Airthings ASA

OSE:AIRX

Earnings Call Transcript 2023-Q3

[Oyvind Birkenes, executive]

Hello, and welcome to our third quarter presentation. I'm Oyvind, the CEO. And with me today, I also have our CFO, Jeremy. We'll go through the presentation and then have a Q&A at the end. So please send your presentations in the chat. It's about 20-second delay, so that we have all the questions when we get to the end.

So the purpose of Airthings is to empower the world to breathe better. Airthings is addressing two critical issues: health and energy. The influence of air on health, well-being and energy is highly underestimated. The air we breathe has massive impact on us, whether it's the cause of cancer or viruses, impact our concentration over productivity or over sleep. And massive amount of energy are consumed by regulating the ventilation, heating and cooling of buildings.

Airthings is all about creating healthy indoor environments to reduce energy consumption of buildings and to make existing buildings smarter and more sustainable with advanced analytics. Air has much bigger impact on energy consumption and on our health and well-being than we think. We are at the forefront of megatrend set to evolve for many years ahead.

So we have been a fast-growing business over many years. We're seeing more modest growth over the last few quarters, but are starting to turn the business around with our new strategy, Airthings 3.0. Yes. You will hear a lot more about our new strategy, Airthings 3.0 in our capital market update later today at noon Central European Time. [indiscernible] down inventories and converting it to cash and we're improving our gross profit margins.

These are results from our new strategy that we started to talk about earlier this year. For the third quarter, we also had more than 80% of our revenue from North America. So North America continued to be a very strong region for our business. So we ended the third quarter at $10.1 million, which is largely flat year-over-year, but up 34% from the second quarter. We had a strong growth on our direct channel airthings.com which we have focused a lot on this year with more than 100% growth year-over-year. Gross profit margin was at 62%, which is up 2 points year-over-year. And we are guiding the fourth quarter with a window from $9 million to $12 million.

So some of the highlights from the third quarter. We had $10.1 million in revenues with improved gross profit margins and also a good growth in annual recurring revenues of 18% year-over-year. And if you look at the annual recurring revenues from Airthings for business, it's up 25% year-over-year. Then we had 100% growth year-over-year on airthings.com.

And then I want to mention this significant -- order we got from a global enterprise customer last year. We talked about that last year and was a contract value of $4.6 million for [ Airthings for Business. ] This year, we received a follow-up order from the same global enterprise customer. We now have a total contract value of more than $7 million from this customer over these 2 years, and the reorder really validates the solution we have at Airthings for these type of customers.

Another highlight is that we were EBITDA neutral for the third quarter. And as we talked about earlier this year, we have changed our strategy to what we call Airthings 3.0 that we'll talk more about at our capital markets update later today. We still see that the current macro environment remains characterized by uncertainty and that our customers and partners are still cautious.

So we'll provide an update by the segments. So the Consumer segment, where we really want to be Your Air Coach. And then we have Airthings for Business, where we are Breathing life into buildings, and we are focusing on office buildings, schools and other public buildings. And then we have the Professional segment for the home inspector market.

So in the Consumer segment, we had revenue of $6.4 million in the third quarter, which is more or less flat year-over-year. And we had a gross profit margin of 59%, which is 1 point up quarter-over-quarter. I think one of the real highlights here is that we're turning airthings.com and our direct channel to really improve better and we have seen 100% growth year-over-year in the third quarter on our direct channel on airthings.com.

We also continue to see that consumer device registrations of our smart product continues to grow year-over-year. And demand, which this is really a pointed towards, it's really growing. And in the third quarter, we increased this [ end demand through ] -- of our smart devices with 18% up year-over-year.

Going to Airthings for business. So we had a revenue of $3.1 million in the third quarter, which is a little bit down year-over-year. But we had a gross profit margin of 65%. And also, if you look at the revenue for the third quarter, it's up 59% from the second quarter this year. So quarter-over-quarter, it's very strong growth. In Airthings for Business, the business is very heavily dependent on also a few large deals causing quarterly fluctuations. And this year, we shipped $1 million [ about ] to a global enterprise customer. But if you look at third quarter last year, we shipped $1.7 million to the same global enterprise customer. So taking that into account, the broad business grew by about 30% plus in the third quarter of 2023. So things are moving in the right direction for Airthings for Business as we're growing the broader base of the business.

The devices in the field is up 47% year-over-year in the third quarter. And the annual recurring revenues from Airthings for Business grew by 46% year-over-year, no, 25% year-over-year.

So I want to talk a little bit about this use case that we have with the global enterprise customer that we now have contract values of more than $7 million from -- if you look at what got last year and this year. It's a global enterprise customer, utilizing Airthings across most of their office space and office portfolio. They have a portfolio of buildings around the world and they utilize Airthings for two main reasons: number 1 is to ensure a healthy environment for the employees coming back to the office after COVID; and number 2 is the remotely monitor the buildings around the world with consistent data to operate the buildings more efficiently and more sustainable with less energy consumption. This reorder really verify the value proposition that we have at Airthings and the value that we're delivering to our end clients.

We also strengthened our partnership with Lindab during the third quarter. We had a solution already with Lindab, where we can do demand controlled ventilation. Now with what we released now a couple of months ago, we can -- we have done integrations so we can also do demand-based heating and cooling and in addition to ventilation. It's a very strong partnership, and this is something we're going to build on over the coming quarters.

For the Pro segment, we had a revenue of $0.6 million, representing an increase of 27% year-over-year. Still strong gross profit margin of 79%, which is a bit down from the previous quarter due to more hardware sales in this quarter. It's a stable business, and we don't expect any big changes, but it's going to fluctuate a bit up and down as we see it.

Looking at our annual recurring revenues, we ended at $4.1 million, which is 18% up year-over-year. The growth is really driven by the Airthings for Business segment with 25% growth year-over-year. And we still have very strong gross profit margins from our recurring revenues with more than 80%.

Now I'll set it over to our CFO, Jeremy.

[Jeremy Gerst, executive]

Thank you, Oyvind. Looking first at the inventory situation, we continue to see positive traction and positive momentum in terms of reducing inventories, albeit modest. Inventories in absolute terms were down $0.5 million over the course of the third quarter, and this translates into also a modest decline in the average days of inventory from 399, down to 392. And this reflects the active steps we've taken, both reducing inbound supply and also promotional activities and other sales activities to get supply out of our warehouses and into the hands of consumers. However, the continued elevated nature of the inventories do additional -- warrant additional steps being taken for the foreseeable future.

If we look at the income statement, as Oyvind mentioned, revenue for the quarter came in at $10.1 million, which is for the quarter largely flat year-on-year and up 1% year-to-date. The gross margin was 62%, which represents an improvement from the third quarter last year and is mostly driven by the strong margins in Airthings for Business in the Pro segment with the Consumer segment having flat margins on a year-on-year basis. In the quarter, we did see a positive EBITDA, modestly positive of USD 0.1 million where we see a reduction on a year-on-year basis in payroll expenses. I do want to note that because of the way holiday pay works in Norway, we often see payroll expenses lower in the third quarter every year. So you certainly see a reduction from the second quarter in payroll expense, but this is largely driven by the holiday pay.

In terms of EBIT, it came in slightly negative at $0.3 million. And this represents both the depreciation of right-of-use assets for leases in accordance with IFRS 16 as well as amortization of internally generated intangible assets.

In terms of the balance sheet, a couple of things to point out here in terms of the change of assets, there's a increase in the deferred tax assets. This is due to losses over the period on a year-on-year basis. Inventories are around the same level they were a year ago. Trade receivables, this is a notable one, is down even no revenues were about the same as they were last year. This represents improvements we've made towards one of the portions of our working capital, trade receivables and reflects lower average days of receivables, which helps our cash situation over time. Cash is down, though on a year-on-year basis, driven by profitability, still high working capital and exchange rates.

In terms of liabilities, I just want to note, as we noted in the second quarter, the noncurrent interest-bearing liabilities reflects the loan that we have from Innovation Norway connected to an R&D project. And then trade and other payables was also up on a year-on-year basis, which comparing this quarter to last quarter demonstrates an improvement in our working capital position as well.

But if we look at the cash flow statement for this quarter, the cash flow from operating activities was minus USD 1.3 million, and that decline is mostly driven by the change in net working capital. So we did see improvements in inventories with inventories coming down with around $0.5 million. However, this was more than offset by a reduction in trade payables and an increase in trade receivables in the quarter. And the increase in trade receivables compared to the second quarter isn't that surprising when you see the revenue growth from the second quarter to the third quarter.

In terms of cash flow from investment activities, this was minus $0.5 million, mostly related to R&D and internally generated intangible assets and cash flow from finance activities was a modest minus $0.2 million with a slightly positive net unrealized foreign exchange difference of $0.1 million.

And with that, I'll turn it back to Oyvind.

[Oyvind Birkenes, executive]

Thank you, Jeremy. So I just want to recall our new strategy that we call Airthings 3.0, which really focus on three pillars. It's the go-to-market strategy, where we have a new focused go-to-market model, both for Airthings for Consumer and Airthings for Business. It's about the product focus and how we're enhancing our software experiences and software value and user experiences to create better and more sticky solutions for our customers and it's about the operating model, how we are transitioning to a more automated and scalable way to run our business and have better and improved unit economics. So we are going to talk a lot more about this later today. So you're all welcome to join at noon today, the Central European Time -- physically here at Danske Bank or on video to hear our capital markets update. We're looking forward to present that.

So revenue -- a summary from today. So we ended at $10.1 million, annual recurring revenues of $4.1 million and a gross profit margin of 62%. It's largely flat, but we see 100% growth on our direct business on airthings.com, which is a very good sign that we're getting closer to our customers and can turn around more direct business from our Consumer segment. We are a bit down year-over-year on Airthings for Business, but we are offsetting for a very big single order that happened also in the third quarter last year. So we see that the broad underlying business is actually growing pretty well in Airthings for business.

We are seeing continued improvements in our inventory levels. But certainly, there is a way to go there to continue to drive that down and convert all that inventory to cash. And we are seeing early signs of traction. We're seeing that OpEx is down. Gross profit is up. Inventories is down. Revenue is a little bit up year-to-date. So things are going in the right direction with Airthings. And this new strategy that we have is really helping us to put more focus and drive the company forward and it's going to be quite exciting to see over the coming quarters.

On our annual recurring revenues, it's up 18% year-over-year, but it's really driven by Airthings for Business grew by 25% year-over-year. So for the fourth quarter, we are guiding our revenue outlook to be between $9 million and $12 million and our annual recurring revenues to be between $4.1 million to $4.4 million.

And our long-term outlook is really supported by lasting factors and megatrends both within healthTech, sustainability, we see it the way we can save energy in buildings and the way we can also be part of the smart home ecosystems in our Consumer segments and help people to breathe healthier air and also save energy in both these sectors is going to drive us forward for the foreseeable future.

So with that, I just want to say thank you, and we'll open up for some questions.

[Operator]

We do not have any questions from the online audience today.

[Oyvind Birkenes, executive]

Okay. We'll probably see a lot more of these people later today. So that's okay. Any other questions from the audience here? Thank you.