Earnings Call: Q2 2017

Jul 25, 2017

Thank you, Sean. Hi, everyone, and welcome to today's earnings call, which is covering the Q2 2017 for Tobey. I am Henrik Asgecason, and today we also have our new CFO, Johan Wilsby with us. So let's get started. Overall, we continue to pursue ambitious strategies for all three of our divisions, Tobii Dynavox, Tobii Pro and Tobii Tech. We have a high pace of investments in product development across all of these three business units. And we're also gradually expanding each of the sales and marketing organizations. In the Q2, we have, in particular, continued to grow our Tobii Tech team to strengthen our ability to respond to increasing interest in eye tracking integration. Compared to a year ago, we've added approximately 80 new colleagues to the Tobii Group, and we're now around 800 employees worldwide. Sales in the second quarter was quite strong for Tobii Pro. In Tobii Tec, sales were stable when comparing to previous quarters, and we saw a large increase compared to Q2 last year. In Tobii Dynavox, we saw a slight increase from the Q1 and flat sales year over year. In the quarter, a significant event in the eye tracking industry was that our largest competitor Sensor Motoric Instruments or SMI was acquired by a company called Vineyard Capital Corporation, which by the media has been reported to have connections to Apple. Atobi, we have very good offerings across most of the verticals where SMI was present, and we believe that this acquisition is likely to open up opportunities for us to advance our positions and to increase our sales to former SMI customers, actually across all three of the Tobey divisions. We also believe that this acquisition is likely to further increase the interest among major device start with Tobii Dynavox. So, start with Tobii Dynavox. So as most of you know, Tobii Dynavox accounts for roughly 65% of the group sales and this business unit is clearly positioned as the global leader in the field of assistive technology for communication with a global market share of over 40%. Let's move to the next slide. The Q2 has been intense in terms of product launches for Dolby Dynavox, And this is the result of several years of hard work. Many of these new products are of highly strategic nature for the business unit. First out was Indi, which we already spoke briefly about in the last earnings call. Indi is the world's 1st speech tablet. Basically, it's a tablet device that is designed specifically for the purpose of effective speech communication. It's sleek and user friendly like an iPad, but it comes with very powerful speakers that makes it possible to make your voice heard even in a busy classroom or in a restaurant. It's semi ruggedized to withstand around the clock everyday usage and it has exactly the right type of ergonomics and the right type of accessories and service options to be truly fit for purpose as a communication device. It also comes at a very attractive price point starting at US999 dollars including industry leading software, all of it ready to go out of the box. And as we mentioned already in the previous earnings call, we believe that Indi is a truly disruptive product offering in this market, and our goal is to take significant market share from solutions based on regular consumer tablets that frankly really aren't appropriate as communication solutions. In that way, we aim to increase our sales into schools as well as directly to end users. We also believe that this type product long term opens up for new opportunities in many geographical markets where access to reimbursement is still limited or non existent. In the Q2, we also launched Snap. Snap is our brand new software for symbol communication that makes it possible for users who are non literate to express themselves. This software together with its language system called Core First is based on decades of leading clinical research in language learning and expression. Compared to Tobii Dynavox previous symbol communication software, Snap is much easier to use, much more responsive and much more capable. Another important addition to this software is that it comes together with a companion app called Pathways, which is a comprehensive instructional and training solution that enable end users, parents, teachers, therapists to obtain a robust and interactive guidance on how to learn to communicate using this solution. Our intent is to make Snap into our flagship software to be used across a broad part of Tobii DynaMox portfolio of devices. It's obviously the default software on the new in the devices And it's also available now on our iControl I Series communication devices. In the Q2, we also launched Snap as an iPad app as well. And this is all done with the long term goal to make Snap the gold standard and the most widely used single communication software in the assisted technology industry. And we believe that this is a very important strategic position to take and to hold for Tobii Dynavox. Both Indi and Snap have received positive initial response in the market with very good reviews from both professional therapists, from end users and their families. India was off to a good sales start towards the end of the quarter, but it's still too early for these new products to have any significant impact on the sales numbers. Typically, it takes a few quarters for new products to gain sales momentum in this market due to long processes for prescribing devices with professionals, etcetera. Thank you, Sean. Hi, everyone, and welcome to today's earnings call, which is covering the Q2 2017 for Tobey. I am Henrik Eskason. And today, we also have our new CFO, Johan Wilsby, with us. So let's get started. Overall, we continue to pursue ambitious strategies for all three of our divisions, Tobii Dynavox, Tobii Pro and Tobii Tech. We have a high pace of investments in product development across all of these three business units. And we're also gradually expanding each of the sales and marketing organizations. In the Q2, we have, in particular, continued to grow our Tobii Tech team to strengthen our ability to respond to increasing interest in eye tracking integration. Compared to a year ago, we've added approximately 80 new colleagues to the Tobii Group, and we're now around 800 employees worldwide. Sales in the second quarter was quite strong for Tobii Pro. In Tobii Tec, sales were stable when comparing to previous quarters, and we saw a large increase compared to Q2 last year. In Tobii Dynavox, we saw a slight increase from the Q1 and flat sales year over year. In the quarter, a significant event in the eye tracking industry was that our largest competitor, Sensor Motoric Instruments or SMI was acquired by a company called Vineyard Capital Corporation, which by the media has been reported to have connections to Apple. Atobi, we have very good offerings across most of the verticals where SMI was present, and we believe that this acquisition is likely to open up opportunities for us to advance our positions and to increase our sales to former SMI customers, actually across all three of the Tobii divisions. We also believe that this acquisition is likely to further increase the interest among major device manufacturers to integrate eye tracking in future devices. Let's go through the developments in each business unit in more detail and let's start with Tobii Dynavox. So as most of you know, Tobii Dynavox accounts for roughly 65% of the group sales and this business unit is clearly positioned as the global leader in the field of assistive technology for communication, with a global market share of over 40%. Let's move to the next slide. The second quarter has been intense in terms of product launches for Dolby Dynavox, and this is the result of several years of hard work. Many of these new products are of highly strategic nature for the business unit. First out was Indi, which we already spoke briefly about in the last earnings call. Indi is the world's 1st speech tablet. Basically, it's a tablet device that is designed specifically for the purpose of effective speech communication. It's sleek and user friendly like an iPad, but it comes with very powerful speakers that makes it possible to make your voice heard even in a busy classroom or in a restaurant. In the Q2, we also launched PCI Plus, which is our most recent premium eye control peripheral device. This is a medical grade device and features our most recent eye tracker platform as well as advanced microphones for speech input, switch ports and connectors for remote control of the home, etcetera. This is a product that is primarily aimed at users who are able to speak, but need eye control, either standalone or in combination with speech or switch input in order to access and use a computer effectively. Together with the PCI Plus, we also launched a brand new version of our Windows control software, and this software is also available on the flagship I Series products and enable our users to do pretty much anything you can do in Windows using Icontrol. In July, we so in the beginning of Q3, we launched the Imobile Plus product, and this is a product that you clip onto a consumer Windows tablet. The Imobile adds an eye tracker, powerful speakers, standalone battery, etcetera, and thus converts the consumer tablet into a competent eye control assisted technology communication device. And this then becomes a lower priced option compared to the medical grade high end eye series and thus enables us to reach additional market segments that are more price sensitive. If we go to the next slide, this shows a bit of an overview of how the portfolio now stands. So we have products across different price categories on the high end of medical grade devices, both in the eye tracking segment and the touch segment. We have mid range devices that are lower priced options. Now both with Indi in the touch segment and with Imobile Plus for eye tracking. And we have lowest cost options. So with all of these new products, we are well underway to do a major revamp of the product portfolio for Tobii DynaLocks. We accomplished 3 major things with these new additions. First, we create this much broader offering across different price points, where historically Tobii DynaMox has been strong in the high end medical devices, both on the eye control and the touch based side, whereas we have been weaker in the lower price solutions. And now we're adding 2 very strong offerings in the mid range segment, Indi for touch devices, Imobile Plus for Imcontrol Devices, and we're also offering Snap as a pure software solution on both iPads and consumer Windows tablets, which becomes a very low cost entry point for potential users. The second thing we accomplished with these new products is that with Snap, this is a major step forward in taking a clear leadership position in software in this market. And although the devices drive a large portion of the revenue, the software unlocks the value and creates all the stickiness with users and therapists. And again, Snap is a huge improvement from previous in book communication software and superior to anything that our competitors offer in our view. And third, the third thing we accomplished with this, it's semi ruggedized to withstand around the clock everyday usage and it has exactly the right type of ergonomics and the right type of accessories and service options to be truly fit for purpose as a communication device. It also comes at a very attractive price point starting at US999 dollars including industry leading software, all of it ready to go out of the box. And as we mentioned already in the previous earnings call, we believe that Indi is a truly disruptive product offering in this market, and our goal is to take significant market share from solutions based on regular consumer tablets that frankly really aren't appropriate as communication solutions. In that way, we aim to increase our sales into schools as well as directly to end users. We also believe that this type of product long term opens up for new opportunities in many geographical markets where access to reimbursement is still limited or non existent. In the Q2, we also launched Snap. Snap is our brand new software for symbol communication that makes it possible for users who are non literate to express themselves. This software together with its language system called Core First is based on decades of leading clinical research in language learning and expression. Compared to Tobii Dynavox previous symbol communication software, Snap is much easier to use, much more responsive and much more capable. Another important addition to this software is that it comes together with a companion app called Pathways, which is a comprehensive instructional and training solution that enable end users, parents, teachers, therapists to obtain a robust and interactive guidance on how to learn to communicate using this solution. Our intent is to make Snap into our flagship software to be used across a broad part of Tobii Dynavox portfolio of devices. It's obviously the default software on the new in the devices, and it's also available now on our iControl I Series communication devices. In the Q2, we also launched Snap as an iPad app as well. And this is all done with the long term goal to make Snap the gold standard and the most widely used software communication, single communication software in the assisted technology industry. And we believe that this is a very important strategic position to take and to hold for Tobii Dynavox. Both Indi and Snap have received positive initial response in the market with very good reviews from both professional therapists, from end users and their families. Inde was off to a good sales start towards the end of the quarter, but it's still too early for these new products to have any significant impact on the sales numbers. Typically, it takes a few quarters for new products to gain sales momentum in this market due to long processes for prescribing devices with professionals, etcetera. Products is that now we have an updated portfolio of very competitive best in class hardware products in most of the device categories in the market. So a lot of new products in the quarter. We're not completely done yet. We're planning to launch even more products in Tobii Dynavox later this year. So over to Johan, please walk us through the financials for Tobii Dynavox. Okay. Hi, everyone. The Q2, revenues increased by 2% compared to Q2 of 2016. Adjusted for currency effects, we saw a decline of 4% and adjusted also for material backlog effect, Dynavox revenues were roughly flat versus last year. We saw continued good growth for our eye control devices, while our older touch products continued to show slower sales as expected. As Henrik mentioned, we're growing our product portfolio rapidly in order to address these new important opportunities as well as the need for product refresh. However, the product launches in the quarter did not yet impact the revenue materially. Overall, we see a lot of progress in the product portfolio and we're confident that these new products will contribute to drive healthy growth going forward. We're not fully satisfied with the sales in Q2, but saw improvements from Q1 of this year. As you know, our long term target is to grow top line in Tobii Dynavox by at least 10% per year. The lower EBIT margin is a result of our gross margin declining 1 percentage point due to product mix shift in combination with slightly increased operating expenses in research and development. In the first half, revenue declined 1% or FX adjusted 5%, and our EBIT margin was 11%. With that, let's move to Tobey Pro. Right. So Tobii Pro is the global leader in eye tracking research solutions used for understanding human behavior. Tobii Pro has a global market share close to 50%. And this business unit makes up around 25% of the group's revenue. The products that we sell in Tobii Pro include both eye tracker hardware and research software that allow our customers to conduct various types of studies into human behavior and consumer responses. Let's move to the slide on the Sticky acquisition. So now in the Q2, Tobipro acquired Sticky. And Sticky has developed a cloud based solution for large scale eye tracking studies, for instance, to test web ads, package design and videos. And Sticky uses regular web cameras to perform a simpler form of eye tracking, which means that tests can be done in people's homes using their own regular computer. You don't need a specific eye tracking hardware. And this makes it possible to obtain large quantities of eye tracking data at low costs. In addition to this, the sticky offering provides very easy to use cloud based tools to design tests, collect the data across many test people and provide automated and rapid reports on the risk. In the Q2, we also launched PCI Plus, which is our most recent premium eye control peripheral device. This is a medical grade device and features our most recent eye tracker platform as well as advanced microphones for speech input, switch ports and connectors for remote control of the home, etcetera. This is a product that is primarily aimed at users who are able to speak, but need eye control, either standalone or in combination with speech or switch input in order to access and use a computer effectively. Together with the PCI Plus, we also launched a brand new version of our Windows control software. And this software is also available on the flagship I Series products and enable our users to do pretty much anything you can do in Windows using iControl. In July, we so in the beginning of Q3, we launched the Imobile Plus product, and this is a product that you clip onto a consumer Windows tablet. The Imobile adds an eye tracker, powerful speakers, standalone battery, etcetera, and thus converts the consumer tablet into a competent eye control assistant technology communication device. And this then becomes a lower priced option compared to the medical grade high end I series and thus enables us to reach additional market segments that are more price sensitive. If we go to the next slide, this shows a bit of an overview of how the portfolio now stands. So we have products across different price categories on the high end of medical grade devices, both in the eye tracking segment and the touch segment. We have mid range devices that are lower priced options, now both with Indi in the touch segment and with Imobile Plus for eye tracking. And we have software that either run on the medical grade, on the mid range devices, but are also available as pure apps as the lowest cost options. So with all of these new products, we are well underway to do a major revamp of the product portfolio for Tobii DynaLocks. We accomplished 3 major things with these new additions. 1st, we create this much broader offering across different price points, where historically Tobii Dynavox has been strong in the high end medical devices, both on the eye control and the touch based side, whereas we have been weaker in the lower price solutions. And now we're adding 2 very strong offerings in the mid range segment, Indi for touch devices, Imobile Plus for eye control devices, and we're also offering Snap as a pure software solution on both iPads and consumer Windows tablets, which becomes a very low cost entry point for potential users. The second thing we accomplished with these new products is that with Snap, this is a major step forward in taking a clear leadership position in software in this market. And although the devices drive a large portion of the revenue, the software unlocks the value and creates all the stickiness with users and therapists. And again, Snap is huge improvement from previous simple communication software and superior to anything that our competitors offer in our view. And third, the third thing we accomplished with these products, and this is all offered as a software as a service business model. We believe that sticky complements Tobii Pro's other offerings in a very good way and thus fits perfectly into Tobii Pro's long term ambition to move beyond the lab and drive large volume testing using eye tracking. We also see clear synergies where TobiPro's other products, global sales force, research service capabilities, customer base and brand name can help accelerate the growth of the Sticky business. Already prior to this acquisition, Tobipro and Sticky were in many cases servicing the same customers. Worth noting is that Sticky is still a rather small business that had about US1.5 million dollars in turnover in 2016. It made a loss of $2,800,000 in that year since the business was still investing to build products and sales. This means that the Stikka acquisition is likely to have a negative impact on the profitability in Tobipro over the next couple of quarters. Let's move to the next slide. Sales was strong for Tobit Pro in the 2nd quarter with a 19% revenue growth adjusted for currency effects, and we drove a solid growth in both established and new customer segments and across most of our major geographies. In particular, we saw strong sales of the flagship product Tobii Glasses 2 and we also started shipping the new Tobii Pro spectrum eye tracker, which drove good revenue. One example of a new and rapidly growing customer segment is the industry segment. In particular, we have progress here in the Japan market. Here eye tracking is for instance used for skills transfer and this means that eye tracking is used to understand what behaviors characterize expert operators and you use this to conduct training on new operators to reach expert level faster. For this type of application, we already have large customers, both in the automotive industry that, for instance, use eye tracking to understand how operators inspect paint jobs in a production line or customers in the process industry who use eye tracking to understand how operators monitor different processes and in the transportation field, for instance, to use eye tracking to understand how train operators should pay attention in a more effective way. During the quarter, we also launched a solution for conducting eye tracking research in virtual reality environments. Many of the research fields are the same as with other types of eye trackers, but with virtual reality, it's possible to obtain a very controlled environment, which enables very focused and efficient studies in a broad range of research fields. Let's move to the financials for Tobii Pro. Okay. So as Henrik mentioned, Tobey Pro had a very good second quarter with revenues increasing 24% or 19% adjusted for currency effect. Products is that now we have an updated portfolio of very competitive best in class hardware products in most of the device categories in the market. So a lot of new products in the quarter. We're not completely done yet. We're planning to launch even more products in Tobii Dynavox later this year. So over to Johan, please walk us through the financials for Tobii Dynavox. Okay. Hi, everyone. In the Q2, revenues increased by 2% compared to Q2 of 2016. Adjusted for currency effects, we saw a decline of 4% and adjusted also for material backlog effect, Dynavox revenues were roughly flat versus last year. We saw continued good growth for eye control devices, while our older touch products continued to show slower sales as expected. As Henrik mentioned, we're growing our product portfolio rapidly in order to address these new important opportunities as well as the need for a product refresh. However, the product launches in the quarter did not yet impact the revenue materially. Overall, we see a lot of progress in the product portfolio, and we're confident that these new products will contribute to drive healthy growth going forward. We're not fully satisfied with the sales in Q2, but saw improvements from Q1 of this year. As you know, our long term target is to grow top line in Tobii Dynavox by at least 10% per year. The lower EBIT margin is a result of our gross margin declining 1 percentage point due to product mix shift in combination with slightly increased operating expenses in research and development. In the first half, revenue declined 1% or FX adjusted 5%, and our EBIT margin was 11%. With that, let's move to Tobii Pro. Right. So Tobii Pro is the global leader in eye tracking research solutions used for understanding human behavior. Tobii Pro has a global market share close to 50%. And this business unit makes up around 25% of the group's revenue. The products that we sell in Tobii Pro include both eye tracker hardware and research software that allow our customers to conduct various types of studies into human behavior and consumer responses. Let's move to the slide on the Sticky acquisition. So now in the Q2, Tobipro acquired Sticky. And Sticky has developed a cloud based solution for large scale eye tracking studies, for instance, to test web ads, package design and videos. And Sticky uses regular web cameras to perform a simpler form of eye tracking, which means that tests can be done in people's homes using their own regular computer. You don't need a specific eye tracking hardware. And this makes it possible to obtain large quantities of eye tracking data at low costs. In addition to this, the sticky offering provides very easy to use cloud based tools to design tests, collect the data across many test people and provide automated and rapid reports on the In the quarter, we also acquired and started the integration of Sticky, but the additional revenue in the quarter only corresponded to a small fraction of the overall revenue growth in Q2. With sticky on board, new refreshed products released and a strong general interest in our is also likely to result in more opportunities for us as a market leader. Gross margin was strong at 73%, and we saw improvements in our EBIT margin compared to last year, even if it is negative in absolute terms. When looking at Tobii Pro, it is important to remember that we have historically seen a strong seasonal pattern with revenue spike in the 4th quarter and comparatively lower sales in the 1st 3 quarters. This is impacting Q2 EBIT materially. And on top of this, we had acquisition and integration related expenses for SICI and increasing operating expenses related to R and D and sales and marketing. In H1, Tobii Pro revenues grew by 13%, which is similar when you adjust for FX and backlog effects, and our EBIT margin ended at a negative 1%. Moving on to Tobitek. All right. In Tobitek, our ambition is to introduce eye tracking in large scale into volume markets such as gaming PCs, mainstream computers, virtual reality, smartphones and beyond. Generally, we're still at a very early stage of market adoption in the different areas that Tobeytech addresses. Several of these opportunities are very large, but we will need significant time and investments to realize them. Turning to the quarter highlights for Tobii Tech. We continue to grow the ecosystem of games that support Tobii eye tracking. More than 15 new games with eye tracking support were announced in the Q2, including several large titles such as Assassin's Creed, Origins and For Honor. We're now at around 80 games with Tobii Eye tracking support. We generally receive positive feedback from our gaming end users. The most frequent comment on the question, what can we improve, is still to have even more game titles supporting eye tracking. We take that as a positive encouragement to continue the work on building the game ecosystem. Our sales of eye trackers to our key gaming PC device partners was stable during the quarter. Their products are now launched, and hence, we expect to continue at roughly these volumes until additional devices are launched in the market that drive higher volumes. We are currently making major investments into our next generation eye tracking platform for computer integration. It is still around a year and a half before this will hit the market, but this is likely to become a key enabler for integration of eye tracking into a broader range of PC devices. Let's turn to the next slide on VR. So in the virtual reality space, and this is all offered as a software as a service business model. We believe that sticky complements Tobii Pro's other offerings in a very good way and thus fits perfectly into Tobii Pro's long term ambition to move beyond the lab and drive large volume testing using eye tracking. We also see clear synergies where Tobii Pro's other products, global sales force, research service capabilities, customer base and brand name can help accelerate the growth of the Sticky business. Already prior to this acquisition, Tobii Pro and Sticky were in many cases servicing the same customers. Worth noting is that Sticky is still a rather small business that had about US1.5 million dollars in turnover in 2016. It made a loss of $2,800,000 in that year since the business was still investing to build products and sales. This means that the Stikka acquisition is likely to have a negative impact on the profitability in Tobit Pro over the next couple of quarters. Let's move to the next slide. Sales was strong for Tobit Pro in the 2nd quarter with a 19% revenue growth adjusted for currency effects, and we drove a solid growth in both established and new customer segments and across most of our major geographies. In particular, we saw strong sales of the flagship product TobiiGlasses 2 and we also started shipping the new Tobii Pro spectrum eye tracker, which drove good revenue. One example of a new and rapidly growing customer segment is the industry segment. In particular, we have progress here in the Japan market. Here, eye tracking is, for instance, used for skills transfer and this means that eye tracking is used to understand what behaviors characterize expert operators and use this to conduct training on new operators to reach expert level faster. For this type of application, we already have large customers, both in the automotive industry that, for instance, use eye tracking to understand how operators inspect paint jobs in a production line or customers in the process industry who use eye tracking to understand how operators monitor different processes and in the transportation field, for instance, to use eye tracking to understand how train operators should pay attention in a more effective way. During the quarter, we also launched a solution for conducting eye tracking research in virtual reality environments. Many of the research fields are the same as with other types of eye trackers, but with virtual reality, it's possible to obtain a very controlled environment, which enables very focused and efficient studies in a broad range of research fields. Let's move to the financials for Tobii Pro. Okay. So as Henrik mentioned, Tobey Pro had a very good second quarter with revenues increasing 24% or 19% adjusted for currency effect. Now continue to the financials for the group. For the Tobey Group, revenue increased by 10% compared to the same period last year and was up 4% adjusted for currency effects. As mentioned earlier, the material growth drivers in Q2 came from Tobii Pro and Tech. Gross margin for the quarter was 71%, down 2 points compared to the same quarter previous year, but in line with Q1 of 2017. Main reasons for the lower gross margin are the product mix changes in Tobii Dynavox and increasing sales in Tech with lower margin. The group's EBIT for Q2 was a negative $70,000,000 significantly lower than last year and also lower than Q1 of 2017. Earnings for our 2 profitable business units, Dynavox and Pro, were lower than last year, as mentioned earlier. Within Tobitek, we continue to invest in accordance with our strategy, which was also the main reasons for lowered EBIT in total for the group when comparing Q2 of last year. Our Q2 results contain nonrecurring items from the Sticky acquisition as well as costs related to the development of the next generation eye tracking platform. In the first half, the group revenues grew by 7% or 2% FX adjusted and our EBIT margin ended at a negative 24%. Please turn to our next page and let's have a view at the balance sheet. So for the group, cash flow after continuous investment was negative $78,000,000 in Q2. The change versus last year was related to the EBIT development and the increased investments in R and D in all three business units, including those nonrecurring items I mentioned earlier. Compared to Q1 2017, we did not have the same positive change in trade working capital and hence the decline sequentially. In the quarter, we paid $24,000,000 related to the sticky acquisition and more details are to be found in the interim report on that. We continued, however, to have a strong cash position of around $630,000,000 at the end of June. In other words, well prepared for future investments. That concludes the presentation of the financials. So back to Henrik. So in a quick summary, this was another intense quarter. We continued to grow the organization. Tobii DynaLocks launched a whole series of new and quite important products. Sales growth in Tobii Pro was really strong. And in Tobii Tec, we continued with progress in PC gaming and increasing investments and great interest in virtual reality. So with that, we're handing back over to you, Siobhan, and to questions from the teleconference. Thank In the quarter, we also acquired and started the integration of sticky, but the additional revenue in the quarter only corresponded to a small fraction of the overall revenue growth in Q2. With sticky on board, new refreshed products released and a strong general interest in our Pro products and services, we see a healthy increase in our pipeline versus previous quarters. Recent news around our competitor, SMI, is also likely to result in more opportunities for us as a market leader. Gross margin was strong at 73%, and we saw improvements in our EBIT margin compared to last year, even if it is negative in absolute terms. When looking at Tobii Pro, it is important to remember that we have historically seen a strong seasonal pattern with revenue spike in the 4th quarter and comparatively lower sales in the 1st three quarters. This is impacting Q2 EBIT materially. And on top of this, we had acquisition and integration related expenses for SIKI and increasing operating expenses related to R and D and sales and marketing. In H1, Tobii Pro revenues grew by 13%, which is similar when you adjust for FX and backlog effects, and our EBIT margin ended at a negative 1%. Moving on to Toby Tech. All right. In Tobitek, our ambition is to introduce eye tracking in large scale into volume markets such as gaming PCs, mainstream computers, virtual reality, smartphones and beyond. Generally, we're still at a very early stage of market adoption in the different areas that Toby Tech addresses. Several of these opportunities are very large, but we will need significant time and investments to realize them. Turning to the quarter highlights for Tobii Tech. We continue to grow the ecosystem of games that support Tobii eye tracking. More than 15 new games with eye tracking support were announced in the Q2, including several large titles such as Assassin's Creed, Origins and For Honor. We're now at around 80 games with Tobii eye tracking support. We generally receive positive feedback from our gaming end users. The most frequent comment on the question, what can we improve is still to have even more game titles supporting eye tracking. So we take that as a positive encouragement to continue the work on building the game ecosystem. Our sales of eye trackers to our key gaming PC device partners was stable during the quarter. Their products are now launched and hence, we expect to continue at roughly these volumes until additional devices are launched in the market that drive higher volumes. We are currently making major investments into our next generation eye tracking platform for computer integration. It is still around a year and a half before this will hit the market, but this is likely to become a key enabler for integration of eye tracking into a broader range of PC devices. Let's turn to the next slide on VR. So in the virtual reality space And we will take our first question from Michael Lassine from Carnegie. Please go ahead. Hi. Thank you. A few questions. First of all, if you can talk about the order intake in Q2. And you also mentioned backlog effects for the Dynavox segment and also nonrecurring high external development costs for ToBitek. Can you please explain what that was? Sure. So if we start with a question on the order intake, and I assume, Mikael, that you mean both maybe in Tobii Dynavox and in Tobii Pro. So in Tobii Dynavox, we did have a backlog effect, meaning that we simply at the we took a fairly high number of orders at the end very end last couple of days of the quarter, which did not ship completely until end of the quarter. Thus, they did not materialize as revenue. And in the numbers in the actual report, you can see the magnitude of those backlog effects. In Tobii Pro, we also had an order we actually for the full quarter in Tobii Pro, we had a neutral backlog effect. So that did not grow or decrease over the quarter. As we actually shipped the new Pro spectrum eye tracker, so we decreased the backlog of spectrum eye trackers. But on the other hand, also in Tobipro, we had strong sales at the very end of the quarter, which meant that we built up new backlog on new products at the end of the quarter. So in Tobii Pro, the backlog effects were 0. In Tobii Dynavox, we added some backlog during the quarter, which contributed to a smaller revenue than we would have had normally. And of course, those orders are likely to materialize in the Q3 instead as revenue. Your question on the external development costs in Tobey Tech. So as Joel mentioned, we had unusually large external development costs in Tobitec and these are specifically relating to some of the components that we are developing for the next generation eye tracker platform for computer integration. And several of those costs materialized specifically in the second quarter, but they are of largely onetime nature. Did that answer your question, Mikael? Or do you have a follow-up question on that? Yes. And the extra costs, they affected the P and L, right? Yes. Okay. Roughly how much was it, dollars 5,000,000, dollars 6,000,000 or less? Close to €10,000,000 Okay. Good. And then I have a few other questions, if I may. You mentioned that you expect unchanged volume? The interest in eye tracking has continued to grow even further. It is becoming increasingly apparent that eye tracking will be a key technology in future generations of VR headsets. And we believe that Tobii is well positioned to become a leading supplier of core eye tracking technology to device partners in this area. In the second quarter, we launched our VR development kit. This is a modification of the HTC Vive headset in which we integrate high fidelity eye tracking by building cameras, illumination system and our iCheck processor into the headsets. We sell this development kit to potential device customers and game studios. And we also sell a special version of it as a research solution within our Tobii Pro division. As already mentioned, we continue to grow the Tobitec organization now in the Q2, and the main reason for this is to enable us to work in parallel with multiple customers on multiple device integration, specifically in the virtual reality field. Do bear in mind that integration cycles are often known for Tobitec. Typically, it takes about a year from interest to a design win and thereafter another year to product launch. Let's go to the next slide. During the spring, we have signed sales agreements with 3 new integration customers in what we call the specialty markets area. 1 customer integrates our eye tracker into a surgery robot solution, one uses it for a diagnostic solutions and the third one builds it into a casino slot machine. These types of customers tend to be lower volume, but higher margin than consumer electronics integration. Johan, please walk us through the numbers for Turbo Tech. Okay. So revenues in Q2 increased by 60% year over year and the external sales were up around 150%. Despite this, sales were on the same level as Q1 this year, meaning stable sales to the PC gaming segment. Q4 of 2016 had, as you might remember, stock buildup effects with some of our major customers included. The gross margin was 43% and the change was driven by a greater share of sales to external integration customers in the PC gaming area. We have grown the organization significantly in TobiTech in the past quarters in order to pursue multiple sub segments, for example, to address the strong interest in the VR market as well as to work in tight integration projects with multiple parallel customers. The largest growth was in R and D, but we of negative EBIT in the business unit. Compared to Q2 of 2016, the operating loss increased from 52,000,000 to 87,000,000 Part of this amount included unusually large external nonrecurring costs related to the development of the next generation eye tracking Tobitik revenues grew by 70% and EBIT ended at a negative €160,000,000 Let's move for Tobeytech until new design wins can be released? And can you please then explain what this means in terms of lead times from the release of the design win when we know about it. And if we also should expect more or less stable Q4 revenues, can you discuss what this really means for ToveTech in the second half? So typically what we see is that once we become integrated into a particular device model, then of course, our sales is depending on how much is sold on that device model. And those sales numbers tend to actually be fairly stable over time. If a computer manufacturer, they launch a new computer, then that model sells at a certain volume. And if our eye tracking component is integrated in that, then we sell at that volume level. And then in order to continue growing the sales numbers, then we need to, of course, then have our eye tracking sensors integrated into a growing number of PC devices. We generally sometimes we can announce design wins well ahead of time. Sometimes depending on the marketing strategies of our customers, those design wins are announced late in the process. And that's typically outside of our control. It is usually impossible for us to preempt the marketing communication of these very large PT manufacturing customers, which means that sometimes it can be a long lead time from when we announce a design win until the product starts shipping and it translates into revenue. Sometimes it's a shorter time period. And we simply cannot usually, it's not our decision to make on that. We do not give typically forecasts for revenue into the future. So we typically do not state what we believe revenues will be in the coming time periods. Okay. But you haven't released any new design wins in, I think, the first half, maybe Q2, has there been any changes in the markets and among your customers and potential customers in your different application areas for TobeTech? We did you're correct. We announced design wins with Asia in the Q1, but we have not announced any additional design wins in the Q2. We continue to see interest in eye tracking on the gaming PC side. Where I would say, we see a clear change. I'll now continue to the financials for the group. For the TOBI Group, revenue increased by 10% compared to the same period last year and was up 4% adjusted for currency effects. As mentioned earlier, the material growth drivers in Q2 came from Tobii Pro and Teck. Gross margin for the quarter was 71%, down 2 points compared to the same quarter previous year, but in line with Q1 of 2017. Main reasons for the lower gross margin are the product mix changes in Tobii Dynavox and increasing sales in Tech with lower margin. The group's EBIT for Q2 was a negative $70,000,000 significantly lower than last year and also lower than Q1 of 2017. Earnings for our 2 profitable business units, Dynavox and Pro, were lower than last year, as mentioned earlier. Within ToveTech, we continue to invest in accordance with our strategy, which was also the main reasons for lowered EBIT in total for the group when comparing Q2 of last year. Our Q2 results contain non recurring items from the Sticky acquisition as well as costs related to the development of the next generation eye tracking platform. In the first half, the group revenues grew by 7% or 2% FX adjusted and our EBIT margin ended at a negative 24%. Please turn to our next page, and let's have a view at the balance sheet. So for the group, cash flow after continuous investment was negative $78,000,000 in Q2. The change versus last year was related to the EBIT development and the increased investments in R and D in all three business units, including those nonrecurring items I mentioned earlier. Compared to Q1 2017, we did not have the same positive change in trade working capital and hence the decline sequentially. In the quarter, we paid $24,000,000 related to the sticky acquisition and more details are to be found in the interim report on that. We continued, however, to have a strong cash position of around $630,000,000 at the end of June. In other words, well prepared for future investments. That concludes the presentation of the financials. So back to Henrik. So in a quick summary, this was another intense quarter. We continued to grow the organization. Tobii Dynavox launched a whole series of new and quite important products. Sales growth in Tobii Pro was really strong. And in Tobii Tech, we continued with progress in PC gaming and increasing investments and great interest in virtual reality. So with that, we're handing back over to you, Siobhan, and to questions from the teleconference. Thank you. Is in virtual reality, where we definitely see a continued growth in the interest and excitement around eye tracking. So there we are on a, I would say, a positive trajectory in the industry overall. And it genuinely feels like eye tracking is likely to become a very important technology in future generations of the ear headset. Okay. Thank you. Our next question comes from Johannes Reiss from Apis Capital. Please go ahead. Yes, good afternoon. Hello. Maybe some follow ons on the topic of first off virtual reality you mentioned in the call, it's a year design and then a year maybe after this product comes to market. Can you give us a feeling maybe that some of your projects you are working on maybe have already gone this way? You made a design win and maybe it's also some work done on the development of the product and bring it to market. Therefore, maybe we could see the launch of the product maybe in the next 6, 9, 12 months? So we have not officially communicated any design wins yet in the VR space. We have officially communicated that we have some technology collaborations, for instance, with STARVR and with VAAL. We have, on a couple of occasions, stated that we believe that it's likely that we will see the 1st mass market VR products with Tobii eye tracking integrated to be in the market, most likely sometime during 2018. And that still feels very much as a good hypothesis. So I think we're likely to see the first products with the right tracking built in during next year. Okay. As you mentioned, you have not published design wins. There could be ones like you mentioned before with the PC area, but you maybe are not allowed to tell us. Therefore, there could be what you even could mention it even without calling the name. Yes. Again, we have not communicated any design wins publicly in the Doctor space yet. On the special markets for Tobeytech, how is the pipeline there? Is maybe do you realize an increasing demand from other sectors, also traditional ones like PC and virtual reality on maybe smartphone area? So in specialty markets, if we start there, that's typically the type of customers or segments that we call specialty markets is, for instance, medical applications or industrial applications. And we do see a good growth of interest and demand from a broad range of different application areas in what we call specialty markets. So we definitely see opportunity there. These type of customers and opportunities are typically smaller in size, in particular in volume, but usually with a higher margin opportunity. So it's sort of a high value sales compared to what we see in consumer electronics where the margins tend to be thinner, but the volumes tend to, at least long term, have much higher potential. On the smartphone side, as you also mentioned, we continue our work was on that side. As you probably know, we had our first design and integration done with Huawei in the Honor Magic smartphone. And we are working with existing and potential new customers to look at possibilities to do more sophisticated integrations of eye tracking into future generations of smartphone. On the smartphone side, though, this is definitely a long term effort that is more likely to take more calendar time to materialize. I would say it's clear that virtual reality is an opportunity that is much more here and now compared to smartphones. Maybe coming back to the specialized markets. Had you seen in the last in the first half a stronger increase there because in my eyes, the specialized markets also maybe are maybe coming a little bit together with virtual reality, with augmented reality, I I agree with you. And that's a it's a good comment that virtual reality and maybe even more augmented reality does have a number of interesting niche applications, for instance, in industrial applications, etcetera. And also here, of course, eye tracking has a clear value proposition and a role to play. So yes, we do see opportunities also there. Okay. And partly finally on SMI acquisition of Apple. Do you see already you mentioned it a little bit in the maybe a little bit in the presentation. Have you seen already interest from customers who may be looking for new sources because they don't want to work together with Apple or maybe can't work again and not again with SMI? Yes. We have seen early indications of that. Okay. Super. Thanks. We have no questions at the moment. And we will take our first question from Michael Lassine from Carnegie. Please go ahead. Hi. Thank you. A few questions. First of all, if you can talk about the order intake in Q2. And you also mentioned backlog effects for the Dynavox segment and also nonrecurring high external development costs for TobeTech. Can you please explain what that was? Sure. So if we start with a question on the order intake, and I assume, Mikael, that you mean both maybe in Tobii Dynavox and in Tobii Pro. So in Tobii Dynavox, we did have a backlog effect, meaning that we simply at the we took a fairly high number of orders at the end very end last couple of days of the quarter, which did not ship completely until end of the quarter. Thus, they did not materialize as revenue. And in the numbers in the actual report, you can see the magnitude of those backlog effects. In Tobii Pro, we also had an order we actually for the full quarter in Tobipro, we had a neutral backlog effect. So that did not grow or decrease over the quarter. As we actually shipped the new Pro spectrum eye tracker, so we decreased the backlog of SpectraMine trackers. But on the other hand, also in TobiPro, we had strong sales at the very end of the quarter, which meant that we built up new backlog on new products at the end of the quarter. So in Tobii Pro, the backlog effects were 0. In Tobii Dynavox, we added some backlog during the quarter, which contributed to a smaller revenue than we would have had normally. And of course, those orders are likely to materialize in the Q3 instead as revenue. Your question on the external development costs in Toby Tech. So as Joel mentioned, we had unusually large external development costs in Tobitec and these are specifically relating to some of the components that we are developing for the next generation eye tracker platform for computer integration. And several of those costs materialized specifically in the second quarter, but they are of largely one time nature. Did that answer your question, Mikael? Or do you have a follow-up question on that? Yes. And the extra costs, they affected the P and L, right? Yes. Okay. Roughly how much was it, dollars 5,000,000, dollars 6,000,000 or less? Closer to €10,000,000 Okay. Good. Yes. And I have a few other questions, if I may. You mentioned that you expect unchanged volumes. As there are no further questions, I will hand the call back to the speaker for any closing or additional remarks. We have a couple of questions from the webcast. And we have questions from Bo Engval. His first question is what is the estimated ToveTech market share of eye tracking in computer gaming in Q1, Q2 of 2017? Hi, Bo. As far as we know, we are the only supplier of eye tracking technology for the gaming segment to date. So that would make our market share 100%. Okay. And the next question is, do you think, strictly technologically speaking, that Tobitec is the market leader, especially considering challenges regarding future hardware and software adaptations to both virtual reality and smartphones? Yes. I do think that Tobii does have a very strong technology offering and clear competitive advantages in terms of the core eye tracking technology. That said, I also believe that there is and we are definitely anticipating strong competitors also focusing a lot of resources on developing technology in particular for VR and smartphone spaces in the future. But I think we are very well positioned as we stand. And the third question is why was Tovitec external sales lower in Q2 twenty seventeen compared with Q1 in 2017? Our sales is, of course, driven by the sales of our customers, our integration customers. Both in Q1 and Q2, the absolute majority of external sales was to the gaming PC manufacturers. Our understanding is that generally sales of PC devices tends to be slower in the summer months, which also means then that our integration customers buy lower volumes of components from us prior to the summer. It's not a big difference, but that explains a small difference between Q1 and Q2. Okay. And then there are no more questions from the webcast. Do we have any more questions from the teleconference? There are no questions on the telephone. All right. So I guess that means we are done for today. Thanks, everyone, for attending the earnings call today. And as usual, we hope to see you again at the next earnings call. Have a great rest of the day today, everyone. Thanks. Bye bye. This is for Toby Tech. Until new design wins can be released? And can you please then explain what this means in terms of lead times from the release of the design win when we know about it? And if we also should expect more or less stable Q4 revenues. Can you discuss what this really means for ToveTech in the second half? So typically what we see is that once we become integrated into a particular device model, then of course, our sales is depending on how much is sold of that device model. And those sales numbers tend to actually be fairly stable over time. If a computer manufacturer, they launch a new computer, then that model sells at a certain volume. And if our eye tracking component is integrated in that, then well then we sell at that volume level. And then in order to continue growing the sales numbers, then we need to, of course, then have our eye tracking sensors integrated into a growing number of PC devices. We generally sometimes we can announce design wins well ahead of time. Sometimes depending on the marketing strategies of our customers, those design wins are announced late in the process. And that's typically outside of our control. It is usually impossible for us to preempt the marketing communication of these very large PT manufacturing customers, which means that sometimes it can be a long lead time from when we announce a design win until the product starts shipping and it translates into revenue. Sometimes it's a shorter time period. And we simply cannot usually, it's not our decision to make on that. We do not give typically forecasts for revenue into the future. So we typically do not state what we believe revenues will be in the coming time periods. Okay. But you haven't released any new design wins in, I think, the first half, maybe second quarter. Has there been any changes in the markets and among your customers and potential customers in your different application areas for TobeTech? We did you're correct. We announced design wins with Asia in the Q1, but we have not announced any additional design wins in the Q2. We continue to see interest in eye tracking on the gaming PC side. Where I would say we see a clear change is in virtual reality, where we definitely see a continued growth in the interest and excitement around eye tracking. So they only are on a, I would say, a positive trajectory in the industry overall. And it genuinely feels like eye tracking is likely to become a very important technology in future generations of the ear headset. Okay. Thank you. Our next question comes from Johannes Reiss from Apis Capital. Please go ahead. Yes. Good afternoon. Hello. Maybe some follow ons on the topic of first of virtual reality you mentioned in the call, it's a year design in and a year maybe after this product comes to market. Can you give us a feeling maybe that some of your projects you are working on maybe have already gone this way? You made a design win and maybe it's also some work done on the development of the product and bring it to market. Therefore, maybe we could see the launch of the product maybe in the next 6, 9, 12 months? So we have not officially communicated any design wins yet in the VR space. We have officially communicated that we have some technology collaborations, for instance, with STARVR and with DAO. We have, on a couple of occasions, stated that we believe that it's likely that we will see the 1st mass market VR products with Tobii eye tracking integrated to be in the market, most likely sometime during 2018. And that still feels very much as a good hypothesis. So I think we're likely to see the first products with the right tracking built in during next year. Okay. As you mentioned, you have not published Design Wins. There could be ones like you mentioned before with the PC area, but you maybe are not allowed to tell us. Therefore, there could be what even could mention it even without calling the name. Yes. Again, we have not communicated any design wins publicly in the VR space yet. On the special markets for Tobeytech, how is the pipeline there? Is maybe do you realize an increasing demand from other sectors, also traditional ones like PC and virtual reality and maybe smartphone area? So in specialty markets, if we start there, that's typically the type of customers or segments that we call specialty markets is, for instance, medical applications or industrial applications. And we do see a good growth of interest and demand from a broad range of different application areas in what we call specialty markets. So we definitely see opportunity there. These type of customers and opportunities are typically smaller in size, in particular in volume, but usually with a higher margin opportunity. So it's sort of a high value sales compared to what we see in consumer electronics where the margins tend to be thinner, but the volumes tend to, at least long term, have much higher potential. On the smartphone side, as you also mentioned, we continue our work was on that side. As you probably know, we had our first design and integration done with Huawei in the Honor Magic smartphone. And we are working with existing and potential new customers to look at possibilities to do more sophisticated integrations of eye tracking into future generations of smartphone. On the smartphone side, though, this is definitely a long term effort that is more likely to take more calendar time to materialize. I would say it's clear that virtual reality is an opportunity that is much more here and now compared to smartphones. Maybe coming back to the specialized markets. Had you seen in the last in the first half a stronger increase there because in my eyes, the specialized markets also maybe coming a little bit together with virtual reality, with augmented reality because with Industry 4.0, Internet of Things and so on, there could be a lot of maybe use cases for such things. I agree with you. And that's a it's a good comment that virtual reality and maybe even more value proposition and a role to play. So yes, we do see opportunities also there. Okay. And partly finally on SMI acquisition of Apple, do you see already you mentioned it a little bit in the maybe a little bit in the presentation? Have you seen already interest from customers who may be looking for new sources because they don't want to work together with Apple or maybe can't work again and not again with SMI? Yes, we have seen early indications of that. Okay. Super. Thanks. We have no questions at the moment. As there are no further questions, I will hand the call back to the speaker for any closing or additional remarks. We have a couple of questions from the webcast. And we have questions from Bo Engvall. His first question is what is the estimated Tobitek market share of eye tracking in computer gaming in Q1, Q2 of 2017? Hi, Bo. As far as we know, we are the only supplier of eye tracking technology for the gaming segment to date. So that would make our market share 100%. Okay. And the next question is, do you think, strictly technologically speaking, that Tobitec is the market leader, especially considering challenges regarding future hardware and software adaptations to both virtual reality and smartphones. Yes. I do think that Tobey does have a very strong technology offering and clear competitive advantages in terms of the core eye tracking technology. That said, I also believe that there is and we are definitely anticipating strong competitors also focusing a lot of resources on developing technology, in particular for VR and smartphone spaces in the future. But I think we are very well positioned as we stand. And the third question is why was Tovitec's external sales lower in Q2 2017 compared with Q1 in 2017? Our sales is, of course, driven by the sales of our customers, our integration customers. Both in Q1 and Q2, the absolute majority of external sales was to the gaming PC manufacturers. Our understanding is that generally sales of PC devices tends to be slower in the summer months, which also means then that our integration customers buy lower volumes of components from us prior to the summer. It's not a big difference, but that explains a small difference between Q1 and Q2. Okay. And then there are no more questions from the webcast. Do we have any more questions from the teleconference? All right. So I guess that means we are done for today. Thanks, everyone, for attending the earnings call today. And as usual, we hope to see you again at the next earnings call. Have a great rest of the day today, everyone. Thanks. Bye bye.