Hi, everyone, and welcome to this earnings call for the fourth quarter and also for the full year 2016. I am Henrik Eskilsson, and with me is also our CFO, Esben Olesen. Let's turn to the next slide. 2016 was an exciting year for Tobii and I think also for the world of eye tracking. We've seen established markets, such as research and assistive technology, continue to grow and mature, and we have successfully taken the first steps into consumer markets. The first consumer laptop with built-in eye tracking was launched in March by the gaming PC manufacturer MSI, and was followed in the fall by Dell with their Alienware 17 premium gaming laptop and Acer with multiple premium laptops and gaming monitors. Eye tracking has also become widely recognized as a key technology for future generations of virtual reality headsets.
On top of that, right before Christmas, we also announced our first smartphone implementation as Huawei unveiled the Honor Magic smartphone. Tobii is clearly positioned as a global leader in eye tracking. Two of our divisions, Tobii Dynavox and Tobii Pro, are profitable market leaders and have well-established product portfolios in the respective markets. Within the third division, Tobii Tech, we invest to take a leading position in several new high-volume markets for eye tracking. To cater to these growing opportunities, we have increased our investments in technology and product development, as well as in sales and marketing. During the year, we have significantly grown our organization and more than 100 employees have been added to the team. We have grown in all three divisions and across all functions, but the largest growth has been in the Tobii Tech division and in R&D.
The Tobii group passed a milestone as 2016 was our first year with revenue exceeding SEK 1 billion. Let's go through the developments in each division, starting with Tobii Dynavox on the next slide. Tobii Dynavox accounts for roughly 70% of the group sales. This business unit is clearly positioned as the global leader in the field of assistive technology for communication, with a market share of close to 50% globally. Moving to the next slide. The Tobii Dynavox PCEye Mini product enables our users to control the computer with their eyes. This product was launched in the summer of 2016, and now in the fourth quarter, it was awarded the Best of Innovation Award in the Tech for a Better World category at CES, which is the world's largest consumer electronics show.
In the quarter, we announced Message Banking, which is a cloud-based solution that enables individuals who are at risk of losing their voice, for instance, for persons with ALS, to create what is called a message bank with recorded messages using their own voice. This makes it possible for them to use a communication device at a later stage to speak with their own voice also after their actual voice has been lost. Turning to the page on the full year highlights for Tobii Dynavox. In the full year, we have provided a voice to nearly 15,000 new Tobii Dynavox users. All of us on the Tobii team are extremely proud of this. It's a true blessing to have the opportunity to work with technology that has such a profound impact on people's lives.
To make our product even better suited for the varying needs of our users, we have in 2016 increased the level of R&D investments in Tobii Dynavox. This has already resulted in several products launched during the year, but we also have made significant development efforts that have not yet materialized and that will result in new products during 2017. Important product launches in 2016 included the I-Series+ with the new IS4 eye-tracker platform, which has resulted in greatly improved eye-tracking performance. We also launched our first localized product for the Chinese market, and we have launched new software such as Snap Scene and a number of important upgrades and improvements to software products such as Communicator, Compass, and Boardmaker Online, as well as functionalities that complement our offerings, such as personalized voices and Message Banking.
In the spring, we started direct sales in the U.K. market, which has led to an initial lower sales in the U.K., as sales via resellers has dropped significantly. We are confident, however, that this is the right strategy long-term for the U.K. market. Let's turn to the page on Tobii Dynavox quarter financials. In the fourth quarter, revenue decreased by 7% compared to Q4 of 2015. In the fourth quarter of 2015, we had significant positive one-time effects from the Steve Gleason Act, which, as you may recall, regulates funding through Medicare in the U.S. If we adjust for those one-time effects as well as for currency effects, sales in the fourth quarter 2016 was flat compared to the previous year. The trend that we have seen earlier in the year also continued in Q4.
We saw a good increase in the number of sold eye-tracking devices. The growth in sold units was in part counteracted by the price reductions we made in April on some of the products, as well as by the fact that several of our touch-based products are late in the product life cycle, which continues to hamper sales in that product category. EBIT margin for the quarter was 20% or 18% adjusted for currency effects, which was an improvement from last year, which was 14% when we adjust for both currency effects and one-time effects from the Steve Gleason effect or the Steve Gleason Act. Let's go to the slide on full-year financials for Tobii Dynavox. For the full year, revenue increased by 3%. This is clearly below our long-term financial target of growing revenue in Tobii Dynavox by at least 10% per year.
When looking at the full-year numbers, the one-time effects from Steve Gleason Act were roughly the same in both 2016 and in 2015. That effect evens out in the full-year comparison. In the full year, the growth in number of sold eye-tracking devices was good. This growth was in part counteracted by the price reductions we made in the spring, as well as by gradually slower and slower sales of touch products. We also saw significant reduction of sales in the U.K. market due to the switch to direct sales there. EBIT margin for the full year was 16%, which was on the same level as 2015 for the full year. As you may remember, our long-term financial target is to improve this over time to reach 20% for the business unit. Let's continue over to Tobii Pro.
Tobii Pro makes up about 20% of the group sales. This business unit is the global leader in eye-tracking research solutions used for understanding human behavior with a global market share close to 50%. Tobii Pro's products include both eye tracker hardware and analysis software that allow our customers to conduct various types of studies of human behavior and consumer responses. We also carry out eye-tracking-based market research projects for our clients. Let's turn to the quarter highlights slide for Tobii Pro. In this quarter, Tobii Pro announced two new very important products. The first new product is Tobii Pro Spectrum. This is our most advanced research eye tracker to date and allows researchers to collect very precise eye-tracking data. The product is mainly targeted towards the academic research segment and enables improved research in fields such as psychology, neurology, linguistics, and infant research.
We believe that this offering will enable us to increase our market share in the very high-end part of the eye-tracking research market. The other new product that was launched is Tobii Pro Lab. This is Tobii Pro's new flagship software for eye-tracking research. It enables our customers to design tests, to collect data, and to analyze this data in a wide variety of ways and with powerful and user-friendly tools and workflows. One key feature with Tobii Pro Lab is that it targets a broader range of biometric research uses where eye-tracking data can be combined with other signals such as brain activity, heart rate, et cetera. Both of these products will start shipping to customers in the spring of this year in 2017. Let's move to the slide on full-year highlights.
We saw strong sales development in Tobii Pro throughout 2016, and sales grew across the board in all geographic regions and across all product categories, as well as in services. Of particular importance was the Tobii Pro Glasses 2 product, which has been a sales driver in both existing and new subsegments such as human performance analysis. During the year, we significantly increased our R&D investments in Tobii Pro by roughly 30%. This has resulted in the new products, Tobii Pro Spectrum and Tobii Pro Lab, as well as in numerous improvements to the Glasses 2 offering. We have also started to explore new business models for eye-tracking analytics by building up our first so-called in-home panel, where we have equipped several hundreds of households with eye trackers and gather data on their attention while they browse the Internet.
This is still at the business development stage, but has the potential to, in the future, enable us to offer eye-tracking data and analytics in much more scalable and valuable ways to a broad variety of agencies, advertisers, publishers, ad tech companies, et cetera. Let's turn to the page on financials for the quarter. In Tobii Pro, we have historically had a clear seasonal pattern with extra strong sales, specifically in the fourth quarter, and this was the case also in 2016. Revenue in the quarter grew by 14% over Q4 2015, or by 8% adjusted for currency effects. The quarter revenue was at a record high, although organic year-on-year growth was somewhat lower than in the first nine months of 2016.
Let's move to Tobii Pro financials for the full year, where sales growth was strong at 17% or 15% adjusted for currency effects. This is well in line with our long-term financial target for Tobii Pro, which is to grow top line by 15% per year. EBIT margin for the full year was 6% compared to 10% in 2015. The main reason for lower EBIT margin, despite good sales growth, was the large increase in R&D investments of approximately 30%. Our long-term financial target is to improve the EBIT margin in Tobii Pro to over time reach 15%. With that, let's move on to Tobii Tech. Tobii Tech provides components and platforms for eye tracking to device manufacturers that integrate our technology into their products.
Our ambition is to introduce eye tracking in large scale into volume markets such as gaming PCs, mainstream computers, virtual reality, smartphones, and beyond. The business unit is investing significant resources to further develop our core technology in order to further improve performance, reduce cost, power consumption, and size, and to adapt it to different types of devices and use cases. We're also investing in growing the so-called ecosystem of application partners that integrate support for eye tracking in a range of different software and computer games. Let's turn to the quarter highlights. In the fourth quarter, Dell started shipping the Alienware 17 gaming notebook with our eye tracker built in. This has meant a significant step up in production quantity for us, and our supply chain has been able to scale well.
In the quarter, we launched the Tobii Eye Tracker 4C, which is our new own eye-tracking gaming peripheral. This, of course, features the new IS4 eye tracker platform, which improves performance quite a bit compared to our previous peripheral product, the Tobii EyeX. We also introduced head pose tracking as a core capability of our eye tracking platform. This makes our sensors even more aware of the user and can, for instance, be used to enable more immersive gaming experiences. During the quarter, Acer announced one more gaming monitor that integrates Tobii eye tracking, and in January of this year, Acer also announced the new V Nitro with integrated Tobii eye tracking. This is a premium notebook that is sort of a hybrid between a professional and gaming notebook, which actually makes it an exciting initiative since it's Tobii's first step towards broader use cases in notebooks beyond pure gaming.
We continue to have good traction in our collaborations with a growing range of game publishers and studios. Ubisoft launched new games such as Watch Dogs 2 and Steep, both with Tobii eye tracking features built in. Crystal Dynamics has come out with an updated version of the game Rise of the Tomb Raider with Tobii eye tracking, and Techland has implemented eye tracking in an enhanced edition of the game Dying Light. To top it all off, Huawei announced a new premium smartphone called the Honor Magic, and this phone uses an IR camera and Tobii's eye tracking algorithms to make the device aware of the user's presence and rough attention. In combination with other artificial intelligence capabilities, eye tracking is used to create a more natural and intuitive experience for the user of this phone. Let's move to full-year highlights for Tobii Tech.
It's clear that in 2016, Tobii and eye tracking has made a positive entry into the PC gaming market. By now, three of the top five game PC manufacturers have launched several gaming laptops and gaming monitors with Tobii eye tracking built in. In addition, we're now up to almost 50 games that integrate Tobii eye tracking to create more immersive gaming experiences. We're still at an early stage on the adoption curve, though. These are all expensive premium hardware devices, which of course limits volume. We believe that we need many more games with really good eye tracking integration to provide a compelling offer to mainstream gamers. We're at a stage where we, together with the game developer community, are exploring and learning how to best use eye tracking in games and how to also truly engage with the gamer community.
We still have a lot of work ahead of us, but in a year, we have clearly taken many steps in the right direction. This positive entry has been accomplished through large investments, both in core technology development, in large integration projects with customers, and significant sales and marketing efforts. We plan to continue with a high investment pace in this sub-segment also in 2017. Over to the next slide. During the year, we have seen a clear rise in the interest for eye tracking in virtual reality. Many in the industry agree that eye tracking is likely to be an important technology in future generations of VR headsets. Google's acquisition of the eye-tracking company, Eyefluence, and Facebook-owned Oculus acquisition of the Eye Tribe in the fourth quarter both illustrate this.
In 2016, we increased our investments in adapting and developing our eye tracking technology for VR, we plan to increase these investments further during 2017. We have also spent significant effort in the collaboration with Huawei to implement our eye-tracking algorithms and use cases into the Honor Magic smartphone. Personally, I'm convinced that eye tracking will be an important technology also in future smartphones and enable such devices to become more intelligent and intuitive to use by being aware of us as users and our presence, our attention, and interest. We are, however, at an early stage on the learning curve here, and significant investments and time will be required to both develop high-quality eye-tracking technology adapted for smartphones and to explore and realize the full value of possible use cases. Let's move to the quarter financials for Tobii Tech.
Tobii Tech's revenue for the quarter was more than two and a half times higher than in the fourth quarter of 2015. The largest increase was in external sales in the PC gaming and smartphone areas. It's worth noting, though, that a significant part of the revenue in the quarter was of one-time nature, due to one-time development fees from customers and inventory build-up among some of our integration customers. The gross margin was lower than the comparison period due to the fact that we have significantly lower gross margin on sales of eye tracking platforms to integration customers in PC gaming. We are at an early market making stage, where we have to work hard to reach a price point that is feasible for early adopter customers here.
With future generations of the core technology in combination with higher volumes, we aim to lower our production costs and thus enable proper gross margins also in this sub-segment. Operating loss in Tobii Tech for the quarter was SEK 64 million, an increase from the same period last year due to increased spending on both R&D and sales and marketing. Moving to the full page or the full-year financials for Tobii Tech, where for the full year, Tobii Tech's revenue increased by 66%. The largest increase came from external customers, but sales to the other two business units also increased. The operating loss increased to SEK 207 million due to significant increase in both R&D and marketing spend. With that, let's turn to the next page on the group financials and handing over to Esben, our CFO.
Thanks, Henrik. Let's take a look at the group summary. Adjusted for currency effect and the one-time Steve Gleason effect, revenue increased by 10%. Gross margin is 71% compared to 76% last year. The main reason for the lower margin is that we, this quarter, have a higher share of Tobii Tech revenue and Tobii Tech have currently a lower margin that we see in Tobii Dynavox and Tobii Pro. We also have some price reductions in Tobii Dynavox, still have an effect on that. We have changed products mixed in Tobii Pro, where we see more consulting revenue than we had last year. Then again, we have the one-time Steve Gleason effect in 2015, which also increased the margin in Q4. Turning to Q4 results. EBIT for Tobii Dynavox was down SEK 4 million.
Here you also have to remember that last year we had the one-time Steve Gleason effect impacting the EBIT in Q4. Tobii Pro was almost the same as last year, Tobii Tech continued to increase investments, resulting in negative EBIT of SEK 64 million. The group EBIT is therefore SEK 7 million down compared to last year. Turning to full-year summary. Revenue increased by 9% compared to last year, adjusted for currency effect. Gross margin is also down here. It's 72% compared to 75% last year, and that is for the same reason as explained for the Q4 result. Turning to the full-year results, EBIT for the group is minus SEK 67 million compared to minus SEK 36 last year. The main driver for the lower EBIT is the continued investment in R&D. R&D investment increased from SEK 267 million to SEK 328 million, an increase of 23% in direct spend.
Adjusted for capitalizations and amortizations, the EBIT effect was SEK 37 million. The majority of the increase in R&D is related to Tobii Tech, but R&D investments has also increased in both Tobii Dynavox and Tobii Pro. Tobii Dynavox came in with an EBIT of SEK 125 and continued to have stable contribution to the group EBIT. Tobii Pro came in somewhat lower than last year due to the higher investment pace we have on R&D and market activity in Tobii Pro. Turning to balance sheet and cash flow. The cash flow from the quarter was minus SEK 23 million, almost the same as we saw in Q3, and reflects again the continuous high investment level for the group. In December 2016, Tobii carried out a rights issue to finance increased investments in smartphones and VR in Tobii Tech, and to give the company greater flexibility and capacity to carry out acquisitions.
The issue, which was heavily oversubscribed, generated net SEK 449 million to the group. We have therefore improved the already strong cash position to SEK 772 million in cash. We have no debt, and the equity rate is now up to 82%. After the rights issue, Tobii have a strong balance sheet and is prepared to meet future investment requirement. Back to Henrik.
Thanks, Esben. Doing a quick summary for the fourth quarter, we saw growth in Tobii Tech as we started shipping quantities of eye trackers to our first integration customers. Although part of the revenue was a one-time nature. In Tobii Dynavox, we had flat revenue compared to Q4 last year, but with good profitability. In Tobii Pro, we saw a solid quarter following good sales growth throughout the year. For the group, we're ending the year with a very strong cash position following the rights issue, which gives us the muscle to carry through on our plans to increase investments in Tobii Tech. With that, we're handing over to you again, Lisa, and questions from the teleconference.
Thank you. If you would like to ask a question at this time, please press star one on your telephone keypad. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, please press star one to ask a question. We will pause for just a moment to allow everyone to signal. We will now take our first question from Mikael Lathén from Carnegie. Please go ahead.
Okay. Good morning. Thank you. My first question is regarding Tobii Dynavox and the margin that the segment reported 20%. The comment about streamlining operations. Can you elaborate a bit on what you have done there? Thank you.
Thanks, Mikael. I would say that it's not one specific thing, but rather that we gradually see increasing efficiencies long-term, post the merger between Tobii's assistive technology business unit and DynaVox. Over time, we gradually see improvements there. One specific thing that we did was that we closed down our Boston office in the summer, which has allowed us to work in a more effective way, in the U.S. part of the Tobii Dynavox organization.
Okay, thank you. Can you also comment on how you see 2017 and the possibility to reach 10% top-line growth again?
We-
The implications, of course, from the touchscreen product renewal and those effects.
We don't generally give forward-looking projections on the business performance, on top-line, et cetera. We do try to be transparent in explaining what is happening in the business historically, which gives often a good ability for investors and analysts, et cetera, to make an informed estimate and view on the business. As we have mentioned previously, throughout all of 2016, we've seen a good growth of the number of sold eye tracking units. Again, this has been countered by the price reductions that we did in April of 2016 to some degree. We have seen gradually slower and slower sales of the touch part of the product portfolio during 2016, as well as slower sales in the U.K. market.
We have already previously mentioned that we are working on developing new products, specifically also for the touch segment in the market, that we plan will come into the market during 2017. Of course, our goal with those new products is to turn also the touch segment within this business unit into a positive development. One should bear in mind, though, that often when we launch new products in this market, it can take some calendar time before it translates into actual increased revenues, as the market sometimes needs some time to learn about the new products, et cetera.
You will meet easier comparisons from April, I guess, or Q2.
In terms of.
The product launches and the price reduction in April.
Yeah, we have not communicated specific dates for when during 2017 we are planning to launch new products. Those products are still under development, which always in itself means some level of uncertainty. But you're right that in terms of the price reductions that we made from April of 2016, those will be on an even comparison after April 2017.
Okay, thank you. Also, of course, a question regarding Tobii Tech and the sales increase in the quarter. You mentioned that it's an inventory buildup amongst some customers. Can you explain this? Will there be immediately lower revenues in Q1, Q2 due to seasonality and this effect?
I would assume so.
Yeah. What we are saying is that a portion of Tobii Tech's revenues in the fourth quarter were of specific one-time nature. In part, this inventory buildup, in part, these one-time development project fees, which means that those one-time revenues clearly then do not represent an ongoing revenue, that we should not expect those one-time revenues in coming quarters, of course.
Okay. Have you any indications and feedback on sellout or how some of the end customers are buying these products?
Generally, our impression is that sales are progressing well on several of these products, without going into specific details.
Okay. Fine. The final question is regarding the R&D level for Tobii Tech. Is this a seasonally high activity in the quarter, or is this a new level that is a new normal for this segment around SEK 50 million-SEK 51 million?
R&D spend, in particular in Tobii Tech, to some extent also in Tobii Dynavox and in Tobii Pro, but in particular in Tobii Tech, the R&D spend can vary quite a bit from quarter to quarter, depending on when we have, for instance, external development fees and things like that can fall into one specific quarter and not the other. I think when trying to find a normal level, it's important to look over several quarters and form an opinion based on that. During 2016, we have gradually increased the spend level, and have, of course, gradually increased the size of the team, which is the most important driver for the cost base. That's been gradually increasing if you adjust for these little quarterly variations.
Of course, in particular, given the successful rights issue, and our plans to increase our investment pace into virtual reality and smartphones, we are planning to continue growing the size of the organization quite a bit, which of course, naturally leads to an increased spend level in R&D, in particular in Tobii Tech, also throughout 2017.
Okay, perfect. Maybe one final question, if I may. Can you discuss or talk about the general market environment for Tobii Tech after these game announcements and announcements last year, the contract that you have? How is the sort of discussions progressing with other or expanding these new first contracts? Thanks.
Good and challenging questions. I would say that we definitely see a positive momentum on the back end of both launched devices from Alienware and Acer, as well as an increasing number of games that implement eye tracking. My impression is also that we are still at an early stage of the market evolution. The actual eye tracking sensors are still a very expensive component for a computer manufacturer to integrate. Even though we've had good successes during 2016 with the game ecosystem, there is still a limited number of games actually available to gamers. My impression is not that we are yet at the stage where we should expect in 2017 to see a very large adoption of eye tracking in the gaming segment.
We're still at the phase where we need further technology development to reduce cost, power, form factor, and a lot of continued work to continue growing the game ecosystem before we are in the longer term, ready for prime time.
I guess that you can still announce contracts and design wins, right?
We of course have-
Even though you're not generating substantial sales improvements.
We of course have as an ambition to sign additional design wins in the gaming segment during 2017.
Okay. Thank you.
As a reminder, if you would like to ask a question at this time, please press star one. As there are no further questions on the telephone, I would now like to turn the call over to Sara Hyléen for any web questions.
Okay. The first question is from Bo Engvall, who says, "Hi, Henrik. Can you say something about your vision of around when in the future you will begin the presentations of the divisions with Tobii Tech instead?
That's an interesting one. Thanks for that question, Bo. I don't know. We'll see, I guess. Right now we're doing them in size order in terms of revenue, right? Of course, I don't know. As some sort of answer to that question, we clearly see good and interesting long-term growth opportunities also in the Tobii Dynavox and in the Tobii Pro areas. Definitely our ambition is, of course, to continue growing at good rate also in these businesses. Of course, you're right that Tobii Tech is the unit that has, as you may call it, the blue sky potential, and if we are successful there, then long-term, that could grow into a very significant business for us. I will not put a specific date or year when we will shift the order, but you'll notice when it happens, right?
Okay. Second question is from Carl Leijonhufvud. It is related to Tobii Dynavox. How should you be able to reach a higher EBIT margin of 20%? When is the target projected to be reached?
We have not set a specific date for when to reach that. What we are saying is that our ambition and goal is to gradually improve the EBIT margin, to reach that long-term. Typically, long-term tends to be not this year, not next year, but sometime beyond that. The simple basic recipe is that our ambition is to grow the top-line revenue faster than we grow the cost base. That is the simple formula for that.
Okay. There are no further questions from the webcast.
All right. With that, I think we are done. Thanks, everyone, for attending our earnings call today, and looking forward to seeing you again on our next call. Have a great day.