Welcome to the Q4 Report 2017 conference call. This conference is being recorded. At this time, I'd like to turn the conference over to Mr. Henrik Eskilsson, CEO. Please go ahead, sir.
Thank you, Sylvia. Hi everyone, welcome to Tobii's year-end report. I'm Henrik Eskilsson, and with me is also our CFO, Johan Wilsby. Next slide, please. We continue to execute on ambitious plans for all of our three divisions, Tobii Dynavox, Tobii Pro, and Tobii Tech. Overall, this quarter was characterized by exceptionally strong sales growth in Tobii Pro. In Tobii Dynavox, we saw a full sales recovery on the back of the success of all the new product we launched in 2017. In Tobii Tech, we continue to see very strong demand for eye tracking in VR. It's clear that the VR industry in mass does now see eye tracking as the key technology going forward. Next slide.
The largest growth of the team has been in our Tobii Tech division. In the fourth quarter, Tobii was ranked number 7 on Universum's annual listing of the best employers in Sweden. This list is based on surveys to the company's own employees and include a large number of companies across all industry sectors. Being placed in the absolute top of this list is a testament to our great team, our strong company culture, and our ability to compete successfully for the very best talent. Let's move on to Tobii Dynavox. Tobii Dynavox accounts for 6% of the group sales and is positioned as the clear global leader in the field of assistive technology for communication, with a global market share of close to 50%. Moving to next slide.
In 2017 alone, we have given a voice to more than 20,000 amazing individuals. These are 20,000 users who would not be able to speak and communicate without our products, who would be trapped inside their bodies without the ability to express themselves, to communicate with their families, to go to school, et cetera. Every single one of them, a fantastic individual who obviously deserves to have a voice. Still today, the vast majority of people who need these types of products do not have access to them. There are tens of millions of people globally who have severe speech impairments, and only a fraction of them have access to assistive technology that enable them to communicate effectively. Tobii Dynavox's mission is to empower people with disabilities to do what they once did or never thought possible. We're pursuing this mission relentlessly every day.
As you may remember, on the next slide now, we launched several strategically important new products in the second and third quarter, including our speech tablet, Indi, and a medical-grade touch device, Tobii Dynavox I-110. Paired with the new communication software, Snap, these are very strong solutions for individuals with good ability to use their hands, but who need assistive technology to be able to speak. The market answer to these new products has been overwhelmingly positive. We have definitely set the new standard for what high quality and good value for money assistive technology means. Our sales and training teams have made and are still making huge efforts in educating the market and meeting with thousands of therapists, teachers, and families to demonstrate the new product. During the first three quarters of 2017, we saw a decline in sales of our old touch devices.
In the fourth quarter, we saw a strong and full recovery of sales. We're now back at the levels we were at before the decline in the first three quarters of 2017. Tobii Dynavox revenue grew sequentially, Q3 to Q4, by 20%. This sales recovery should be seen in the light of the fact that Indi, one of the new products, is priced significantly lower than previous offerings, which means that the ASP across the full portfolio is lower. The increase in the number of sold touch devices in the quarter compared to Q4 last year in 2016, was up by as much as 80%. Next slide. We have now revamped our touch device portfolio with strong and competitive products in all the categories from low-cost apps all the way to medical-grade high-end devices packaged together with large service bundles.
Most of the sales increase in these new devices is still from English-speaking markets, predominantly the U.S. and Canada. The new software is not yet localized into other languages. We plan to launch localized versions in several important markets during 2018. The reason that this takes some time is that it's not just about localizing a software, it's about localizing a language on things like grammar, vocabularies, even cultural differences mean that localization of a language system is a major effort in itself. Johan, please walk us through the financials for Tobii Dynavox.
Hi, everyone. As Henrik mentioned, revenue grew sequentially by 20% in Q4 compared to Q3. This was driven mainly by strong growth in our touch device segment, but it was also due to a slightly positive seasonal effect. We're now back on the same level as prior to the decline in earlier quarters. Adjusted for currency effects, revenue in the fourth quarter was essentially the same as Q4 of 2016. Gross margin was below our normal level due to two major factors. With new products in various price segments, we saw natural shifts in product mix happening. This, together with increased tech support resources, explained half of the decline versus Q4 of last year. The other part was non-recurring in nature, including a product recall and increased obsolescence charge for an end-of-life product.
Our operating expenses were kept in control, but were also helped by positive non-recurring items coming from improved collection processes and positive effects in operating expenses, and positive FX effects, should be, in operating expenses and from revaluation of our trade working capital. We also saw a major improvement in our EBIT margin compared to previous quarters, driven by higher revenue, but still our operating margin was lower compared to a year ago. The key reason for this being the lower gross margin. Let's move to the full year results. For 2017, revenues for Tobii Dynavox was down 6%. This was due to the decline in sales of our older touch devices in the first three quarters of the year. In 2017, we were behind our long-term target of growing top line by 10% per year.
With the newly released products and the entry into new price segments, we're confident that we're on a path well-aligned to our long-term target. Our full-year growth margin remained at a healthy level, although dropping 2 points. Most of the change was related to the changes in our product mix, while the non-recurring items I mentioned for Q4 explains the smaller portion. The lower EBIT margin was mainly effect of revenue and gross margin decline, but also due to negative FX effect from our trade working capital. Back to you, Henrik.
Thanks, Johan. This morning, we also announced updated long-term financial targets for Tobii. Just as before, we mainly express these targets per business unit. The updated financial target for Tobii Dynavox is to increase revenue on average by 10% per year, with an EBIT margin of 15%-20%. Let's move over to Tobii Pro. Tobii Pro is the global leader in eye tracking research solutions used for understanding human behavior, and this business unit makes up around 30% of the group sales. Next slide. The fourth quarter was yet another quarter with exceptional sales growth in Tobii Pro. Revenue in Q4 was up by 40% compared to last year, adjusted for currency effects, following a 44% year-on-year growth in the third quarter. Moving to next slide.
The growth we're seeing in Tobii Pro is fundamentally driven by a steadily increasing awareness and acceptance of the powerful insights that eye tracking enables across a wide range of application areas. We see solid growth in established markets, including a broad array of academic research fields and commercial consumer insights in market research and user experience testing. Our new professional performance segment continued to grow rapidly also in the fourth quarter. In this segment, we have customers that use eye tracking data for training and educational purposes, in areas such as automotive industry, process industry, in simulators, in sports, et cetera. We're working in close partnership with lead customers such as Toyota and Mitsubishi. The growth is also supported by the investments we've done in the past year, both in growing our global sales and marketing organization and in our further development and refinement of our world-leading product portfolio.
The combination of hardware-software sales, together with a rapidly growing research services business, also proves to be a success concept for driving sales towards a much broader array of customers. Moving to next slide. Tobii Pro was also positively impacted by the fact that its main competitor, SMI, was acquired by Apple in the second quarter. It is, since that acquisition, discontinuing its sales of eye tracking solutions for behavioral research studies. Tobii Pro has been successful in capturing a significant portion of SMI's former business, and we now estimate that Tobii Pro has a global market share of at least 60%. Next slide. One new product in 2017 was our solution for eye tracking studies in VR environments. This opens up for new ways of doing research where a test person can be put in a very realistic situation, but still with full control of the research scenario.
The fields of application for eye tracking research in VR is very diverse, ranging from flight simulators to phobia research to shopper insight studies and many other areas. In the fourth quarter, we also launched a new version of the Pro Spectrum eye tracker. This eye tracker machine collects 1,200 eye tracking gaze data points per second and can thereby provide detailed insights into neurological processes in the brain. This product further strengthens Tobii Pro's position in the high-end academic research market. Johan, back to you.
All right. Tobii Pro had a great fourth quarter with revenues increasing by 32%, or 40% adjusted for currency effects. In the quarter, we experienced good growth in all our segments and geographies, as well as in both products and services. Gross margin was strong at 73%, but down three points from last year, as well as sequentially, mainly driven by product mix. In this case, larger share of hardware and services sales. We saw significant improvements in our EBIT margin compared to last year. Actually a record quarter, despite the fact that we keep on investing in R&D and sales and had a negative effect on results coming from our Sticky integration. Let's have a look at the full year performance. Tobii Pro did not just have a great Q4, but also a strong full year 2017, with growth around 25% and gross margin stable at 74%.
Our EBIT margin was up three points compared to last year, despite significant investments in sales and R&D. This includes a negative impact of SEK 7 million from the Sticky integration, and excluding this impact, we would have had an EBIT margin of 11%. Henrik, over to you.
Tobii Pro's mission is to empower professionals with revolutionary insights into human behavior using eye tracking as our foundation. The updated financial target for Tobii Pro is to increase revenue by on average 15%-20% per year and to reach an EBIT margin of 15% by 2020. Let's move over to Tobii Tech. Tobii Tech is the world's leading supplier of core eye tracking technology to integration customers. We are working with partners in volume markets such as gaming PCs, mainstream computers, virtual reality, augmented reality, smartphones, and several niche markets. Turning to the quarter highlights for Tobii Tech. In our last earnings call, we stated that Tobii Tech was actively working on five large-scale projects with potential customers and partners in virtual reality, with the aim of products reaching the market in late 2018 or in 2019.
In the fourth quarter, we have made good progress in these projects and also added further collaborations on VR product integrations and reference designs. In addition, we're in early discussions with about 10 other potential customers and partners in VR. Tobii is very well-positioned among eye tracking suppliers, and I strongly believe in our ability to build a substantial business in this segment. Next slide. CES is the world's largest consumer electronics show, and it was a major success for Tobii this year. We showcased eye tracking for a range of applications with a focus on our implementation of eye tracking in VR. The most prestigious tech media, major business partners, general public, provided unanimous and forceful feedback that eye tracking is a necessity in upcoming generations of VR headsets, and that Tobii is really well-positioned in the market.
For instance, Engadget's headline was, "Tobii Proves that Eye Tracking is VR's Next Killer Feature." A fun quote from the article was, "Trying Tobii's technology for just 30 minutes has already ruined me for every VR headset without it." Tom's Hardware gave us a CES 2018 Best in Show award and wrote, "Tobii showed us eye tracking inside a VR HMD that was as perfect an implementation as we've seen. That, coupled with the company's unique position in the current marketplace, has Tobii in a prime position for the market's future." If you want to check out these and other mentions for yourself, please read the blog post that we link to in the bottom right corner of this slide. Next slide, please. IDC is a research firm that provides regular market estimates for the VR and AR markets.
In their most recent December update, they project that the VR and AR markets will grow from 10 million units in 2017 to 60 million units by 2021. The largest growth is projected to be in so-called standalone and tethered categories of headsets, which are the more advanced headsets. We believe that most of the headsets in these categories will be equipped with eye tracking, and thus, this very well defines our target markets in VR and AR. This is obviously a large opportunity, which is likely to unfold quite rapidly over the coming years. Next slide. We continue to invest in the PC market. We added a number of games that support Tobii eye tracking and have now passed 100 titles, which was a key milestone for 2017. We deepened our activities in esports.
For instance, gameplay with eye tracking overlays were streamed during the Counter-Strike ELEAGUE Major, with over 1 million viewers watching the broadcasts live. We continue to see steady sales of gaming PCs with eye trackers integrated. Our partners such as Dell are happy, and we have a good and deep collaboration. We have now seen a first wave of PC integrations with Dell, Acer, and MSI. We definitely continue to believe that eye tracking will be big and important in this segment also. This belief is strengthened by the fact that the center point of this industry, Microsoft, has integrated eye tracking as the fifth major modality in the core of the Windows operating system now in the fourth quarter. However, we also expect that it will take time to develop this market into high adoption rates.
We do have several ongoing dialogues with PC manufacturers, both our existing customers as well as potential new ones. We expect our new upcoming platform, the IS5, to be a key driver for additional design wins. This platform will be ready for sampling later in 2018, which means that products based on this platform can be available in the market first half 2019. Next page. In addition to the high volume opportunities in consumer devices, Tobii Tech also has a growing number of integration customers in various niche applications. In the fourth quarter alone, we signed four new customers in psychology rehabilitation, in health testing, in assistive technology, and in lie detection. Even though these customers typically represent lower volumes, they comprise a segment with higher ASP and profit margins, hence an important customer group for Tobii Tech. Over to the financials.
All right. Revenues in the quarter declined by 10%, but were flat when adjusted for currency effects. Internal sales were up about 30%, while external revenues were down due to non-recurring items in the comparison period. However, external sales were up materially versus the first three quarters of 2017. Gross margin was up four points to 43%, and the change was driven by a greater share of sales to internal customers. The organization in Tobii Tech has grown significantly in the past few quarters in order to pursue multiple sub-segments, for example, to address the strong interest in the VR market. The largest growth has been in R&D, but we have also increased our resources in sales and marketing. This quarter, some positive non-recurring expenses contributed to limiting the operating expense growth, which meant that our operating result was on the same level as in Q4 last year.
Let's move to the tech financials for the full year. In 2017, our revenues increased by 25%, and external sales were up about 42%. Gross margin was 43%, which was on par with 2016, despite a significantly larger share of sales to external integration customers. Our organization grew significantly in Tobii Tech in 2017, and this drove increased operating expenses in accordance with earlier communication. Our operating loss ended at around SEK 290 million. Let's now continue to the updated financial targets.
Tobii Tech's mission is to make technology understand humans. An overall objective is to retain Tobii Tech's position as the world's leading supplier of eye tracking technology for integration into high-volume products, and to, in the long term, achieve sales of several billion SEK with good profitability. This development is expected to take place gradually over a number of years and will require considerable investments in technology and market development. For Tobii Tech, the financial target is to reach profitability in 2021. This is a bit different. In the past year, we've not expressed a specific financial target for Tobii Tech, as the market has been in an early stage. However, with this updated financial target, we hope to provide the market with a clearer picture of the anticipated investment horizon for this business unit. Let's move to financials for the group.
The group revenues were flat in the fourth quarter compared to the previous year, but increased 8% adjusted for currency effects. As mentioned earlier, the material growth drivers in the quarter came from Tobii Pro, while Tobii Dynavox and Tech were flat in the quarter from a top-line perspective. Gross margin for the quarter was 69%, down 2 points compared to the year before. Main reasons for the lower gross margin were product mix changes and non-recurring items in Tobii Dynavox and Pro. The group EBIT for Q4 was a negative SEK 11 million, pretty much in line with last year. This result contained a material ramp-up in resources, counteracted by positive non-recurring items. Let's move to summary for 2017.
Full-year revenues increased 3% compared to 2016, and included material growth from Tobii Pro and Tobii Tech, while Tobii Dynavox had a tougher year while transitioning to the new product portfolio. Gross margin was fairly stable, but product mix changes in Tobii Dynavox contributed to the slight decline. In line with our previous communication around investment and a material headcount ramp-up in Tobii Tech, the group EBIT worsened in 2017. Lower earnings for Tobii Dynavox contributed as well, and in addition, we also had material negative costs related to currency valuation effects. Next slide, please. Let's round up with a look at our cash flow, which was a negative SEK 42 million in Q4. The change versus last year was related to our EBIT development and the increased investment in R&D in all three business units. Compared to Q3, we improved our cash flow materially, though.
We continue to have a strong cash position at almost SEK 540 million at the end of the year. That concludes the numbers section. Back to you, Henrik.
For the group, the financial target is to reach profitability in 2020. A quick summary on the fourth quarter is very strong sales growth in Tobii Pro, full sales recovery in Tobii Dynavox, and very strong demand for eye tracking in VR. With that, we are handing over to you, Sylvia, and questions from the teleconference.
Thank you, Henrik. Ladies and gentlemen, if you wish to ask a question, please press *1 on your telephone keypad. Please also ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, it is *1, ladies and gentlemen, to ask a question. We will now take our first question from Rob Stone from Cowen & Co. Please go ahead, sir. Your line is open.
Hi, guys. I have a few questions. The first one with respect to Tobii Pro, you noted the market share gains. Do you feel like that capture of available share is fully reflected by now, or is there potential for more consolidation?
Hi, Rob. It is not that easy to know. We think there may be opportunity to capture even additional revenue. It is clear that with SMI's departure from the market, we have established a sort of a long-term, significantly higher revenue level in Tobii Pro.
Okay. With respect to the new language launches for Tobii Dynavox that you mentioned, you've said in the past that it takes a little while, even after the availability of new products, because of the need to educate the channel and so forth. Is it possible for you to do some of that preparation work along the way, or if we see new language versions launching this year, when might we see the impact on revenue growth?
Generally, it's difficult to do it before the product launch because sort of what actually requires some effort is to train and educate the prescribers, and that's not possible to do before the product has been launched in the market. Generally, we see a bigger effect like this when we launch completely new software platforms, like we did in the second and third quarters of 2017. For instance, if we bring out new hardware devices in the U.S. market in the future, that can be a sort of a less burden on training professionals in the industry because the lion's share of training actually is required on the software side. You're right, when we localize into new languages, it will be gradual pickup as the new software becomes familiarized by the professionals in the respective geographical markets. It takes a couple of quarters.
A couple of questions. Yep. A couple of questions for Johan. You mentioned some one-time benefits on the run rate of operating expenses in the fourth quarter. How should we think about sort of the normalized run rate for expenses going into the first quarter of 2018?
Hi, Rob. I think the right way to think about it is that you know from the numbers that we have reported how much we have ramped up the organization, that will continue into at least the first couple of quarters in 2017.
In 2018.
Sorry, in 2018. That you need to cater for that. Obviously the positive non-recurring we saw in Q4, you should not factor those in going forward in the same fashion.
Do you have a figure in mind for headcount additions for the full year of 2018 versus the 200 plus that were added last year?
The net full-time equivalent that we added in 2017 was 120 to reach 840.
Oh, sorry
full-time equivalents. As Johan mentioned, we expect to continue growing the organization in 2018 as well in order to cater in particular to the strong customer demand in Tobii Tech in VR, but also in, for instance, Tobii Pro. However, we expect to grow clearly less in number of headcounts than compared to what we did in 2017.
Great. Thanks. I'll jump back in the queue.
Thanks.
Thanks.
Our next question comes from Johannes Ries from Apus Capital. Please go ahead. Your line is open. Thank you.
Yes, good afternoon. Also a couple of questions. Maybe you can give us first some update on your hardware platform. Last time you mentioned, you said, you need always the 12 to 18 months to further shrink it. You also worked on your own image sensor to make the whole platform smaller, lighter, and especially cheaper. How far you proceed sir?
This question specifically relates to the eye-tracking platforms we have in Tobii Tech and for the PC market, so for integration in laptops and monitors and peripheral PC devices.
Exactly.
We're developing a new platform there, IS5. That development is progressing well. It's a very large development project. We expect to be able to provide samples to customer in the middle of this year. Then typically from there, it is often say five to nine months from samples. It typically takes five to nine months for a PC manufacturer to do all of the integration work and supply chain design and these aspects before they can launch a product. Effectively, that means that we could see products integrating the new IS5 platform first half 2019.
Any ideas about the matrix? How much smaller, how much cheaper?
The single biggest aspect of the new IS5 platform is that it becomes much easier to integrate into, for instance, laptop computers. This is because we are reducing the size significantly of the platform, and we're also making it more modular so that you can-
in better ways, do a nice-looking industrial design integrating the eye-tracking sensors into even slim form factor laptops, et cetera.
We're also reducing the visibility of the system so that the near-infrared light, for instance, becomes practically invisible in many integrations, which is also a very important aspect of consumer adoption.
We're making some reductions to the production cost as well.
In the range of maybe 20%.
Okay.
That's also important. The main innovation actually lies in making it much easier to integrate. It's also an improvement in performance of the platform, which is important for driving adoption.
Okay. I see. Maybe you need another step to be really for the total mass adoption is right in my head, because if I right remember, you said you need two steps to bring further the cost even down to make it really ready for mass adoption. I think as IS4 is still EUR 60, EUR 70 or so, or SEK 60, SEK 70. It's right in my head, man.
Yeah. We are to high volume customers in the PC market. We're selling the current IS4 platform already clearly below SEK 50.
Okay.
We're coming down further with the IS5 platform. You're correct. The IS5 platform, we expect it to enable us to take one significant step up on the adoption curve for PC, but to reach full consumer adoption and really high volume in the tens of millions of units, we probably need yet another step to bring down cost and power and size even further.
Okay, super. Thanks. So far, you're on track to maybe to the guidance you gave before on how long it will last.
Yeah
Okay. That brings me to the longer-term guidance of Tobii Tech. You talk about several of billions. What are the assumptions you have laid below? Is it first in large wins in virtual reality and maybe also the breakthroughs and like we talked above, on the mass adoption in the PC, tablet, et cetera, notebook market, man?
If we take the financial target that we specifically expressed to become profitable by 2021 in Tobii Tech on a standalone basis, that is based on an assumption of a reasonable success in integrating eye tracking technology in virtual reality.
It's based on continuing to drive good business with a number of specialty applications, niche application customers, and a realistic progression of business in the PC market as well.
Okay.
Obviously, there is a lot of growth potential beyond that as well. The long-term plan for Tobii Tech stretches much further than 2021, but reaching the profitability is a credible target, in 2021 and even in 2020, we should of course see a good progress towards that target.
I see. Maybe on the competition in Tobii Tech, how you see your competitors' development, especially maybe the guys who have been acquired by large guys like Google.
Yeah. I would say that so far, we've seen quite positive effects from these acquisitions.
Okay.
They have helped to heat up the market even further and make it even more apparent to everyone that eye tracking is going to be a necessity in several of these devices in the future. Tobii was the clear market leader already before this in eye tracking, and now we're in an even stronger position. I think that this has really helped us in several ways, even to the point where I still believe that there is opportunity, potentially, to see some of these companies that have made acquisitions to be potential customers or partners in the future sometime. Time will tell.
Okay. Maybe not only internal sourcing of these guys. Maybe on Tobii Pro, one question to the longer-term target. You made already very strong margin in Q4, much better than the whole year. It looks like Tobii Pro has also good growth potential going forward. Why the margin should stay clear below this 15% in the beginning? What investments you are doing there?
When it comes to Tobii Pro, you need to look at seasonal effects. We have a pretty strong seasonal pattern where Q4 is much stronger than the other quarters.
Okay.
When you look at a full year long-term target, you cannot only look at Q4, which is traditionally our strongest quarter.
Okay. You said you will first make some investments, but in the longer term then reaching the 15%, yeah.
Correct.
Maybe final question, on the cash flow, on the burn rate. Is it still the case here to expect this SEK 540 million will be enough before you reach even the cash break-even? Is the cash break-even maybe similar in the same year, like the whole company gets profitable in 2020? Could it last maybe a little bit longer to be even cash positive?
No, we consider ourselves to be fully financed with the current business plan we have. That is obviously the basis for the long-term financial target that we updated today.
Mm-hmm. The cash break-even should close at the same time as the company gets profitable, or is it because of growth produce working capital, therefore maybe there could be some delay?
Yeah. It's hard to tell exactly on the details, and we're not specifying those in our target.
Okay. Thanks a lot.
All right. Thanks.
Thank you. Again, ladies and gentlemen, as a reminder, it is star one to ask a question. Our next question comes from Kalle Sejerback, who is a private investor. Please go ahead, your line is open.
Thank you. My question was actually answered here, but since I am on the line, I can ask you just one year ago, you said that we would probably see eye tracking integrated into head-mounted devices by maybe the end of 2017 or the beginning of 2018. Now it is one year ahead. Why is that?
You are correct. If we back up a full year, we did state that. However, for the past several quarters, we have been stating that our estimate is that we will see the first real consumer implementations for eye tracking late 2018 or during 2019. This is largely caused by delay and sort of later planning for the products for some of the customers and partners we are working with.
Why is that, more specifically?
It is difficult for us to speculate in some of the product plans and product strategies for our customers and partners.
Okay. Thank you.
Thank you. Our next question comes from Morten Larsen from ABG. Please go ahead, your line is open.
Thank you very much. Hi, guys. Congratulations on what looks like a very good quarter. A couple questions from me. First of all, could you talk a little bit more about what kind of volume growth trends you saw in Tobii Dynavox between Q3 and Q4, maybe into both touch and eye tracking? Maybe sort of also tell us a little bit about how we should think about the fact that you now say tech profitability 2021, when you say profitability break even in 2020 for the group. Should we take this to assume, or your way to tell us that tech will not really be any sort of meaningful contributor until 2021, i.e., very little to add in 2019? Let's start there.
Hi, Morten. Thanks for those questions. Your first question was a little bit on the volumes in Tobii Dynavox between the quarters. Generally what we've seen in Tobii Dynavox, we've seen in the number of units, we've seen a very significant increase from the third to the fourth quarter on the touch side. Touch devices have increased materially. From the third to the fourth quarter, we've also seen an increase in the number of sold units on the eye tracking side. In terms of the actual value, well, then we've seen on the touch side, a significant increase from third quarter to the fourth quarter, whereas on the eye tracking side, it has been a modest increase sequentially.
Maybe a follow-up on that. How much of the volume increase quarter-on-quarter do you think ascribes to the hurricanes in the third quarter?
Some, but a smaller portion.
Could you maybe talk about the volume increases year-on-year in Tobii Dynavox on touch and eye tracking so we can get a little bit better feeling for that development
Looking at the number of units on the touch side, from the fourth quarter of 2016 to the fourth quarter of 2017, we saw a significant material increase. Also in value, we saw a significant increase. On the eye-tracking side, in terms of volumes year-on-year, we were roughly flat. However, with a shift to lower-priced products in the portfolio, it actually meant a small increase in value on the eye-tracking side. One contributing factor to this, we believe, is that the sales force spent a very significant part of their time and effort showing the new touch device portfolio to potential clients and products. It deviated some attention away from the eye-tracking portfolio temporarily.
Okay.
Thank you.
Morten, could you repeat your second question, just to make sure we understood that one?
Yeah. It was the fact that you state that Tech will be profitable by 2021, but you talk about group level in 2020. I wonder whether you're trying to tell us anything about the ramp-up we should expect in Tech profitability and more push that towards 2021 as the hugest thing affecting place there. Is that what you're trying to tell us?
Well, effectively what we're seeing is Tobii Dynavox and Tobii Pro are already profitable. Of course, with the financial targets we have in place, we expect to continue growing both top line as well as profit margins. The absolute profit level in Tobii Dynavox and Tobii Pro, there our goal is to grow that at good, healthy pace for the coming years and contribute to the group's profitability. In Tobii Tech, we're still at a very high investment pace in 2017 and in 2018. As we start gaining traction and revenues with design wins in VR, in specialty applications, as well as on the PC side, we of course anticipate that in 2019, even more so in 2020, we will start seeing meaningful revenue contributions and gradually reducing losses, i.e., investment into Tobii Tech.
It takes until 2021 until Tobii Tech on a standalone basis reaches break even. The increased profit level in Tobii Dynavox and Tobii Pro, in combination with the reduced investment by 2020, according to the current business plan, is sufficient to reach profitability for the group by 2020.
Okay. A little follow on that. I really appreciate the fact that you're giving out these plans. I think it's a very strong signal. Could you perhaps give us some flavor on how you would describe your visibility into 2020, 2021 in Tobii Tech? Based, for example, on how the five big clients you're working with now and the plus 10 you're tentatively working with, how would you describe your visibility on 2020, 2021?
I think that the VR market in particular is a well-defined market. We're obviously dependent on the expected growth of that market. I am quite confident that we will see a good adoption rate for eye tracking in VR. Of course, these plans are based on the assumption that we are successful in obtaining a significant market share for eye tracking in VR, which we are very well positioned to do. I would say that our visibility here is clearly better than what we have had in previous years in Tobii Tech, and that's also one of the reasons for being a bit more specific about the investment horizon. Of course, one should still consider the fact that Tobii Tech is at an early stage of adoption curve. Of course, there are uncertainties in how the market will evolve, of course.
Brilliant. Thanks, guys.
Thank you. Gentlemen, it seems that we have no further question at the moment from the audio, I will now hand back to you in the room. Thank you.
Yes, okay. We have some questions from the webcast, the first questions come from David Carlson. Some of your questions have actually already been answered, I will focus on the ones that we have not discussed. One additional question related to the IS5 platform. David says that in the Q3 report, you mentioned that OEMs wait for the IS5. Is that why we haven't seen any new design wins in gaming computers yet, wonder?
That is one explaining factor, yes.
Okay. Can you say anything more about the demand for eye tracking in gaming computers?
Yep. As we sort of mentioned previously, we continue to have a strong belief in the PC market, we expect to see a gradual adoption in that market. It will be driven by several factors. It will be driven by improving the technology, as we talked about, becoming smaller, more power efficient, more invisible, even better eye-tracking performance. It gives a more consistent and plug-and-play user experience. Also very important is to continue to see the evolution of the actual content, the user experiences that you can experience with eye tracking, which is about broadening the portfolio of games. Very important is what Microsoft is doing with gradually implementing and integrating eye tracking into Windows now, which is really exciting, also a number of other experiences and use cases catering both to the gaming as well as to the non-gaming side.
We do anticipate and expect that this will drive gradual continued adoption. We also expect that it will take some time to accomplish all of these things, both for Tobii, but also for the ecosystem and the PC market as a whole, very much in collaborations with the different partners we work with, from the PC vendors to Microsoft to the graphics cards players to the game studios, et cetera. It's a pretty significant effort, and one should anticipate it to be gradual over several years in terms of the development.
Okay. David's next question is related to the eye-tracking hype, he says that it hasn't really been reflected in the valuation of the company's stock. Do you see that you have been able to capitalize on that hype in any other ways?
We see a very strong and very fundamental growth in the sincere and deep interest in eye-tracking technology across almost the entire consumer electronics market. It's fairly common to sometimes overestimate how fast things will go. I think it's important as investor to have a bit of patience and long-term perspective on creating and growing what can be a very exciting long-term business in a field with new technologies such as this.
Okay. We have a question from Ayas Alakbarov. Do you expect consolidation in the market or further acquisitions of eye-tracking companies by large tech companies?
Obviously, sort of difficult for us to say, since that may not necessarily be a decision that's in our hands. I think that could very well happen. Most of the competitors that we have today are very small companies. A couple of the ones that were acquired, for instance, The Eye Tribe, et cetera, were also very small companies with like a dozen people. Could other large tech companies acquire a small company with some people? It's not impossible, of course. That could still happen.
The follow-up question is, do you expect yourself to make some strategic or defensive acquisitions of new small eye-tracking startups with disruptive technologies?
In general, we do have quite an active, proactive M&A agenda. We are continuously looking at several potential acquisition targets. We see opportunities for doing acquisitions across all of the three divisions, and both in areas such as products, channels, and potentially technology as well. We're obviously, in terms of innovative core technologies, we are looking very carefully at new competitors that are popping up. We're looking very carefully at what's happening out in academic research. Of course, we're also investing in our own internal research to ensure that we stay on the forefront of innovative eye-tracking technology and its use cases.
Okay. We have one more question from David Carlson, he wonders if we see any correlation between the selling rate of our own eye tracker peripherals due to the promotion we get in big gaming events.
That's a good question. We do see a significant increase in the sales of our own consumer eye tracker peripheral. That's a very good trend. I would say we don't have specific data on how that correlates with big esports events, et cetera, where eye tracking is being used. We don't have that yet. It's interesting to look out for, I agree. I would actually expect there to be an effect like that, but we haven't seen it in the numbers yet.
One last question comes from Hunter Fientol, he says, "Thank you, Henrik and Johan, for a good summary. Regarding the IDC report, by 2021, the market for VR is estimated to be around 60 million units. When it comes to the market share in VR for Tobii, what's your estimated penetration of these 60 million?" Yeah.
Of those 60 million, which is for VR and AR together, approximately 50 of those are expected to be in the standalone and the tethered categories. Of those 50 million, we anticipate that a majority will be equipped with eye tracking, so that would be the penetration. That's our expectation and belief. Of course, our goal as Tobii is to have a leading market share within that market in supplying eye-tracking technology for that.
Good.
All right. I think that concludes the questions, and I think we're running out of time here as well. Thanks everyone for attending our year-end report, and we wish you all a very good continued day and evening, everyone. Thank you. Bye-bye.
Bye-bye.