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Earnings Call Transcript 2023-Q1

[Oyvind Birkenes, executive]

Hello, and welcome to the first quarter presentation of Airthings. I'm Oyvind, the CEO, and we also have our CFO, Jeremy, with us today. Please send in your questions in the chat. And there is about 20 seconds delay, so we can get all those questions in.

So the purpose of Airthings is to empower the world to breed better and air has a much bigger impact on energy consumption, on our health and well-being than we think. So this is our focus. And Airthings, we have been growing fast over many years. 2022 was a more challenging year with limited growth and some macroeconomic headwinds. We are aggressively selling down inventories, and we are converting it to cash. Some of the growth challenges also remains now in the first half of 2023. However, we see a stronger pipeline of projects, both for the consumer and Airthings for Business segments, and we see a pretty solid outlook for the second half of this year.

We are pivoting on our strategy, and we have worked intensely on defining and executing on this new strategy. I'll come more back on that. But for consumer, we are investing more in our direct channel, airthings.com, and we're reducing the number of retailers to only a few successful ones.

In Airthings for Business, we are drastically reducing the number of partners. And we're spending more our commercial efforts with end clients and with a few very key partners that we work closely with.

You see that we had a strong revenue in the first quarter from North America with 79%, while the rest comes from -- mostly from Europe and some in Asia Pacific.

So for our first quarter, we ended at $8.8 million, which is flattish year-over-year, with a modest growth in the Consumer segment, supported by promotional activities to sell down inventories. We had no large rollouts in the first quarter of this year in Airthings for Business, and we see some key projects are being pushed out in time. Overall, gross profit margins came in of 56%. And we see year-over-year growth is coming in the second quarter, but modest, and we see a much stronger outlook for the second half of this year. And we have a guidance window now for the second quarter of $7 million to $9 million.

Some of the highlights from the first quarter. We had a very strong growth in consumer device registrations with 30% year-over-year, and this is really driven by promotional activities. We reduced our inventories by $1.6 million throughout the quarter. And we also launched a new consumer website with a much better web shop experience with improved conversion rates as this is also now a more focus moving forward.

We improved our balance sheet with a capital raise of NOK 75 million, but also with a significant grant and loan from Innovation Norway to develop our energy reduction products and solutions for both consumer and the Airthings for Business segments. So about NOK 17 million of this is a grant, while the rest is a loan from Innovation Norway. And this comes in addition to the already reported $8 million revolver, the RCF with Danske Bank.

We ended our annual recurring revenues in the first quarter of $4 million, and this is really driven by Airthings for Business, which is up 43% year-over-year. A highlight is also the new Airthings' strategy that we have defined now in the first quarter, and we just started to execute on. I will present an overview later in the presentation. And there's still a tough market out there. We see it both in the Consumer segment and the Airthings for Business segment. And we see some of our partners and customers are cautious and that some of the larger projects are still being pushed out in time. So we're a bit cautious now for the second quarter outlook, but we see a very strong pipeline for the second half.

The brand awareness of Airthings is continuing to increase. We have a record sales on our direct channel during the Airthings Masters. And we also now have been listed as Fortune's top health and wellness products with our View Plus. This helps us being the global leader within advanced air quality products and solutions.

So I'll do an update by the segment. Our core and key segments is the Consumer segment and Airthings for Business, but we also have a Professional segment that I will present an update on.

So in the Consumer, we had a revenue of $6.4 million, which is up 4% year-over-year. This is really driven by promotional activities to reduce inventories, and we saw a hit on the gross profit margin due to this. We see also a strong growth on our direct channel on airthings.com as this is a key focus for us moving forward.

The consumer device registrations continues to grow year-over-year. It's -- it was driven by a lot of the promotional activities during the first quarter and is -- was up 30% year-over-year. Airthings for Business revenues came in at only $1.7 million for the first quarter. This is down 23% year-over-year as we also had some bigger rollouts in the first quarter of last year.

So what happened in the first quarter of this year is that we didn't have any big project to be delivered, but we certainly see a strong outlook for the second half. We see also with some headwinds in the overall market that Airthings for Business deals are being pushed out in time as companies are more cautious in their investments.

However, we still won some key projects during the first quarter that we started to roll out. We won a major Ivy League university in the U.S. Unfortunately, we're not able to talk about names with all those -- these -- the bigger projects. And we also started a large rollout with one of the global top-tier service and consultancy companies. Also with the Norwegian municipalities, we see a lot of interest. I'll show a slide on that, and we are continuing to expand in this market.

The devices in the field for Airthings for Business is up 86% year-over-year, and this is a factor for driving our underlying growth in our annual recurring revenues. So Hamar kommune or Hamar Municipality in Norway is a really great example on how Airthings is helping building managers and facility managers get an overview of how their buildings operate and how they also can do significant energy reduction utilizing Airthings data and advanced analytics.

So Hamar Municipality, they save 2 million kilowatt hours of energy in 1 year after installing Airthings for Business. We see a positive return on investment in less than 1 year. And as they say, without utilizing Airthings, it's like operating their buildings in the blind. While what Airthings is actually doing here is to make the invisible visible, you really see how your buildings operate and what you can do in every building to ensure there's healthy environments, but also to run the buildings in a very energy-efficient manner.

We show customers, we help our clients to see where all the energy leaks. And when you do heating, ventilation, air conditioning or cooling or in areas that has no people. We're seeing many more projects like this, and we are very excited about the coming quarters to show more examples of these great rollouts with so much significant energy reduction.

There's still a challenging home inspector market in the U.S. for our Professional segment, View Radon Professional segment. We had a revenue of $0.6 million in the first quarter, but with a very high gross profit margin of 87%.

We ended our annual recurring revenues at the end of first quarter at $4 million. Growth is really driven by the Airthings for Business segment, which -- where we saw a 43% year-over-year growth. And the reason you see higher growth in annual recurring revenues for Airthings business than the product revenue is also because there has been inventory corrections in our channels also for Airthings for Business. And when devices are installed in the field, that's when we really can see the recurring revenues coming.

Then I'll send it over to Jeremy for an update on the financials.

[Jeremy Gerst, executive]

Thank you, Oyvind. Starting first, as Oyvind mentioned, we've seen an overall decline in inventories of around USD 1.6 million over the course of the first quarter, and this has also resulted in a modest decline in the average days of inventory going from 466 to 422. And these really reflect improvements -- these improvements reflect the active steps we've taken in terms of our promotional activities, especially in the Consumer segment and the campaigns there, and also efforts to negotiate reductions in inbound inventories from our key suppliers.

However, the continued elevated levels of inventory is at USD 17.1 million. Warrants then further steps being taken over the course of the second quarter and potentially into the second half of the year in terms of promotional activities.

When it comes to the income statement, as Oyvind mentioned, revenue for the quarter came in at USD 8.8 million, which is down 3% year-on-year. Gross margin came in at 56% in the first quarter, which is below what we've seen both a year prior and the previous quarter, and this really reflects the reduced margins in the Consumer segment from those aforementioned promotional activities.

EBITDA came in at minus $3.2 million, and we've seen both reductions in payroll expenses and other operating expenses compared to the first quarter last year, and this is despite less capitalization of R&D activities. EBIT came in at minus USD 3.6 million.

Turning to the balance sheet. In terms of changes in assets, we've seen an increase versus the same quarter a year ago with the deferred tax asset, and this is due to losses over the period. Inventories, as I mentioned, are still elevated and certainly around $5 million -- $4 million or $5 million above the levels a year ago. Other receivables have also increased slightly. This reflects, in part, some prepaid expenses and some prepayments to suppliers in terms of the negotiations I mentioned to reduce inbound inventories. Cash has declined year-over-year due to profitability, the working capital situation and exchange rates.

In terms of changes in liability, equity has declined. This, in part, reflects the losses and also because of the exchange rate between the Norwegian kroner and the U.S. dollar as our functional currency is Norwegian krones but our reporting currency is U.S. dollars. We've also seen a decline in long-term liabilities and a slight decline in trade and other payables, and this largely reflects the decline in inbound inventories.

Turning to the cash flow statement. Cash flow from operating activities was minus $3.2 million. This is mainly driven by operating profit. Cash flow from investment activities was minus $400,000, and this is mostly capitalization of internally generated intangible assets in correspondence with the R&D activities. And then cash flow from financing activities in this quarter, here, you see the effects of the capital raise and that raised our cash by USD 6.9 million.

What's not reflected here is the RCF. So as Oyvind mentioned, we have an $8 million RCF with Danske Bank. As of the end of the first quarter, we hadn't utilized any of that facility. Otherwise, we have a net realized foreign exchange difference of minus EUR 1.2 million, and that's again because our functional currency is Norwegian krone and our reporting currency is U.S. dollar. So this hasn't been realized, but it's reflected in the cash flow.

Turning it back to Oyvind.

[Oyvind Birkenes, executive]

Thank you, Jeremy. So I'll talk a little bit about high level on the new strategy. And the background of this is that certainly we have been growing fast over many years. And then we got a heavy year in 2022 with limited growth. Also, we see that in the first quarter of '23 that the usual growth rates are still not there. So we really analyzed our go-to-market model and worked on our strategy. And our approach has traditionally been to go very wide in many countries and going in many channels at the same time.

When we see the growth is -- has flattened out for a little period, we see that this has created several challenges. We have channel conflicts. We have elevated inventory levels. This has saturated our cash position. And we have had a lot of focus on top line growth versus unit economics, which has been driving down variable costs. So we have had decisions that impacted by shorter-term revenue focus over long-term profitability. So we have really been focused on growth versus profitability, and this has now, for sure, been changed over the last few quarters. But now with what we see moving forward now is that we have to improve on this in a much, much higher level.

So our new refined strategy focuses on 3 key pillars. It's on the go-to-market strategy, where we want to own the customer relationship and moves towards a digital-first go-to-market model. This relates both for Consumer and Airthings for Business. We're going to improve the scalability of what we do and the unit economics of every device that we sell. And we're going to narrow our geographical focus and go deeper rather than broader.

When it comes to the products, we're going to really become a hardware-enabled software company with a software-first mentality. And we're going to focus much more on creating awesome customer experiences and sell more to existing customers than what we have done in the past.

And when it comes to the operating model, we have to transition to a much more automated way of operating to properly enable the growth and to improve also unit economics and variable costs. So we are going to focus a lot on both fixed cost and variable costs moving forward and make the company much stronger as we get out of these macroeconomic headwinds moving forward.

It will take some time to see the direct results from this, but we are going to be a much stronger company. We will share more details of our new strategy at the Capital Markets update that's coming up in October.

So a summary from today. We ended revenue of $8.8 million in the first quarter, with annual recurring revenues of $4 million and a gross profit margin of 56%.

We had a modest growth in the Consumer segment, supported by promotional activities to reduce inventory levels.

We had a pretty low revenue from Airthings for Business in the first quarter as some of the key projects have been pushed out in time, and we didn't have really big rollouts in the first quarter as we had last year.

We see a reduction of overall inventory levels has started, and we see some improvements in that sense.

We have updated our strategy to support Airthings' profitable long-term growth ambitions along 3 main pillars. It's refined go-to-market strategy, it's becoming a true hardware-enabled software company and it's being about having more automated operating model to scale with better unit economics and make more money for the [ wise ] we sell.

So the outlook for the second quarter, we are guiding it to be between $7 million to $9 million, so a modest growth in the second quarter year-over-year. And our annual recurring revenues, we are guiding it to be between $4 million to $4.3 million.

And at the end, I just want to see that Airthings is really supported by really lasting factors and megatrends. Fresh, healthy air and energy optimization will still be very important over many years to come. Only in the U.S., 25 million people have asthma, and there are 1.6 million emergency visits per year due to asthma just in the U.S. Millions of people die due to poor air quality every year. More than 41,000 people die of lung cancer due to radon only in the U.S. and Europe combined. Most people have their sleep affected significantly by poor air quality. Most buildings in the world are not smart. There are huge opportunities to save energy in buildings around the world with technology and solutions from Airthings, like the example you saw from Hamar kommune today.

With that, I'll open up for any questions.

[Unknown Executive]

Yes. And then we have some questions from Eirik Rafdal in Carnegie. You call out some key projects have been delayed in Airthings for Business. Do you expect these to materialize in second quarter or later this year? Or is it postponed indefinitely?

[Oyvind Birkenes, executive]

So we are working on many products. There are new rollouts every quarter, but some of the really major ones we see have been pushed out. Some of them could happen in the second quarter, but what we see right now is that there are certainly bigger ones happening in the second half.

[Unknown Executive]

And then...

[Oyvind Birkenes, executive]

And also on that, we don't see that product have been canceled.

[Unknown Executive]

And from the same, on a year-on-year basis, you are guiding for a return to growth in the second quarter. What will be the primary drivers of this?

[Oyvind Birkenes, executive]

For the...

[Jeremy Gerst, executive]

Growth in the second quarter.

[Oyvind Birkenes, executive]

Growth in the -- so growth in the second quarter is both in the Consumer and Airthings for Business. So we'll -- that's our expectations, that we'll see growth in both those areas.

[Unknown Executive]

On the refined strategy, how should we think about Amazon in all of this? It's digital, so it fits with the GTM. But how should we think about it versus owning the customer relationship?

[Oyvind Birkenes, executive]

You can do that.

[Jeremy Gerst, executive]

I can take that one. I mean Amazon has always historically been a very important channel for Airthings and where we've seen a lot of success, and it will absolutely remain a key pillar in the go-to-market strategy within consumer and the digital approach there. But it's much more about making Amazon and airthings.com work in tandem with each other and a key piece to that will be the consumer app and utilizing that to not just give useful information to the customers but also to personalize that experience and sort of nudge them into the purchase of additional devices and then directing them to Airthings.com.

So you can see Amazon will be a very important acquisition channel for us, especially in the U.S., which is our largest market. A lot of consumers prefer to shop on Amazon. So it will remain a very important acquisition channel, but it needs to work better than before in tandem with airthings.com.

[Unknown Executive]

And then the last question also from Eirik Rafdal. Could you please be a bit more specific on what gives you confidence that the second half of '23 will be materially better?

[Oyvind Birkenes, executive]

Yes. So I mean the pipeline of projects. So we have a pretty good overview of pipeline of projects that is going to happen. So our expectations and our outlook looks strong for the second half but we cannot really list any details or any specific project that is happening. Also, if you look in the Consumer segment, of course, the second half is traditionally seasonally much stronger period for us than the first half. And we also see some good outlook for consumer for the second half based on what we see right now.

[Unknown Executive]

Then there is no more questions.

[Oyvind Birkenes, executive]

Okay.

[Jeremy Gerst, executive]

Okay. Thank you very much.