Airthings ASA

OSE:AIRX

Earnings Call Transcript 2024-Q1

[Emma Tryti, executive]

Good morning, everyone, and welcome to this quarter presentation of the Q1 results. I'm Emma Tryti, and I've been CEO of Airthings for almost 3 months now. And this being my first quarterly presentation, I would like to grab the opportunity to say thanks for the warm welcome to the Airthings family. I'm truly impressed by our skilled and dedicated team who has build a global leader within the indoor air quality industry.

And today, we present a solid quarter. And together with my copilot, Magnus, our interim CFO, we will give you the details from the first quarter. And you're more than welcome to ask questions. So please send them in the chat. There's about 20 seconds delay, and we will have a Q&A session at the end.

So firstly, the highlights. All in all, we delivered a solid quarter with growth in top line, gross profit margin and ARR from last year.

On segment level, I would say the quarter has a twofold outcome, where the Consumer segment, on the one hand, delivers all-time high revenues while the Business segment, on the other hand, sees a decline in revenues due to no major contracts signed in the quarter.

The Consumer segment delivers the best quarter ever with revenues of USD 7.8 million, corresponding to an increase of 22% compared to last year. And it's driven by strong sales across all sales channels.

And for the first time, we had positive cash flow from operating activities due to a combination of realized revenue growth, improved gross profit margins, reduced operating costs and net working capital. And this is expected to fluctuate between quarters.

And a big thing this quarter, although with limited revenue impact, was the launch of Airthings Renew, our first smart air purifier released at CES in Las Vegas in January and launched to the market in March. We sold out initial batches after high market demand, and we have now ramped up production. And I'm so happy to see that we are responding to customers' needs as Renew enables our customers to actively to clean the air through a seamless user experience in the Airthings ecosystem.

And before going into the details of Q1, I want briefly to recap on our long-term growth drivers and the Airthings 3.0 strategy. We are definitely starting to see positive results from implementation of our strategy.

We are uniquely positioned to capture growth in a global market, capitalizing on 2 megatrends, health and energy efficiency. So health tech, that's the main driver in the Consumer segment. We spend more than 90% of our time indoor, where the air is up to 5x worse than outdoor. 55 million people have asthma in the U.S. and Europe combined. Particle pollution is a major cause of it. And a rapid increase in instances of wildfires increase the risk of both cardiovascular and respiratory-related effects.

So better health, that's what we sell to consumers. We provide insight that improve air quality, leading to better focus, sleep and overall health. And with almost 400 million residential homes in EU and North America, I guess we could say that the market is large.

And for the Business segment, an important driver is that our products can reduce energy needs in buildings by optimization -- optimizing the ventilation. More than 30% of global energy consumption comes from commercial buildings. So there's an enormous potential in reducing energy use here. So all in all, the market is big. Our job is to create the awareness and generate increasing demand for our products and services.

And in our strategy, we focus on 3 pillars to drive profitable growth going forward. And it's about time to change the perception in people's head around our products from nice to have to must have. Previously, we reached out to innovators, early adopters, often tech-savvy men in their 40s. These days, we are approaching a much wider customer base, including families, women and younger -- also younger audience.

And then it's especially important that we, one, continue to educate millions of people to understand the impact of the air they breathe and increasing the awareness. And secondly, to move towards a more digital go-to-market model. So digital distribution in combination with physical presence enables us to be even more targeted and reach out to even more at a lower cost.

And lastly, to create engaging user experience across software and hardware. We come from hardware. Now as we are connecting it all, delivering volume through the app, it's all about engagement. That is how we stay relevant and build relations with our customers.

So as we change the mindset from nice to must have, we also, at the same time, develop a scalable operating model and drive cost down. So this will result in growing revenues, expansion of gross profit margin, OpEx growing less than 1-to-1 with revenue, generating positive and expanding EBITDA margins over time.

And as you can see, our strategy is having a positive effect on our value drivers. So measuring on a rolling 12-month basis, revenue is up 6% over past year. The gross profit margin has improved by 4 percentage points from 58% to 62%, and OpEx has been reduced in absolute terms and declined from 91% to 77% as a percentage of revenue. So while we're not still not profitable, this means that our 3.0 strategy has given us a clearer path to profitability. And I'm very confident in the quality of our products, our people, in our position as an innovation leader, in the indoor air quality space and in the long-term drivers for our market.

However, we have been and remain in a challenging market with cost-conscious enterprises. And as this continues, it will -- it can put a damper on sales in the Business segment. But in such a business environment, we need to stay prudent and focus on what we can control. And while we continue to invest in sales, we will maintain a strict cost control.

So let's dig into the details now or the Q1 result. We delivered sales revenues in a total of USD 9.5 million. That's up 9% year-on-year. And as I said, on segment level, the quarter has a twofolded outcome. In the Consumer segment, we sold more products and services per customer, strengthen loyalty and reducing customer acquisition costs, resulting in the strongest quarter ever, and it's driven by underlying growth in sales and increased demand in all channels.

In the Business segment, there was no large contracts in Q1, resulting in revenues below expectations. So our strategy in the Business segment concentrated on increased focus on larger, more strategically important accounts, meaning longer sale cycles and less visibility regarding the timing of the large contracts, and that's the nature of it. And more of the segment -- more on the segment when we come a bit further. So the gross profit margin came in strong of 61%, up 5 percentage points from the first quarter last year.

And then into the Consumer segment delivers, as I said, record high revenues of USD 7.8 million. And this segment saw a pretty steady underlying demand across all channels, and this is mainly driven by solid performance with Amazon, boosted by targeted activities during the Radon Awareness month in January. And in addition, we continued the buildup of our direct channel and average order value at airthings.com was up 25% compared to the same period last year.

And following a recovery period in 2023, global retail sort of recovered in the first quarter '24. And our retail partners such as Home Depot in the U.S., Canadian Tire and Best Buy in Canada [indiscernible] in Clas Ohlson here in Norway delivered solid growth.

And the gross profit margin in the Consumer segment came in at USD 4.4 million in the quarter, resulting in a gross profit margin of 57% compared to 49% in Q1 '23. And the improvement largely reflected higher price points, stemming from lower levels of promotional activities this year and also a larger share of higher margin sales through airthings.com.

We also saw an all-time high device registrations in the segment. And this is a metric that we follow closely on a weekly basis as it is a fundament for our future. The more engaged our customers are with our products, the easier it is to stay relevant and build that long-lasting relationship. So the increase in device registrations is mainly driven by new accounts, bundled sales and repeat purchases. And unlike the steady quarterly trend we see here with 75% of device registrations are net users and the remaining 25% are customers would repeat purchases.

And also worth mentioning the 8% increase in device registrations compared to last year, that's below standard, but also as expected due to heavy inventory push in Q1 last year.

Airthings Renew, our first air purifier launched as a response to the needs of our customers. California was one of our fastest-growing markets last year and represents a significant potential due to increasing presence of wildfires and subsequent focus on home air quality.

Renew, our first smart air purifier, it was developed in response to customers who want to actively clean the air while having an air purifier working seamlessly in the Airthings ecosystem. And the market launch in March, it marked our first entry into the large market for air purifiers. And we learn as we go and still limited contribution to revenues, but we are glad to enable customers to actually fixing the problem.

And as I said, the revenue contribution of USD 1.2 million from the Business segment was lower than expected. And the reason for this is partly because the market is slow, but more importantly, because we did not sign any large contracts in Q1. The segment is characterized by longer sales cycles, more volatility and less visibility compared to the consumer segment. At the same time, it represents vast potential due to both increasing energy prices and nations' climate goals, as much as half of the energy consumption from buildings can be reduced by optimizing heating, ventilation and air conditioning, HVAC. And we provide the Business segment with relevant, timely and effective answers to most of -- to some of the most challenging issues it faces today.

And our sales efforts, they increasingly concentrate on large strategically important accounts. And our pipeline of potential deals, it looks promising. The public school sector in the U.S. is particularly active, and we are already engaged in several pilot projects with various schools.

So going forward, in this segment, we need to do two things. Firstly, to increase the baseline, the underlying run rate. And secondly, win large contract every single quarter.

So in Q3 and Q4 last year, we won big contracts with high instant revenue impact. This quarter, we want to request for proposal, RFP, with a global health care company to roll out Airthings' products and solutions across global offices. This agreement, it represents a significant revenue potential to increase the underlying run rate, the baseline.

And I'm glad to say that by the end of the first quarter, more than a quarter -- more than -- by the end of the first quarter, more than 100 Norwegian municipalities are customers of Airthings. That represents more than 1/4 of the municipalities in Norway. And out of those, 20% are actually all-in customers using Airthings products and solutions in all their schools and kindergartens.

We saw great growth in business in the field, driven by large contracts from the second half of last year being installed this quarter. And this is also a main driver for the increase in ARR in the Business segment.

Airthings for professionals, that's the smallest of the 3 Business segments, offering an easy-to-use certified rate and measurement device with a dashboard solution, tailored for home inspectors and Radon professionals.

In addition to device sales, Airthings also offers calibration services and leasing. So this is a stable segment, contributing with USD 400,000 to USD 600,000 revenue on a quarterly basis.

The annual recurring revenue came in at USD 4.2 million in the first quarter, which is within the guided range. It represented all in all 4 percentage growth year-on-year.

The Business segment stood for $3.1 million out of those $4.2 million, up 19% compared to Q1 last year. And as I said, this is driven by the large installments at large enterprise customers and U.S. school districts.

Churn levels have remained negligible over time, supporting the stability of the recurring revenues. And the gross profit margin of the ARR remains above 80%.

And then I hand over to Magnus for some more details on the financials.

[Magnus Bekkelund, executive]

Thank you, Emma. As Emma mentioned, we recognized revenues of USD 9.5 million for the first quarter, which is up 9% year-on-year.

Gross margin for the quarter was 61%, which represents an improvement from the first quarter last year of 5 percentage points. This is driven by improved margins in the Consumer segment largely reflected higher price points, stemming from lower levels of promotional activities compared to Q1 '23.

We saw an EBITDA loss of USD 1.8 million for the first quarter, resulting to an EBITDA margin of negative 19% compared to negative 37% the same quarter last year, reflecting a reduction in payroll expenses of USD 500,000 and flat other operating expenses, and this despite significant inflation pressures on prices and salaries.

In terms of EBIT, it came in at negative USD 2.2 million for the quarter, and this represents both amortization of right-of-use assets plus amortization of internally generated intangible assets. The reported net loss for the first quarter was USD 800,000.

So turning to the inventory situation. In the quarter, we saw a decline of USD 1.2 million in overall inventories from the fourth quarter, which represents a reduction of 26 days from 386 to 360 days. And this reflects the active steps we have taken to reduce inbound supply.

In addition, approximately 40% of our inventory are components, which were secured through non-changeable orders in 2021 and 2022 and delivered during '23 and early 2024. We are now reaching the end of these orders, and a contributor to reduction in days of inventory going forward will be that we utilize these components in production finished goods sold this year while not receiving more components into stock. With this and the continued focus on controlling inbound supply, we aim to be at less than 350 days at year-end.

So moving to the balance sheet and looking first at significant changes to assets. The deferred asset has increased due to the losses the last 12 months. And as discussed in the previous slide, inventories are down USD 3 million. Trade receivables are down USD 1 million, and this despite higher revenues this quarter compared to the first quarter in '23.

I will cover cash in more detail on the next slide. In terms of liabilities, the increase in noncurrent interest-bearing liabilities reflects the loan we received from Innovation Norway in 2023, and trade payables and other current liabilities are slightly up compared to -- last year, and that's mainly due to increased subscription sales, which will be recognized as revenue over time.

So looking at the cash flow statement for this quarter. We reported a cash balance of USD 13.2 million, down USD 1.4 million from year-end 2023. This is mainly driven by a slightly positive cash flow from operating activities of USD 100,000 due to negative EBIT, offset by positive changes in the net working capital.

In terms of cash flow from investment activities, this was negative USD 258,000, mostly related to R&D and internally generated intangible assets, offset by interest received on our cash balance.

And cash flow from fund activities was a modest negative USD 254,000 with a negative net foreign exchange difference of USD 923,000.

With that, I leave the word back to Emma for summary and outlook.

[Emma Tryti, executive]

Thank you, Magnus. So to sum it up. We delivered a solid quarter with twofolded outcome on segment level. So record high consumer quarter corresponding to a 22% increase year-on-year, mainly driven by solid performance with Amazon and increasing traction on airthings.com.

And the Business segment were lower-than-expected revenue contribution in the quarter. So first quarter with positive operating cash flow driven by trade receivables and reduced inventory. Airthings Renew was launched with solid market reception, strong preorders and good reviews and awareness across all our markets. So revenue growth, gross margin expansion and increasing operational leverage from our 3.0 strategy.

And we are now well into the second quarter, which marks the start of the wildfire season and peak pollen season. We recently released a new pollen feature in the app and are continuously working on improving customer experience, so more would follow. And our guiding for the second quarter this year is revenue within the range of USD 8 million to USD 10 million and annual recurring revenue in the range of USD 4.3 million to USD 4.5 million.

Thank you so much, everyone. And now I'm curious to hear whether we have any questions.

[Unknown Executive]

Yes, we have one question from [ Markus Heiberg ] in [ SEB ]. Can you elaborate on the decline in consumer gross margin from Q4?

[Emma Tryti, executive]

Yes, from Q4 '23?

[Unknown Executive]

I assume it's '23. Does it say in the question?

[Emma Tryti, executive]

Yes, yes. Yes. Usually, we compare from 1 quarter to 1 quarter because of the seasonality, but the main reason for that decline is a slightly different product mix in sales in Q4 last year.

[Unknown Executive]

And one question -- one more question from -- also from [ Markus Heiberg, SEB ]. What drives consumer revenue growth ahead of device registration? Is it due to higher ASP in your B2C channel? Or are you selling more into the channel? Are you seeing more normal inventory levels?

[Emma Tryti, executive]

Yes, I can start commenting on the first part of the question. So in a world where all our devices would be connected devices and also in a world where everyone who buys a device start out by registered device straight away, that will be a 1-to-1 correlation on that, but we still sell quite a bit of the devices that are not connected. And we also see for some customers that it takes some time before the devices actually are connected and registered the app. So that's the reason for the deviation. And then maybe you will comment on the inventory level?

[Magnus Bekkelund, executive]

Yes, I can comment on the inventory levels. This has been a key focus area for Airthings for a year now. And as I mentioned in the presentation, the components will be utilized in the production of finished goods sold this year, which will drive down the inventory levels. And we aim to reach 250 days by year-end.

[Unknown Executive]

Then we have a question from [ Kenneth Erik ], what are the expected sales of the air purifiers in Q2?

[Emma Tryti, executive]

The air purifier, as we said, we launched it to the market in March, and we had strong preorders. And as I also said in the presentation, we learn as we go, and the receptions has actually been above expectations. So we haven't guided on the number of devices sold or the revenue contribution from it. So it will still be a limited revenue contribution in Q2.

[Unknown Executive]

No more questions.

[Emma Tryti, executive]

Thank you, everyone, for listening.