Earnings Call: Q1 2020

May 6, 2020

Summary

Q1 revenue rose ~75% YoY to nearly SEK 117m, while operating margin reached 12.3%. First intercom deliveries began, and COVID-19 disruption remained limited as the business continued investing for growth.

Thank you very much, and welcome to our presentation of the first quarter 2024 INVISIO. As an introduction, I would just let everyone know that at our annual meeting yesterday, it was decided to change our company name from INVISIO Communications to INVISIO, simply INVISIO. Going forward, we will only refer to INVISIO. We can report continued good growth for the first quarter and also a significant event in terms of having delivered our first intercom systems. If we look at the numbers on page 4, our revenue amounted to almost SEK 117 million, which was a growth of about 75% compared to last year. It is actually the highest revenue number for a first quarter in the history of the company. We have to remember that first quarter last year was quite weak, so it is not a totally fair comparison. We are off to a good start. Our gross margin was a little bit lower in the quarter than normal, and this is due to one particular order, where we had to sell with a little lower margin due to some previous commitment with this customer. All other deliveries during the quarter was made with gross margins above 60%. We sometimes have deliveries of third-party products or certain run-offs where we have to accept a lower margin. In general, our gross margin is above 60% now. This gives us an operating margin for the quarter for about 12.3% compared to 2% in, as I said, the weaker quarter last year. We continue to invest in R&D and sales according to our plans and our strategy, that I will come back to in a minute. This has been a pretty much normal quarter for INVISIO. Our order book was about SEK 125 million at the end of the period. Order intake during Q1 was also reasonably good, about SEK 90 million. Turning to the next page, we can see a continued good development in sales over the last five-year period. In fact, our growth on average has been about 20.6% in revenue. On page 6, we have the usual update per quarter for a longer period of time, where the main point is that our order intake and sales fluctuates greatly between quarters. Once we look at the longer perspective and we calculate the rolling 12 months average, we can see a relatively stable and positive development, both in our revenue and also in the order intake. We have also to remember that since 18 months ago, we operate a little bit differently in the sense that we have decided to keep a somewhat higher stock level to be able to deliver to customers a little faster. That means that our normal order backlog is not as high as it would have been if we did not have this stock. In the current situations, in the COVID-19 situation, this stock of components and products has proven to be a good thing for INVISIO, for us to be able to still deliver timely to customers on key orders. On page 7, we, during the quarter, received another order from the US Army Security Force Assistance Brigade, called SFAB. This time for about SEK 36 million, and these products will be delivered during the second quarter. This is a very prestigious customer for us. We have now continuously been delivering to them for the last 2 years at least. It is very good for us to see that they keep coming back with more orders, and they are apparently very pleased with what we have delivered to them so far. The intercom, as many of you know, is a highly prioritized new product category for us that we have been working on for quite some years. We did a new announcement of the product late last year, and we have now finalized the product. We are in the sales startup process, and we have initiated several tests around the world with key customers where we are initially trying to address those customers that already use INVISIO products in terms of our hearing protection systems. During the first quarter, we made a delivery to a defense force in Europe. This is a customer that has participated in the development of the solution, and this order was actually received already back in 2018, so the customer has been patiently waiting to get delivery, which now happened in Q1. In addition to that, we received a smaller order from a European special force customer. This is also a customer that is already using INVISIO's equipment. We have a good list of current customers, existing customers lined up for testing of our intercom system as we now roll out on a broader scale, and we will do that during 2020 and onwards. This means continued investment in marketing and sales activities for the intercom system. We are, as said many times, certain that the intercom system will over time develop into a broader product portfolio and it will contribute to the company's continued growth over years to come. We also know that it takes time, and therefore we are still cautious and say that the first orders or next orders for intercom will probably not be until the second half of the year, and they will still be smaller orders in the beginning. On the next page, we have a little update regarding what is affecting the entire globe right now, the COVID-19 situation. INVISIO is in a very fortunate situation that we experience only few negative effects of the virus, and we believe that, as it looks right now, the effect on our operations is quite limited. But of course, if this turns out to be a very long pandemic, we cannot rule out any changes and any more negative effects to us. But right now, we are only mildly affected. It is mainly things like trade shows that have been canceled or postponed. Of course, we do not have the possibility to visit customers as we normally do, but in a situation like this, being the market leader that INVISIO is an advantage. We are well known, our products are well known, and we still have our normal contact with our customers. It is now conducted over phone and video conferences, but still all activities are running. All our manufacturing partners are also running as close to normal as possible, and the supply chain system is well functioning. There has been some smaller delays in certain shipments from one region to another, but it is not more than we are able to handle and plan for. As I said, we have a good inventory in terms of both components and finished products. So we are well prepared for handling deliveries of certain size over the coming quarters. Last but not least, INVISIO has a very strong financial position, and we will use that position over the coming period of time to reinforce our market leading position. We will continue to invest in our growth strategy as we have done over the past years. The strategy, as you see on page 10, includes a number of activities where we, first of all, want to increase our market share in existing markets, not only winning more contracts, but also increasing sales to the contracts that we already have, the customers we already have. We will continue to use our innovative skills to broaden our product portfolio in both existing products but also, as I said, in the intercom area where we see that turning into a full product portfolio. We will address new user groups. We have started that already in terms of focusing more on law enforcement and security, and that will increase. New geographies is also extremely important, and we have seen the first small orders from parts of Asia, and these areas will continue to play an important role for INVISIO's growth. Last but not least, our cost effective and sustainable operations are really the foundations of how we run INVISIO, and this is a very important part of continuing to being in a good competitive situation in all markets and geographies. So, in rounding off, we see 2020 as a year where we will continue to follow our established strategy. We will continue to invest in product development and organization development, and especially in R&D and sales. We had a very strong 2019 with some new contracts and collaborations, and we believe that we have a good, strong foundation for continued growth. That concludes my presentation, and operator, I am ready to take questions, please. Thank you, ladies and gentlemen. We will now begin the question-and-answer session. As a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, please press star one if you wish to ask a question. Your first question comes from the line of Viktor Westman. Your line is open. You may ask your question. Hi, guys. Congrats on a solid quarter, and thank you for the questions. Okay. First, in your annual report, you wrote that military budgets are increasing. Can you just provide some more color where you see this and how large the growth is that we are talking about here? Well, yes. I think this is a clear message that we get from our sales teams around the globe, without going into, and we have not quantified it or gone into details. But I think it is very clear that both in the U.S. and also in Europe, we see not only overall budgets increasing, but also the focus that countries have in the communications area is increasing. So we can see that the interest in getting new modern radio communications equipment, and therefore also our hearing protection systems, is on their radar for investments over the coming years. So it is definitely a trend, but we are not able to quantify it in numbers. Yes. Okay. In your old programs in Canada, Australia, U.K., et cetera, would you say that these rollouts are, in essence, finished now or do you think there is more to come from here? Yes. It is a little bit individual, but I think they are. As a thumb rule, they are continuing, and some will be prolonged, and some will wait for a while and then maybe continue. So I think that they are all still running, as far as we know. Some have been updated, like the one in Denmark was prolonged with another five years a couple of years ago. So, yeah. Yes. Just on the intercom on your two new customers there, these are the two first movers. I am just trying to understand what was the deciding factor for them to be first with this. Why was it so important for these two? Of course, first of all, they have a long experience with our products already, and therefore they can see the benefit that they get from the intercom. Secondly, they were on the list of our top customers that we would like to start fielding with. They do have an operational need where they can see that our intercom system will help them. So they are now buying some units to really try it out over a period of time in those operational environments. So you can call it pilot orders if you like. They do have an operational need. Yeah. Is it fair to say that these customers are the creme de la creme of the special forces, the Navy SEAL Team Six and all the like stuff? No, I don't think that would be fair to all our other customers, because I think we have many customers. But they are in special forces, and special forces are the ones that we have decided to address first with the intercom. So that has also been the way we introduced our hearing protection systems some years back. So this is very natural that it is the special forces that we address first, also because they sometimes have a little shorter decision times, and they can start with a small amount of products to try out in their environment. So yes, they definitely belong to the top of the line. Okay. Last question on the inventory, if I may. I saw it increased a bit again here. I assume this is related to you guys being cautious and building some inventory due to the coronavirus. Can you just say something how you think about the inventory going forward? Will you continue to build more inventory? I think we work with the inventory in a way that, first of all, we can say that everything we have in the inventory is sellable products. Fortunately, there is no seasonality or color or anything that we have to account for in our business. Our products are standard products, so we can have a stock without being afraid of not being able to sell it. Then we always try to look ahead for two or three quarters and see where we think we might get orders from, and then we try to prepare for that by ordering certain components and products to have in stock so that we are prepared if those orders come as expected. That's why our inventory will go up and down a little bit quarter by quarter, depending on what we are preparing for. But also in these difficult situation, these times with the coronavirus situation, it is a huge benefit for us to have our own stock and that we are able to deliver even smaller amounts of products with a short lead time. Mm-hmm. Okay, understood. Thank you so much, Gary. Welcome. Next question comes from the line of Guy Tronwell. Your line is open. You may ask your question. Yeah. Hi. Good morning. Thank you. Just a quick question on manufacturing. With your manufacturing partner, have they had any issues in terms of their operations with coronavirus or having cases of it or having to shut down at all? Can you just give us some color on that, please? Thank you. Okay. Good question. No, I would say we are very fortunate because, first of all, majority of our manufacturing is in Western Europe, and I will say we work with large, very professional contract manufacturers. All of them very early started initiatives to be prepared for the coronavirus situations once they heard of it. So they've all very early implemented hygiene rules and making sure everybody is sitting with distance and so on. So the report we get now actually is that they have, in some instances, actually seen less sickness than in normal years because all the normal flus and the normal colds are nonexistent since they have implemented these hygiene rules and keeping a distance. So I would say that all our manufacturing partners are running at normal capacity as it relates to our products. They might have reduced their capacity because of some of their other customers not being in the same situation as we are, but the capacity related to INVISIO is intact. Okay, great. Thank you. Welcome. Next question comes from the line of E. Ray Zhao. Your line is open. You can ask your question. Hi. Thank you for taking my question. Lars, could you give us an indication on the public tender activities for this year? Especially considering the uncertainty amid the COVID-19 pandemic. I think that as usual, I will be boring and say that, no, we will not talk about the coming tenders. The only thing I can say to try to respond is that we don't see any change in the tender activity as it stands today because of the coronavirus. For us so far, it is still activities as usual. So no indication that anyone has canceled programs or done anything of the like because of the virus. Okay, thanks. Second, I have another question regarding the product testing. Could you give us an indication on what's going on in the U.S. at the moment? Is also your salesperson cannot go into those base and help them to test the new product? It's a little complex because it is different from state to state. Some states are almost open as normal, and other states are more closed. It's a little bit different. But in general also, many people have been working from home in the U.S., but I would say the feedback so far from our U.S. team is that they still have their sales meetings and calls, which is then done electronically instead of physical. But there is certain of our sales teams that are able to visit customers still as usual. Again, I think that we benefit from being the market leader because we are well known, and we are able to talk to a customer electronically and send samples as we normally do, and even do some instructions and demo electronically. We are still in a good shape. Okay, great. Thanks. I'll jump back to the queue. Thank you. Your next question comes from the line of Henrik Hviid. Your line is open. You may ask your question. Hi, Lars. Hi, Thomas. Two questions. Could you talk a little bit how the implementation of your products in the Swedish police office is doing? The second question in this context is how does the pipeline look in the law enforcement global? Yes. Good question. Thanks, Henrik. I would say that we have delivered the first shipment to Swedish police to different locations around Sweden, and then training is ongoing. Once these different units are receiving equipment, then our team will visit, and we will train or train the trainer and help them implement the product. So far it is going very well. As with all types of equipment, there is always the need for training. Our products are quite advanced, and there is a need for somebody to be there and have a training session in the beginning. But so far, it is looking good. In general, for law enforcement, as we also indicated when we did the update of the market size before Christmas, we do have a positive view on law enforcement and security going forward. We can see that there is an increasing need for our types of products, that they are also getting modern radios, and they are getting more funding. Both in Western Europe but definitely also in the U.S., there is a lot of opportunities for us in law enforcement. We will continue to have, I would say, probably an increased focus on law enforcement going forward and making sure that we capture all the opportunities that we see there. But you don't have pipelines like you see here in the second half that you can- Not in the same way, because it's not driven by large tenders. It's more driven by smaller programs and individual groups and so on. Yes, I would say that when I look at the number of quotes we do to police customers globally, that is definitely increasing week by week. So the pipeline is definitely-- But it's not. A million EUR is a large order for law enforcement at this point in time. It's not EUR 10 million orders we are looking for law enforcement in the shorter run. But the pipeline is definitely there, and it is increasing week by week. Okay. Thank you. You're welcome. Once again, please press star one if you wish to ask a question. That is star one if you wish to ask a question. There are no further questions at this time. Please continue. We will conclude the session for today. Thank you everybody for calling in, and hopefully talk to you again at the event of our Q2 report. Thank you.