is required to have any benefit from AI. This is how our products are streaming telemetry information to the users, as an example. So what is the next step for us? Well, the next step is now to take this broader group of people, first of all, to use our architecture group, which is bigger now, to create the frameworks for us on how do we develop our AI tools, back end, front end and UX and then to distribute that among a much broader set of users and developers in the company. So where are you going to see the shareholder benefit of AI?

Well, I would say in two places primarily. Number one is going to be our ability to grow OpEx slower than revenue yes, to grow OpEx slower than revenue going forward, that's number one. And number two, you will see our the share of software and service revenue growing in the future versus solutions and devices.

Pad Boormann, Moderator, SmartOptics: Thank you. So two questions The from George first one, it's a little bit long too. Regarding mid term targets, do you have an explicit gross margin target baked into your corresponding EBIT margin? And regarding geography, is it always large variation in revenue from quarter to quarter? But should we see the lower growth in regions outside America as any consequence of your internal prioritization of revenues?

Or did the sales outside Americas simply reflect the market and your underlying business activity and normal lumpiness? And when you talk about record order intake, how was that distributed between customer groups and geographies?

Magnus, CEO, SmartOptics: Okay. Can you repeat the first part of the question there, please?

Pad Boormann, Moderator, SmartOptics: Yes. Regarding midterm targets, do you have an explicit gross margin target baked into your correspondent EBIT margin?

Magnus, CEO, SmartOptics: Okay. Thank you. No, we don't. We will move over to measuring EBIT and reporting EBIT slowly now. So of course, we will report our gross margin.

We have not set any new expectations on gross margin, but we have our old efforts and continuous work to keep gross margin high. But having said that, we also have an ambition to win larger and larger products and larger and larger deals. So we want to have a little bit of flexibility on the gross margin side to do that and to be aggressive and to act as the challenger in the market. So therefore, we are a little bit cautious with setting targets on that. We understand that it's very, very important and we put an awful lot of focus on it and we will continue to do so.

The second part of the question, I think, was related to Pal. Remind me, please.

Pad Boormann, Moderator, SmartOptics: Yes. Regarding geographies, as always, large variation in revenues between geographies.

Magnus, CEO, SmartOptics: Yes. We have had large variation. Well, we haven't this is, of course, the largest variation we've had over the years. Yes, on both there, I would say there is always an element of where we prioritize our work and where we choose to focus deliveries, etcetera. We always have an element of that in every quarter.

But it's also where are the big projects at the moment and where are the projects happening at any given time. And that goes a little bit up and down, as you have seen over a very long time. So we have both of those elements affecting us.

Pad Boormann, Moderator, SmartOptics: Good. And then the final question on the portal. Where do you see the number of FTEs developing the coming one to two years?

Magnus, CEO, SmartOptics: So I'm sure we will grow in FTEs. We're going to do that with an ambition to be considerably lower than the revenue growth. What we have learned as we have worked through our strategy is that it really makes sense to take every OpEx decision and measure that against efficiency improvements, how we can use automation, how we can use AgenTik AI tools and really be careful about thorough in that investigation. And going forward, every new recruit will be measured against other initiatives that can increase efficiency in the company. So way more attention to that question.

But as I said, I'm sure we will grow. There is also an element that when people appear on the market that we are very interested in, we may strategically choose to take them on board because it brings us value.

Pad Boormann, Moderator, SmartOptics: Perfect. That was the last question from the portal.

Magnus, CEO, SmartOptics: Thank you very much. Then I wish you all a great summer, and see you again in a quarter. Thank you.

Stefan Carlson, CFO, SmartOptics: Thank you. Thank you.

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