Earnings Call: Q1 2018

Apr 26, 2018

Ladies and gentlemen, welcome to the Tobi Abe Conference Call. For your information, today's conference is being recorded. At this time, all of your lines are in a listen only mode. However, a question and answer session will take place at the end of today's presentation. At this time, I'd like to turn the call over to your host, Faber, Henrik, Eskelsen. Please go ahead, sir. Thank you. Hi, everyone, and welcome to Tobey's Q1 report. I am Henrik Asgeson, and with me is also our CFO, Johan Bilspur. Let's move to the next slide, please. We've had a good start to the year, and 2018 has started out really well in all three business units. Tobii Pro showed amazing sales growth in the Q1 and a high EBIT margin. Tobii Dynavox is now back in growth, driven by the new touch devices and the software that we launched in 2017. And Tobii Tec continues to have great momentum in the VR segment in particular. Let's start by going through Tobii Dynavox in a bit more detail. As you know, Tobii Dynavox is the global leader in assisted technology for communication. Each quarter, we help several thousands of new users to speak, to access computers, participate in school and work. Simply put, to do what they once did or never thought possible. As we've talked about many times before, there is still a huge unmet need for assistive technology for communication that is adapted to individual needs and conditions. As one of our tens of thousands of users, if you have the time, please check out Michael and his story by clicking on the link on this slide. Inclusion and improving accessibility in the broader sense is a strong fundamental trend in society. And even though there's only a limited number of companies that are serving this market with dedicated solutions, the concept of accessibility is gradually becoming embraced and incorporated into workplaces, into schools, into government policies as well as in mainstream consumer and enterprise products and solutions. And all of this together contributes to driving awareness and large scale inclusion. One positive development in this context is Tobi's relationship with Microsoft. Microsoft is highly committed to making their solutions accessible to everyone. And a recent result of this collaboration is that Microsoft is integrating Tobii Dynavox Symbols in Microsoft Word Online and Outlook.com, for instance. And this makes documents in the software accessible to users who benefit from symbols to help understand the meaning of words in the documents. For Tobii Dynavox, this is not in itself a major revenue stream, but it helps establish our huge symbol library as a de facto standard among users and professionals in the accessibility industry. Next slide, please. Tobii Dynavox has turned a corner and is now back in growth, which is great to see. In the Q1, sales overall grew by 4%, adjusted for currency effects. In particular, we continue to see very positive market response to the new touch devices and software that we launched in 2017. In particular, quantities of sold touch devices is growing rapidly, and we're clearly gaining share in this segment of the market. To gain full effect from these new products across more geographical markets, we're making extensive efforts in localizations of the software and language systems. Until now, the new products have only been available in English. In the Q1, we launched Snap and Core First also in German and Spanish. And during 2018, we plan to add over a dozen additional languages. We also continue to drive innovation and invest large resources in product development in Tobii Dynavox with the aim to come out with several new and important new products in both touch and eye tracking segments during 2018. Johan, over to you and a quick look at the financials for Tobii DynaHawks. Thanks, Henrik, and hi, everyone. Before we start out with our financials, I do want to clarify that our Q1 report follows the new accounting standards, IFRS 15 and 9, and you can find more information about these in the disclosure part of the interim report. And this means that we are presenting restated financials for 2017 aligned to these new standards. As Henrik mentioned, Tobii Dynavox are now back in growth mode following the turnaround in Q4 of last year. Adjusted for currency effects, revenue in the Q1 grew by 4%. Gross margin was down 1 point year over year, but up compared to Q4 2017, where we had some non recurring items. Our operating expenses were influenced by some resource investments, but cost control is present. Growth in expenses adjusted for FX was 6%. The Q1 EBIT margin was slightly down compared to previous year, partly affected by the lower gross margin coupled with increases in R and D. Over to you, Henrik. Okay. Let's move to Tobii Pro. Tobii Pro provides comprehensive eye tracking solutions and services that enable thousands of commercial companies and academic research institutions to gain unparalleled insights into human behavior, consumer responses, experiences and performance. Tobii Pro is the undisputed market leader in this space with a global market share over 60%. Next slide. Tobipro continued a very strong and rapid growth trend that we've seen in the past quarters. In Q1, we even beat the strong growth of Q3 and Q4 of last year, and sales grew by a fantastic 6% over Q1 of 2017 adjusted for currency effects. As in previous quarters, there are numerous factors driving this outstanding growth. Awareness and demand for eye tracking insights is growing rapidly across a broad spectrum of segments and industries. A very strong products and services portfolio is driving both market growth and increasing market shares. And the departure from the market of our former competitor, SMI, has given us a strong additional boost in this quarter as we've been successful in capturing a large portion of their former business. Next slide. In the Q1, we acquired the 2 sister companies, Acuity ETF and Acuity Intelligence. Acuity ETF has been Tobii Pro's largest reseller for many years and Tobii Pro's sole channel into the strategically important U. K. Market. Acuity Intelligence is a thought leading eye tracking consulting services business. And by acquiring these companies, Tobii Pro is strengthening its global presence in both sales and services by adding a direct sales team and our own services branch in the U. K. Market. And in addition to being a large market for Tobii Pro in itself, the U. K. Is also home to many multinational global brands, which we will be able to serve more effectively going forward, thanks to this. Through this acquisition, we also obtained an important software for doing eye tracking analytics inside VR environments developed by Acuity. Eye tracking research in VR is an area that is projected to grow significantly across a broad range of enterprise and academic research applications. We see a lot of opportunities to drive long term growth in telipro and are investing in further scaling up both our R and D team and global sales, marketing and services organizations. Johan, over to you. All right. So Tobey Pro continued its strong growth trajectory from 2017 with another great quarter with revenues increasing year over year by more than 60%. We continue to experience stellar growth in all our segments and geographies. Gross margin came in at 74%, down 1 point from last year, but actually up 1 point sequentially. Operating expenses grew materially investments both in sales coverage and product development. The acquisition of Acuity was a discrete increase in resources and hence expenses. We saw a significant improvement in our EBIT margin compared to last year. 16% margin in the quarter was driven by the strong revenue performance, some scalability, but also temporary effects in our ongoing investment areas like R and D and sales. This means that some planned growth in operating expenses will occur in coming quarters instead. So back to you, Henrik. All right. Thanks, Johan. Moving over to Tobitek. Tobitek is the world's leading supplier of core eye tracking technology. Tobitec sells and licenses eye tracking technology in the form of system designs, algorithms, platforms, ASIC chips, sensors and cameras, applications, software and IP. Next slide, please. In Tobitec, we address several very large opportunities. Core focus in the near to medium term is to build up a solid business in supplying eye tracking technology to consumer PC gaming, virtual reality and a range of niche customers. In the longer term, we're convinced that eye tracking will be a major technology across a large portion of all PCs, tablets, smartphones and VR and AR devices. Next slide. So called stand alone or mobile VR headsets are a very exciting new part of the VR market, and this is believed to become the biggest driver of growth in both the VR and AR device markets going forward. Qualcomm is the processing platform of choice for the major standalone VR headsets, including recently announced devices as Oculus Go, HTC Vive Focus and Lenovo Mirage. In March, we announced very exciting news as Tobii and Qualcomm have collaborated extensively to integrate Tobii eye tracking into Qualcomm's reference design for standalone VR headsets. This integration includes hardware design on the optical system as well as adaptation and optimization of the Tobii I Core algorithms for the Qualcomm Snapdragon 845 platform. We believe that this is a very important development. Although it's not a design win by itself, this puts Tobey in pole position to supply eye tracking technology to future generations of Qualcomm based headsets. The collaboration with Qualcomm also includes go to market engagements. Turning to next slide. GDC, which is short for Game Developers Conference, is the world's largest conference for game developers and takes place in San Francisco each year. At this show, we had an overwhelmingly positive response from customers, partners and media. Some of the media quotes on this slide illustrate this quite well, I think. And it's fantastic to see that we get the reactions, the same reactions every time we show and have people actually try out eye tracking technology in VR, reactions stating that eye tracking in VR is totally natural and intuitive and even to the point where people say it's hard to imagine going back to an experience without eye tracking once you've actually tried it. Thus, we feel that the industry and media are unified in the perception that eye tracking is a must for VR to literally become a virtual reality and that we have proven that Tobey is the leader in eye tracking. Next slide. Tobey has, over the past year, worked intensively to obtain this leading position in supplying eye tracking technology to the VR headset market. As we have mentioned previously, we are working in more than 5 large integration projects with major customers and partners, and these engagements have continued to press well during the quarter, both technically and commercially. We expect to see the 1st VR products with Tobii eye tracking in the market late this year or in 2019. And most of the projects we're working on target products in market during 2019. In addition to the specific ongoing projects, we also had a strong pipeline of several additional potential projects across both VR and AR. As you can see from the table on this slide, and we've shown this table before, IDC projects that VR and AR devices will reach over 50,000,000 units by 2021. At Tobii, we believe that a majority of these will be equipped with built in eye tracking. Next slide. In the PC segment, we continue to work in close collaboration with our lead customers. In the past months, a number of very significant games have been announced that feature built in support for Tobii Eye Tracking. This includes mega titles such as Far Cry 5 by Ubisoft, Final Fantasy 15 by Square Enix, Kingdom Come and Vermintlide 2. We also saw a growing interest for eye tracking use cases in esports, both in live stream competitions and in trainings. In the ELEAG COUNTER strike major in January, an audience of more than 1,000,000 live viewers saw games with eye tracking overlays. For us, this was an amazing marketing outreach, driving further awareness and interest for our technology and the gaming community. In the quarter, Anywhere also launched an updated version of their Anywhere 17 top of the line gaming laptop with built in Tobii eye tracking. Over to you, Johan, on the Tobitec financials. All right. So revenues in the quarter were up 26% year over year or grew by 37% adjusted for currency effects. Internal sales were up 30% and external revenues currency adjusted grew by almost 30%. The gross margin was up 1.42%, primarily due to product mix driving lower cost of goods sold. As we have communicated earlier, we have grown the organization in Tovitec significantly over the past few quarters in order to pursue multiple sub segments, for example, to address the strong interest we see in the VR market. The largest growth has been in R and D, but we have also increased our resources in sales and marketing. However, this quarter, the expense growth was virtually 0 due to some material non recurring expenses in the comparison quarter. Next slide, please. So over to the group. Our total revenues showed material growth in the Q1 and increased by 21% adjusted for currency effect. As mentioned earlier, the material growth drivers in the quarter came from Tobii Pro and Tobii Tec. Gross margin for the quarter was 70%, down 1 point compared to last year, but up sequentially from Q4 2017. The group's EBIT was negative $37,000,000 which was materially better than last year despite the material ramp up in resources in the company. The next slide. So let's round up with a look at our cash flow, which was a negative $65,000,000 in Q1. The change versus last year was driven by the improvement in EBIT, but also due to an increase in net working capital, which was driven by increased sales and accounts receivables. We acquired Acuity during the quarter and the upfront payment impacted our cash flow after investment. We continue to have a strong cash position of almost $460,000,000 at the end of the quarter. That concludes the walk through of the numbers. So back to you, Henrik. Thanks, Johan. Summarizing the Q1, we delivered fantastic sales growth and strong EBIT in Tobii Pro. We're back in growth mode in Tobii Dynavox, and we saw continued strong momentum in VR in Tobii Tech. So all in all, this was a really good start to the year. With that, we're handing over to the operator and questions from the teleconference. Thank Our first question today is coming from Mr. Rob Stone calling from Cowen and Company. Please go ahead. Good afternoon, gentlemen. Lots of good stuff going on. I'd like to start with Dynavox. Henrik, I wonder if you could just provide a little more color on the commentary about coming new products. And also you mentioned a dozen or so new languages. Roughly, how should we think about the cadence of those things? Is there some particular industry event or something around which you may want to launch new products and languages this year? Hi, Rob. Thanks for that question. We're looking at coming out with both new devices, both in the touch segment as well as in the eye tracking segment, as well as we mentioned in the presentation, what's quite important as well is these additional language localizations. In terms of cadence, there are no sort of single particular events during the year that we necessarily drive towards in terms of product launches. So we expect products to be launched at different points in time throughout the year. Now that your DiamondBox segment is back to growth mode, sort of 4% ex currency. How should we think about the secular market growth? So overall, we believe that assistive technology for communication is a market that has been and will continue to show gradual long term growth. If you look at the market overall, it's not a market that grows at sort of fantastic high rate, but has a long term growth potential as awareness and reimbursement gradually improves in many countries, both in developed and emerging markets. And we do very much believe in this long term trend gradually improving accessibility and inclusion in society. And it goes for really all countries worldwide, we believe. As you probably know, we have expressed a long term financial target to grow by, on average, 10% per year for our Tobit Dinamox business. And this is a target that also reflects an ambition to grow slightly faster than the overall market growth. Okay. That's very helpful. Turning to Tobey Pro, very impressive acceleration in the growth. And you mentioned the beneficial impact of one competitor withdrawing from the market and, of course, the benefit of the acquisition as well. So how should we think about the impact of those two things? Have you seen all of the market share shift that you might get from SMI ceding share? And it's clear that you are in a better position to develop the U. K. Market now. Should we think in terms of a revenue impact from that taking some time to develop? Or if you could just sort of parse those two impacts? Yes. In terms of sort of taking over the market share from our previous competitor, we believe that, yes, we've seen the absolute majority of that effect as we've been it's difficult to know the exact numbers, but our perception is that we really have been successful in obtaining an absolute majority of their former business. So we're very happy about that. And obviously, what this means is that this, together with the other underlying growth, organic growth that we've had in Tobipro has really put Tobipro at a new level in terms of revenue. So we've sort of really stepped up the size of the Tobipro business to a new level. In terms of the acquisition of Acuity, we only have 1 month of acuity numbers in the Q1 numbers. So there is only a small effect from the Acuity acquisition in the Q1 numbers. So we expect to see a bit more of that going forward. On the other hand, it's also important to realize that Acuity has a large portion of Acuity's revenue has been reselling COVID products, which means that even before the acquisition, a relatively large portion of Acuity's revenue was part of Tobey's revenues already. So it's not a one to one revenue addition there. Okay. A related question on the EBIT margin for Pro and over to you, Johan. You mentioned there were some temporary benefits from the timing of planned expense growth and now we'll get a full quarter of acuity expenses. So can you help us a little bit understand the size of the impact on EBIT margins in the next quarter for Pro? Yes. I can try to help. We're not guiding, as you know. But what we stated in the report is that we have a business plan in place that we're executing on. Sometimes you in some of the areas you have slight delays, etcetera. And that means maybe that not all of these investments have been kicked off and ramped up in Q1. And we foresee execution on these projects and these resource sort of additions in the coming quarters instead. So you're going to have to model in some increased OpEx basically that we didn't see in Q1. So it's not a step function, it's sort of over the course of the next several quarters. That's helpful. And along those same lines, you mentioned the expense growth for Tobeytech. And I know you're not guiding explicitly, but if you could help us just visualize the pace of expense growth for Tek? Is that likely to be similar, maybe a little bit faster or slower than we've seen in the recent quarters? I think, in general, we have had a significant sort of headcount ramp up during 2017 continuing into Q1 of 2018. So that will probably over time slow down to a bit. That's our plan. And but also if you look at Q1 specifically, we had some nonrecurring items in Q1 of 2017, which made that set of expenses be fairly high. That one time effect will not happen in the following quarters. So expense growth will actually go up since the comparative numbers will not have that item in them. Great. Thanks. I'll jump back in the queue. Okay. Thanks. Thank you much, Mr. Stone. We do not appear to have any audio questions at this time. Okay. We have a couple of questions from the webcast from Mr. Bo Engel. And his first question comes here. So can you say something about how the gross margin for Tobitec is expected to be effective next year if substantial revenues will be related to VR in addition to the existing revenues related to gaming computers and so on. Thank you, Bo. The gross margin profile in Tobitec will depend a lot on which business models we have in particular deals that are of significance. And in VR specifically, we have 2 main types of business models that we're working with. And currently, we're seeing in the engagements that we're active in right now, we're seeing sort of a fifty-fifty split between those two business models. In the one business model, we work on a pure licensing basis where we work together with a customer to do integration of eye tracking technology, and we license the system design. We license algorithms, application software and IT. And since it's a pure license business model, in that case, we have on those types of deals close to 100% gross margin. In other engagements, we also supply specific hardware components, either our Tobii Eye Chip ASIC or cameras or image sensor components, in which case we typically have lower gross margins on those type of deals could be, say, in the 40% to 50% range in terms of gross margin. So it's difficult to say upfront exactly where that's going to land. But again, it's going to be the gross margin is going to be a mix in Doctor, probably ranging from the very low end in 30% to 40% up to very high, almost close to 100%. And then it's going to be a mix of different customer deals within that spectrum. I hope that answers the question a bit, Bo. Okay. So next question is regarding Tobi's estimates for TobiTek. In previous communication, they've said that the total market sales value could exceed SEK 10,000,000,000 per year sometime between 2020 1 2024. And Bo wonders if we can be a little bit more precise about the expected timing of that event. Yes. I mean, we this is how we have communicated, and that's, of course, on purpose. So I think I do not think we, at this stage, feel that it's appropriate to define that more granular than that. In Tobitek on a stand alone basis for the Tobitek division to be profitable and reach profitability in 2021. Okay. We have another question from Niklas Jundblom. He wonders if we still expect the current funding to be sufficient to execute on the business plan. Thanks for that question, Niklas. The shorter answer is yes. We consider ourselves to be fully funded on the current business plan, with the exception if we do acquisitions, but maybe it's a thing that requires additional funding. Okay. Then there are no more questions from the webcast. Do we have any further questions from the telephone conference? We do, ma'am. We do have a question coming in from Joachim Hedlund. Please go ahead. Yes, thank you. I wonder, we're all waiting for maybe you're breaking through on getting integrated in all these computers and smartphones and so on. But I think you were bad at communicating what this means for the profits in Tobey. Could you please develop a little more about how much you can make if you're in a PC game or in a VR headset or the different segments? Thank you, Joakim. So as you obviously know already, we are profitable in Tobii Dynavox and in Tobii Pro. So that's sort of an important base. If we look at Tobii Tec, Once we reach significant volumes, which we are convinced that eye tracking will do over the next several years. And reaching into the millions of units and even beyond that, into tens of millions of units, we clearly see opportunities to create a business in Tobitek that over time reaches several SEK1 billion in revenue. So Obitek is the type of business that has a very strong leverage in the business model, we believe, where there is a lot of upfront investments in both technology and building up the market and sales relationships. But as it scales into volumes, you have a very nice leverage and operating leverage in that type of business, which means that we believe that once we become successful in driving a significant top line in Tobitec, that also is likely to drive a very good and strong profit margin in that type of business. We have expressed a financial goal. It's a long term financial goal for Tobotec to reach profitability, breakeven and profitability in 2021. But of course, the ambition is to move further from that to reach very healthy profit margins beyond that time point. I hope that, that helps a little bit, Joakim. Yes. Thank you very much. I also wonder if there is room for development like in most areas to develop new functions with eye tracking. Technical point of view? Do you have the face recognition with Microsoft? Or is there other can you develop in gaming? Do you see new ways that you can develop eye tracking? Is it possible to develop the functions? Absolutely. I think that eye tracking is still at the very early stage of being utilized to its full potential, even in areas like PC gaming or PCs in general, where we have been working intensely for some time. So we are quite excited about the possibilities and opportunities to really leverage and make use of eye tracking asset technology in a variety of different ways. One very important focus for us right now is to make sure that we realize the core values of eye tracking in virtual reality. As we are expecting the first consumer devices with Tobii eye tracking in VR to come into the market relatively soon, the core focus is to work together with both device partners, but also other players in the ecosystem to realize some of these core value propositions that we're tracking. And that's both different value propositions where we can use eye tracking as a very powerful input to a VR device, basically as a way to control your environment and your experience inside virtual reality using eye tracking, but also to realize very strong and exciting benefits like oviated rendering, which is where you drive graphics quality, high quality graphics only to where you're looking and thus dramatically improving performance of a VR headset device. So there's lots of work to do there and lots of opportunity to realize these benefits. Thank you very much. Sounds exciting. We're hoping for the best. It is. Thank you, Joe. I can. Thank you. Thank you, As we have no further audio questions at this time, I turn the call back over to the organizers for any additional or closing remarks. Thank you. All right. Thank you. And thanks, everyone, for attending Tobey's Q1 earnings call today. I hope that we will see you all again at our next earnings call. Have a great afternoon, everyone. Thank you. Bye bye. Ladies and gentlemen, that will conclude today's conference. Thank you much for your participation. You may now disconnect. Thank you.