Earnings Call: Q2 2018

Aug 17, 2018

Summary

Q2 sales rose ~11% YoY, order intake reached ~SEK 115m and gross margin exceeded the historical 50%–55% range. Intercom pilots were possible by year-end 2018, with significant sales expected only well into 2019.

Thank you very much, and welcome everyone to our Q2 update. We saw a very good quarter in terms of increased sales and strongly improved gross margin compared to the same quarter last year. This is a result of the very strong position we have in several key countries in NATO and the long customer contracts that we have. We also saw during the quarter that we continue to invest. We will get a little bit back to that, but we continue our planned investments into both product development and market development in anticipation of future growth for the company over the coming quarters and years. If we go to page number 4, where the numbers are, as I said, our sales grew with about 11% under the quarter, and we had a very good order intake during the quarter from existing customers and contracts. Net orders intake was about 115 million SEK and came from North America and key customers in Europe mainly. We have changed our, say, modus operandi when it comes to press releases on orders. During the quarter, we only released one press release, which was regarding the Security Force Assistance Brigades in the U.S., that they gave us a new order again for about 20 million SEK. That was the only order we announced during the quarter. As I said, going forward, we will not announce orders unless they are of a significant size or of a very strategic importance. We do have a lot of customers and contracts now that give us orders on a running basis. Again, unless it is significant or very high, they will not be announced going forward. Our gross margin was significantly higher than last year. Last year, we were a little bit impacted by some third-party products that had a lower gross margin. In general, you can also see that our gross margin have improved over the last year. Most of that is due to the fact that we now sell a larger portion of our product directly to the users through our own sales offices in U.S., France, Italy, and in the Scandinavian area. We see that continuing. We do anticipate a good gross margin also going forward. We have always said that we would be somewhere between 50% and 55% gross margin. It is clear to everyone, seeing the numbers, that we are above that now, and we would say that this is due to our direct sales model, and we do expect to see sound gross margins moving forward. As you will notice, we have increased costs during the quarter related to our growth initiatives within R&D and in the markets. We do have some of the OpEx in the quarter being a little bit, I wouldn't say one-off, but they are a little higher than usual due to the fact that we have, first of all, two very large trade shows in the quarter, SOFIC in U.S. and Eurosatory in Europe in the same quarter. Two of the very biggest trade shows we have, which is a heavy expense. We have also had very high activity during the quarter in terms of travel activities and samples. For certain customers' activities, we do provide significant amount of samples. We are required to provide significant amount of samples free of charge for their testing. So sometimes that impacts us a little more than in other quarters. As you will also see, we, during the quarter, announced a new stock option program for our employees, which also had some one-off costs associated with it. But other than that, it is in line with our expectations and our internal plans because we do believe that we have significant growth ahead of us that we should be well prepared for. That is also why the inventory value temporarily is higher than usual, because we are anticipating certain deliveries in the second half of the year where there are long lead times and a lot of components that needs to be coordinated. Therefore, we have decided to be prepared and increase our stock somewhat in anticipation of those deliveries. Turning to page 5, you have the usual trend graphs over sales development, rolling 12 months on the sales side and the order backlog. We had about 148 million SEK in the backlog at the end of the quarter, about the same level as last year, but please remember that sales has gone up also, as you see on the sales graph. On page 6, I would say that from the big trade shows we participated in, SOFIC, Eurosatory, and also the many meetings we have had with customers during the first half year of 2018, it has been confirmed that INVISIO has a very, very strong position in the market. In the major NATO countries, our systems are now fielded. They are being used, and the feedback we get is very positive. That is also why the customers keep coming back and giving us new orders under the existing contracts. And we are certain that our systems will continue to be fielded into new programs and to more customers over the coming quarters and years. We do have a very strong position, and we do not see anyone that has threatened our position in the first half of the year. On page 7 is a slide that you have seen before, but we just want to repeat that we are in a business of modernizing soldier communications and in an area where there is a high need for better hearing protection and reducing the cost associated with hearing loss and hearing damages. And we are definitely in a strong position to be part of that trend. The market is still in its infancy. We have only penetrated a very small amount of the total market, so we do see significant opportunities over time. But we also always remind you that the order intake and the program activities is somewhat lumpy. It does vary a lot, and there are often delays or very long decision times, testing times for each program. So it is always difficult for us to predict exactly when orders will arrive. But we continue to expand on our business. On page 8, we have the picture of our current system on the left with our control units, our headsets that are primarily aimed at users on what we call dismounted activities. And on the right-hand side, we are trying to create a new circle with our new product category for communication in vehicles and aircraft and boats and so on. And the two platforms for dismounted and mounted communication gives the user a system which is absolutely unrivaled in the market. We will bridge the gap between the dismounted and the mounted soldier and giving them the opportunity to communicate seamless wherever they are. On page 9, our new product category for communication in vehicles, as I mentioned, the INVISIO Intercom System is under development. A lot of work is going on inside the company. I will not give too many details on where we are, but only say that we expect it is possible that we will get a few small pilot orders before the close of 2018. We do mean small pilot orders. We do not expect any significant business from these new products until we get well into 2019. It is a long-term opportunity, but it is definitely a very attractive opportunity for INVISIO over the coming years. In parallel, as you see on page 10, we continue to develop our current portfolio of products. We have now added a new control unit called V10, which is a product that has been requested by several users as a single radio PTT. It is very rugged, easy to use, and it is a product that you can use in all situations. Everything from jumping in a parachute, being under pressure in the air, to going underwater when it is a different kind of pressure that the product needs to endure. We have seen that many customers actually require this type of product in addition to what we have. Some customers will buy this as their own solution. Other customers will buy the V10 as an addition to a V60 or a V50 or something that they have already. We see very good business opportunities as part of our total system for the new V10 control unit. It has been very well received both at the SOFIC Trade Fair and at the Eurosatory Trade Fair in Europe. Finally, on page 11, something that is not a sales opportunity for us, but still something that we are very proud of. As some of you might have seen from a press release this week, we were asked to help the crew and Tom Cruise in the filming of the latest Mission: Impossible – Fallout movie, where there are some very dramatic and difficult stunts, both with HALO jumping and helicopter, where communication is very difficult. We were asked to, based on our technology, to create a special headset for Tom Cruise and some of the crew members, and they were able to record these difficult scenes and have a crystal clear communication. The sound engineer on the movie was a gentleman called Chris Munro, a double Oscar winner. I have been informed that he also has a site where there is a lot of behind-the-scenes information and how did we do information, where it is possible to see how the INVISIO headsets contributed to shooting of the Mission: Impossible – Fallout. Page 12. Our continued focus in 2018 is on the continued expansion of our business. We are continuing to build on our strong position in our key markets, and continue to spread our wings into more countries and more areas, that we will follow up on in all the coming quarters as the information flows into us. As you know, we have for a while also had activities in new geographies, like Middle East and Latin America and parts of Asia. And there will be continuous updates on that once we see some of the first good results coming in. With that, we have been through the presentation as we intended. Operator, we are ready to take questions. Most certainly, sir. Ladies and gentlemen, if you would like to ask an audio question, please press star one on your telephone keypad. Today's first question is coming from Mr. Viktor Westman calling in from Redeye. Please go ahead, sir. Your line is open. Good morning, gentlemen. Thank you for taking my question. Morning. First, I want to touch on the TCAPS, if you have an update on what is going on there. There has been a bit of a radio silence there for a long time now. I think what the reason is that, first of all, we have fielded more than 30,000 TCAPS systems that are being used around the globe by the different brigade combat teams. After the new administration came into place, there was a shift in people and command, and we have seen some effect of that. I think also that the newly formed SFAB units have been given priority in the first part of 2018 as opposed to TCAPS. We have been seeing good business from the SFAB units with products that in performance and so on are similar to what TCAPS buys. That is the update we have at this point. Mm-hmm. Yes. Great. Can you also comment on your investments and maybe give a bit of how the proportions are there? For instance, how much is the INVISIO Intercom System solution and how much is other stuff? Any color would be great. What do you mean in terms of investment? Yes. What do you mean, Victor, the investment? I would only say that Yeah I will not give you any numbers, but I will say that the development of the INVISIO Intercom System is a very significant investment. It's probably the biggest development project we've had in the history of the company. We are putting very significant resources into that. We are also putting very significant resources into the sales and marketing of this new category of products. It is definitely a big thing for us, the biggest project that we have been involved in so far internally. Mm-hmm. Okay, great. Last one from me then. Are you at the moment in procurement related to the intercom? Well, yes and no. As I said, we don't expect more than a few smaller pilot orders at the end of the year, and that's basically also because we are not able to deliver volumes before sometime in 2019. The reason is, of course, that there is a lot of back and forth finalization and testing going on. This product contains a huge amount of software, which is new to us to the extent that this product has. There is a lot of development work that needs to be verified, get some customer feedback, then we modify a little bit, then we send another version out for further test and evaluation. It is a back and forth thing for a period of time until we say that now the product is finally ready. In the meantime, we of course have discussion with potential customers about what the product can do. We have received a lot of positive feedback. At the point in time when we are able to provide, I would say, almost finished samples, I'm sure we have a lot of customers in all geographies that would like to try. When that happens, we also know that the lead times are long, as they always are in this industry, and that's why I said that even though the interest is very high, we do not see any major orders until we come well into 2019. Thank you very much for that color, Lars. Very much appreciated, and keep up the good work. Thank you, Victor. Thank you, Mr. Westman. Ladies and gentlemen, once again, if you wish to ask any questions, please press star 1 on your telephone keypad. We do have a question coming in now from Mr. Victor Sorcell, calling in from ABG. Please go ahead. Thank you for taking my call. I have a question regarding the OpEx level in this quarter and going forward. You touched upon that some of it was not maybe one-offs, but close to it. Could you elaborate a little bit more on that and what we should expect going forward in terms of the OpEx? My personal quick guess or estimate is that maybe SEK 3 million-SEK 5 million are a little bit above normal in this quarter due to some extra activities in sales and marketing and the reasons I mentioned around stock option program and so forth. Going forward, we do not give any guidance for the cost levels, but I would not expect it to be higher than what we are now, probably lower. We have also said that we are not shy of adding additional resources where we see a benefit. If we do see an opportunity based on a customer request or based on a sales opportunity, or if we need to do something extra on the R&D side, we will do that because we know that the long-term opportunities are there. We do need to take those investments when they are needed. I don't see any increases in the quarterly running rate over the next six months. Okay, understood. A last question. Here in Q3, have you seen an increased competition regarding any procurements? No. Okay. Nothing Not increased. No, nothing more than usual, or? Nothing more than usual. I think that, as I said, again, we have been confirmed in our belief that we have a very strong position right now, and that we have a very strong offering to the market. We are, of course, always on the outlook for what new potential competitors can bring. We also think that competition is good in terms of bringing the total market forward. But again, due to the long contracts we have, due to the fantastic product solutions we have, we are definitely sure that our position is very strong in the market. Okay. Yep. Thank you very much for your answers. You're welcome. Thank you much, sir. Ladies and gentlemen, once again, as a reminder, please press star one for questions. We do have another question coming in now from Mr. Henrik Fed, calling from C WorldWide. Please go ahead. Hello. One question here. This inventory buildup here is pretty big. How much is coming from the intercom and how much is from orders you can see here in the normal business here in the second half? All of it is related to our existing products. There's no buildup related to intercom. This is all for our existing business. This is, as I say, in anticipation of deliveries that we need to make in Q3 and Q4. Due to the fact that our customers now often request that we deliver a full system in a bag where there's products and cables and everything, then we need to make sure we have everything ready when the customer wants delivery. We are just doing this to prepare and make sure we can deliver on the dates where the customer is asking us. All of this is done in anticipations of orders that we either have received already or that we expect to receive in Q3. This is just part of our business that we need to be prepared for this. There is no risk with this inventory. It is all fresh and fine products that are ready to ship. My second question is regarding your order intake here. You only announced one order to the U.S. here, and then you have around SEK 85 million of unannounced orders here. Yeah. Could you talk a little bit about the size of the orders and how much is spread around? I can see you have had a fantastic year in Europe here. Could you talk a little bit what countries it is and et cetera? As we say, we now get continuous orders from many of our long-term customers. We have been getting orders from programs in Europe, and I would say the size, there is a couple, three orders in the around SEK 20 million area. Then there is also some smaller orders, of course, from existing customers and from new customers. I think we have seen a good mix from different customers in Europe especially, but also some in North America. We are quite pleased with that. We also expect this to continue because we have said that the long-term contracts we have with these customers, they do actually continue to buy from these contracts. It might be a little different from quarter to quarter, but all the customers will continue to buy on the contracts that they have with us. Sometimes at the end of their fiscal year, sometimes in connection with that, they have an activity they need to do, or they are allowed to buy some more radios or so on. But we will see continuous orders from all the programs we have, whether it's in Canada, in the U.K., in Australia, in France, in the U.S., and Denmark. They all continue to order products. Regarding the intercom, you're stating that you'll see the first pilot intercom orders here in 2018. Yes. What revenue should we expect from a pilot order? Very small. I can't tell at this point, but it's small. It's nothing you should consider in your models at this point in time. Take it as a positive surprise if it gets more than you think, but don't put any big numbers in at this point in time. When you make such a big investment here, do you have some commitments from some of the armies around that they are interested in this intercom? Yes. The interest is definitely there. That is for sure. We also know that it takes time, and they cannot give us any commitment until they actually have a procurement process. Many of them will not be allowed to buy without having an official tender process, so it will take the usual time. This is a new product category, so it could take a little longer for their testing and all the different documents they need to do. There is no doubt that this is a product that has really given big interest because it is a new category, and we made it based on users' input and what they told us they would need. I think it is without a doubt that this would be a very interesting area for us over the coming years, but it will not be a big boom splash from the beginning. It will, as usual, take time. As we have said several times, we believe this area over years will be at least of the same size as our current business. Thank you. Welcome. Thank you much, sir. Ladies and gentlemen, once again, if you wish to ask any questions, please do press star one. As we do not have any further questions, I would like to turn the call back over to Mr. Lars Højgård Hansen for any additional or closing remarks. Thank you. Thank you very much for participating and for your questions, and looking forward to talk to you after the Q3 report. Thank you.