Earnings Call: Q4 2018

Feb 15, 2019

Summary

Delayed orders weighed on 2018 revenue and profit, while full-year gross margin improved to 56.4%. U.S. GSA access, a confirmed Intercom order and 2019 product launches support the growth outlook.

Thank you very much. Welcome everyone. Thank you for calling in to our conference for the fourth quarter and full year 2018. We have two highlights that we have focused on in our report. First of all, another important breakthrough in the U.S., where we received a GSA contract after the end of the quarter. Another highlight is the fact that we received the first smaller order of our new Intercom system. The quarter in itself, were impacted by several orders and deliveries that was further delayed. We have talked about this earlier, but these deliveries and orders have been delayed into the first half of 2019, which has impacted the quarter and the full year 2018. This is, as we've said many times, the effect of the long lead times in our industry. We have, during 2018, worked very focused according to our strategy. We have initiated and carried through some of the largest investments in the company history in both R&D, product development, and also in sales. We are certain that these initiatives and investments will lead to growth opportunities going forward in the form of new product launches that we will see during 2019. I will go to page number 4, where we have the overview. Our revenue in Q4 was the highest in the year, but lower than the same quarter in 2017, which was actually one of our best quarters ever. This led to a full year revenue result, which is a little lower, almost in line with 2017. As said, certain expected orders and deliveries have been pushed into 2019, so that did impact the full year revenue result as well. Our gross margin in the fourth quarter was also a little lower than we normally see, which is due to a higher amount of third-party products. We often deliver full systems in packages to our customers, and as we act as a technical integrator or system integrator, this sometimes includes third-party products that have been integrated with our systems. That does impact our gross margins when we have a high amount of these third-party products. But for the full year, the gross margin improved to 56.4% compared to 55.3% last year. We expect that the gross margin can continue to fluctuate between quarters depending on the product mix and whether we sell direct or not. But we also estimate that the gross margin going forward in average should be about 55%. Our operating profit was lower in the Q4 and also for the full year. This is the impact of the many investments we have made in both R&D and in sales. We are convinced that this will help us in the years to come. We'll get back to that. In the next slide, number 5, we have the usual overview of the sales development and the operating profit. Not so much to say, this is self-explanatory. We are more or less at the same level as last year, for the reasons just mentioned around delays in certain orders and projects, and the operating profit is naturally impacted by the large investments we have made internally in the organization. On page 6, we show the sales and order backlog on a rolling 12 months. For sales, you see a positive trend. Apart from last quarter, we did have a quite good order intake in Q4 of SEK 70 million. With that said, our order book was quite low compared to earlier quarters, 56.1, about SEK 100 million less than last year at the same time. As said many times, we know that this fluctuates due to the large procurements we see and that they come in as irregular intervals. Again, we have certain projects that we expect will arrive shortly, and that also will have a positive effect on our order intake and on the order backlog going forward. Turning to page seven, as I said, we have diligently pursued our strategy during 2018. One of our major focus areas is to continue to grow in our existing markets in Western Europe, North America, Oceania. We saw very good development there. Our own sales teams, both in the U.S., France, and Italy, had a good year with a good development in the order numbers from those existing and new customers. We continue to deliver on contracts that we hold in these countries, and we also did see additional order from, for instance, the US Army Security Force Assistance Brigade, the so-called SFABs. In Denmark, we got a new five-year framework agreement from the Danish Army. It was a continuation of the agreement we had already back in 2012, so a long-lasting relationship with our home market. As said, we did get a smaller order for our INVISIO Intercom system. I will just get back to that as well. At the end of the quarter, we got the so-called GSA status and contract in the U.S. Now, this is a very important development for us in the U.S. market. It is a five-year contract with the potential of three five-year options, which means a total of 20 years. If you turn to the next page, the GSA status basically means that all federal state and local government entities and customers are able to efficiently purchase INVISIO equipment at the pre-negotiated terms and conditions. Normally it takes quite a period of time to obtain a GSA contract, if you can get it at all. We have had sponsors among important U.S. customers that have been supporting us in obtaining the GSA contract. After a very short period, just to implement the terms of this contract, we are certain that the new GSA status and contract will make it a lot easier for customers in the U.S. to place orders with us and will benefit us in terms of the numbers of orders we will see from the U.S. market. So, a very positive thing for us. Turning to page nine. Another part of our strategy is geographical expansion into certain areas of Asia, Middle East, and South America, and we have continued to be present there. We have had many meetings, we have worked with partners and reselling entities, and have had a good progress during the year. We see the same business pattern as we see in the western part of the world, that first of all, we receive orders from special forces that are normally smaller orders. That will eventually lead to larger orders from army customers. We are at a point now where we do expect at least the first larger order to arrive shortly, and maybe also a few more during the next quarter or so. We do see a positive development in these new markets as well. On page 10, a first strategic priority is broadening our product portfolio. I would definitely say that INVISIO is driving the market through our very innovative product development and new solutions we bring to the market. In 2018, we have a historic high in the investment we have made into new products. That will lead to a number of new product launches in 2019, both within existing and new product categories. As you all well know, on the next page, 11, we have a new product category called Intercom system, portable Intercom systems that is just on its way to the market. We, in Q4 2018, received the first small order from a defense customer in Europe. This little unit will make it possible for our customers to have a seamless integration between when they are in a dismounted, i.e., in the field scenario and when they are in a mounted scenario, i.e., in a vehicle like a boat, a helicopter, or some kind of vehicle. So, it is a lightweight system that can be carried in a backpack or mounted in a vehicle. We are in the final stage of development, where the last tests are now being performed internally. The last also what we call environmental tests are being performed. We do expect to see other smaller orders in the second half of 2019, but as lead times are long in our industry, large volume orders will not be until we get into 2020. But it is definitely a very exciting product category that we expect will have the potential of becoming as large as our current category for dismounted communication and hearing protection systems. So all in all, even though the revenue numbers in Q4 were a little lower than expected due to certain delays, we believe that we are in a very strong position to see continued growth and development for INVISIO in the coming years. We have a good, strong market position. We have invested heavily in new products that we will start seeing the effect from in 2019. We do have some certain projects that have been pushed into 2019 that we should soon start to see the outcome from. So all in all, we are very positive on the continued positive development for INVISIO. That also leads to my last slide, number 12, where our board of directors share the positivism around our continued development. They therefore propose that the dividend is increased from 0.60 Swedish krona per share up to SEK 0.70 per share for this year. With that, I conclude the presentation of Q4 and the full year, and operator, we are now ready to take questions, please. Thank you. Ladies and gentlemen, if you would like to ask a question, please press star and one on your telephone and wait for your name to be announced. You can cancel your request at any time by pressing the hash key. Once again, for any questions, please press star and one on your telephone. We do have a question from the line of Viktor Westman of Redeye. Please go ahead. Thank you so much. Okay. As I read your report, you mentioned one large contract during the next quarters, and then at least two more later during 2019. Is that correct? Several, Viktor. I think when we said at least one from new geographies and several more later in the year. In addition to that, we have the ones that we have been waiting for from existing markets in the last quarter or so. So it is several. Okay. Can you give the geographical mix of these new quarters? No, the majority of what we have been waiting for is related to existing markets, which is also, as we have talked about before, the reason why we have a fairly high stock level of products ready to be shipped as soon as these orders arrive. We do believe that the fact that we now have a GSA contract, we will be able to speed up some of these orders that we have been waiting for a while. Okay. I also want to ask about the old contracts that you have. Is there any ramp down in the end of this contract ahead of new procurements? Not as we see it. I think each contract is living its own life, so to speak, and it is very country-dependent. But we do see, as you can see in Q4, we had about SEK 70 million in order intake that was not announced, which means that no order were greater than SEK 20 million. There is a lot of smaller orders from existing customers and programs that are continuously coming into us. So each program is still alive, and we do get orders from them on a regular basis. Okay, just the last one on the operating expenses. They are a little bit lower now in Q4. Are there any positive one-time effects, or is this just that you are having a little bit lower investments from now on? No. The technical nature, in the same way, where in Q2, we had a little higher operating expenses due to the fact that we accrue for vacation payment to staff. In Q4 2018, our salary payouts were a little lower than expected due to the fact that we did not meet our own internal targets, and therefore, for instance, bonus payments are much lower. So these are some of the internal effects that we have. Okay. Thank you. Welcome. Once again, for any questions, please press star and one on your telephone. We also have a request from the line of Joey from SEB. Please go ahead. Hi, it's Yiwei from SEB. Thank you for taking my question. A couple questions from my side. I'll start with two. Firstly, you mentioned there would be more product launches in 2019. Could you elaborate a bit on this? Is it within the new product category, or it is your existing product category? Then on the new product Intercom system, you're saying still doing environmental tests. How could you receive the order, I guess, with a couple million, before you have finalized or passed all the tests? Thank you. Good questions. On the first one, I would say that, without revealing any details to competitors, I would say we have a number of product launches coming in both our existing categories as well as within the Intercom system area. That is as much as I will say at this point, but we have, I think, a very exciting year ahead of us with a number of new things coming. When it comes to the order for the Intercom system, I think we have, as I tried to describe, a very high interest for the new product we have made. In this particular case, there is a customer who has been putting money aside for a certain project that they have in 2019, and they have been willing to put an order in with us even before they have the final product in their hand. They have very high faith. It is one of our existing customers that have been using our other products for many years. They have high faith in us, and they are willing to put in an order before they have seen the final product. They do, of course, know what we are delivering. As I said, we are in the final stages of fine-tuning the product, which means like any other very advanced electronic product, there is always some software upgrades, changes, debugging that needs to take place when we do our very final test. There is also environmental tests which are related to the different military standards that exist. We are doing that always externally to make sure we comply with all different test requirements. We see, again, the product will be gradually introduced during 2019 to the select customers that we know are very interested, and then a little bit later in the year, it will become generally available to a broader audience. Okay. I just follow up on the new product launches. You mentioned a couple of products in both existing and new product category. Is it fair to assume you have built a product together with your customers, or we should be expecting something completely new, or you want to introduce to the market? No, I would say that the completely new stuff is, of course, the Intercom system category. But the other things we do is a continuation of our total and expansion of our current product portfolio. Everything we do is in close collaboration with customers. We are very good at working with our customers. We have a very deep understanding of the environment they operate in. All new features, all new products we do are always based on customer input and feedback along in the development process. Yes, it is based on customer feedback. Okay. Just for me to understand this, the first order on Intercom system, is it fair to assume you said the customer has set the money aside for the product. Yeah. From what I understand, this first order you received in Q4 is already in your order book? Yep. Okay. This is conditional or it is confirmed order? Confirmed. Okay. Fair enough. Yeah. Right. Okay, cool. I have two more questions, you have time? Yeah. One is on the R&D capitalization. I can say that's increased significantly in Q4. I guess that also helps on your EBIT margin in the quarter. What is the rationale behind this? You say it's 9 million SEK in a quarter, and last year same period, you had only 3 million SEK, and that is three times. Could you elaborate a bit on this? Basically, as I said, we have invested historically high in product development in 2018, and the numbers in themselves are, of course, related to the IFRS rules about how you activate and so on. This is only to confirm that development in totally new products is at a historic high level at this point in time. For instance, if you take an example, when we develop something completely new, we should activate a very large part of it. If we do a modification to an existing product, then we do not activate on it, and that's according to the rules. The fact that activations are high is due to a very high level of new product developments. Okay. This increased R&D capitalization is related to the modification on new upgrade of your existing product which will be used in 2019. Is it a fair assumption? Not modification, new development, completely new development. Okay. From what I understand, normally, if you have early-stage R&D and you have to expense it, but if the later stage with higher visibility, then you are allowed to capitalize it. Is it the case here? Right. Now you can increase your capitalization in Q4 this year. It's close to the launch. That's why you have- Do you want to comment on this, Thomas? Yeah. We have started a lot of new products. This is Thomas Larsson. We have started a lot of new projects, and that's why we can activate them all. We can also say that we've always been very conservative and not trying to get more activation than absolutely possible. You should only see this as an indication that the development, as I said, of new products is at a very high level. Also related to the fact that we have because most of the activation is of course also related to new people that we get on board that work on new products. Okay. Amortization for those capitalized development costs is the same compared to last year? Yeah. Okay. They could then be higher going forward once we start launching products. Okay. All right. It will be back to normal level, after you launch it, right? The capitalized development costs. Yeah, unless we decide to start doing more new products. Let's see about that. Okay. All right. Thank you. The last question, the leasing accounting, the IFRS 16. The financial statements you provided in the report, is it reflected the new standard, the IFRS 16? No, it is not. Okay. Then you will update, from Q1, I guess? Yeah. Okay. Fair enough. Thank you. Then I am good for now. You are welcome. As a reminder, ladies and gentlemen, for any questions, please press star and one on your telephone. We have a question from Mr. Aberson. We do not actually have a company name here, so please, Mr. Aberson, please state your company name. Please go ahead. Hi, this is Jesper at ABG. I just had a question regarding the tender from the US Marine Corps. Have there been any updates on that? Do you expect to receive orders during 2019 or is it probably in 2020? Thank you. So far there is no update that we can communicate around. They put out the RFI. We have responded to the RFI, and for the time being, as we understand, they are reviewing the RFIs and are looking at what the next steps will be. Great. Thank you. You're welcome. As a reminder, it is star and one for any questions. We have no further questions at this time. Please continue. That concludes the presentation of Q4 2018. Thank you everyone for listening in, and have a great day.