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Earnings Call Transcript 2023-Q4

[Oyvind Birkenes, executive]

Hello, and welcome to our fourth quarter presentation for Airthings. I'm Oyvind, the CEO. And I also have with me today, our CFO, Magnus. Please send your questions in the chat, and there is about a 20 seconds delay, and then we'll have a Q&A session at the end. There are some really exciting updates today. So let's get started.

First, Airthings stands at the forefront of the indoor air quality industry as leaders in the invisible. We have become a market leader in our categories, and we offer sophisticated monitors and cutting-edge software with cloud analytics, serving both households and businesses around the world and bringing clarity to enable action. We have grown a lot over the years with 43% CAGR growth in U.S. dollars since 2015. And we have built up a high-margin recurring revenue based on service revenues with now $4.2 million of annual recurring revenues. Airthings is an early mover pursuing a massive market opportunity with our 2 business units, what we do in the consumer space with Airthings for Consumer and in commercial buildings with Airthings for Business.

So for the fourth quarter, we continue to see growth. We ended the fourth quarter at $10.3 million, which is up 9% year-over-year and slightly up also from the third quarter of last year. Consumer is up 14% and really driven by the strong growth on our direct channel on airthings.com. with more than 100% growth year-over-year. Our gross profit margins came out at a strong 63%, which is 4% points up year-over-year and 1% point up from the third quarter. And if you look at Airthings for Business, we saw 6% point improvement in the gross profit margin and also strong gross profit margin in the Consumer segment at 61% for the fourth quarter.

We're guiding our first quarter of this year 2024, between $9 million to $11 million. 2023 was a challenging year, but we also really redefined and started to execute on our new strategy that we call Airthings 3.0. And we've been super focused on moving the financials in the right direction even when the growth rate is modest. We ended the year at $36.6 million in revenue despite a challenging market conditions for our company, and we see that also for our partners and similar companies in this category. Our gross profit margins of 61% for the full year, which is up 2% points year-over-year. And we see significant higher margins in Airthings for Business, which shows 8% points improved gross profit margins year-over-year, which is really driven by more direct sales, price increases and increased share of our software revenues. The company is now on a good path to profitability.

I want to recall the 3 core elements of Airthings 3.0, which is our new strategy that we started to execute from the second quarter of 2023. First is the go-to-market strategy, which is about having a more focused and disciplined approach to how we go to the market with an emphasis on owning the customer relationship and being closer to our customers. Number two is about the product focus and enhancing the value proposition of our solutions with our software offering. And number three, it's about the operating model to develop a more automated and optimized way and scalable business to drive down variable costs and improve our unit economics, make more money per device that we sell.

So we already started to see that the strategy is creating financial results. We see revenue growth. We see improved gross profit margins, while we have reduced our operating expenses and improved our EBIT and EBITDA margins.

So at the Capital Markets Day that we had in October last year, we showed the financial improvements as you see on the top here. As we started to execute Airthings 3.0 from the second quarter of 2023, we now have even one more quarter in the books, and we see even further improvements. Revenue is up 6% points from the second quarter of last year -- the second, third and fourth quarter of last year versus the same period the year before. Gross profit margin is up 3.3% points. Operating expenses has been reduced by 12%, and we see improvements of the EBITDA margins from minus 32% to minus 13%. And we're going to continue to present these type of numbers, and we're going to continue to execute in this direction, and that's the plan for the coming quarters.

If you look at the highlights from the fourth quarter, we have improved revenue growth, improved our gross profit margins, and we have an increased share of our annual recurring revenues. We have a good path to profitability with our new strategy, and we are converting our inventory to cash step by step. Our direct channel on airthings.com has grown by more than 100% year-over-year. And really, the performance marketing we're doing is really paying off and helped us really grow this channel. We have not released any new consumer hardware products in the last 2 years, and we've just launched some really great new products at CES in Las Vegas a few weeks ago. These products, we plan to help us drive a lot of future growth with these type of products.

We are entering a brand-new market category with Airthings Renew. We launched it at CES and received already lots of good attention and PR for these products. It's a high-performance product. It's smart, very silent, and it connects to the Airthings app and ecosystem and looks really awesome. We also launched Wave Enhance for consumer, which is especially developed for bedrooms and also launched a Space Nano for our commercial space and Airthings for Business.

Overall, we still see that the current market conditions are uncertain and that customers and partners are cautious.

Looking a bit more at what we did now at CES and with the launch of Airthings Renew. North America is our fastest-growing market and an unfortunate contributor to the growing awareness around air quality in North America are the soaring wildfires that we can see on the news. This is why also we made Airthings Renew, which is a direct answer to our customers really wanting a smart air purifier from Airthings that can work seamlessly with our system and app experience. It ensures a healthy indoor environment free from particle matters, which is built up by smoke and other pollutants. So this smart air purifier connects to the Airthings app, and we will start to ship it this quarter.

It has sensors so that it will automatically adjust according to surrounding and will speed up when the air quality is worse. It's a very silent device and developed, especially also to be in the bedroom. It has 4 stage filtering, including a medical grade HEPA-13 filter, an active charcoal filter to remove chemicals in the air and odor. It's going to be exciting to see over the coming months and quarters how Airthings Renew is going to redefine Airthings as a company and drive further growth.

We also launched Wave Enhance at CES. Our fastest growing demographic, a very health and wellness-focused people. And they're very -- have a big emphasis on ensuring healthy environment and lifestyle for themselves and their loved ones. We launched Wave Enhance as a bedroom specific device to enable this audience to understand and ensure optimal air quality conditions and great conditions in general for a great night sleep. It provides a really great app experience with analytics to help you sleep better. We'll start to ship this device in the second quarter.

For our commercial space and Airthings for Business, we also launched Space Nano to make commercial buildings smarter, healthier and more energy efficient, and to also further help facility managers become proactive and more efficient in their jobs. This is a rugged device for indoor and outdoor use, and it's ideal for induct monitoring of ventilation systems as well as monitoring of unoccupied spaces and cold storages, for example. It provides up to 20 years of battery lifetime, so you can place it and forget it, and you'll be notified when needed.

Many of our existing customers in Airthings for Business are now adding Space Nano into the buildings that are already utilizing Airthings to make the buildings even smarter. One other key release we did now is also worth talking about. Ventilation Rate is an advanced analytics that we provide in our cloud to determine the ventilation rate in the room. So with an Airthings sensors in a meeting room, in an office room or in a large open area in a commercial building or a classroom, we can actually detect the number of air exchanges per hour. This is a critical component of indoor air quality, and there's a big regulatory momentum towards mandating minimum levels of air exchange in various rooms of buildings. You see this, especially now in North America. This is a groundbreaking new feature from Airthings that's going to help, especially in the HVAC industry.

So now I will provide an update by the segments. The Consumer segment where Airthings is really going to be your air coach and help our consumers and homeowners to breath healthier air. And Airthings for Business where we'll be breathing life into buildings, make them smarter and more sustainable. And then we also had a professional segment, which is really targeting home inspectors in North America. So in the Consumer segment, we saw a revenue of $7 million, which is up 14% year-over-year with underlying growth across all markets. The main driver is 100-plus percent year-over-year growth on airthings.com and our D2C, the direct-to-consumer channel and the focus we have on that is really showing results. That also shows on the gross profit margin, which is to 61%, up year-over-year, which is 4% points up year-over-year.

Also, what we see is that the device registrations continues to grow year-over-year in the Consumer segment. This shows that the end demand is there and it's continuing to grow. It was up 15% for the fourth quarter and up 22% year-over-year for the full year of 2023.

Going into Airthings for Business, we saw sales revenue of $2.9 million, which is up -- slightly up year-over-year. Strong gross profit margins of 66%, which is 6% points up from the same period of 2022. For the full year of 2023, gross profit margins in Airthings for Business is up 8% points. And this is based on execution of more direct sales. We have had price increases, and we have larger share of our software revenues in this segment.

What also happened during the fourth quarter is we won another contract with a top Fortune 500 enterprise customer. We started to ship some of those in the fourth quarter, but we also see more orders, and it's going to be exciting to follow this and other large enterprise customers that really see the value of bringing Airthings into their buildings. We also see that the business -- the Airthings for Business segment remains heavily affected by large deals called [ Sing ] revenue fluctuations quarter-by-quarter. So we have an underlying run rate business and a software business that provides good revenue every quarter. But then there are some quarters with large deals and some quarters without. So there will be quarterly fluctuations in this market.

We are continuing to see that we have more and more devices in the field, and it grew by 36% in the fourth quarter of 2023 year-over-year. We see that this is also a driver for our underlying growth in our annual recurring revenues in this segment.

In the Professional segment, we had sales revenue of only $0.4 million in the fourth quarter, which was a decline of 6% year-over-year. We still have very strong gross profit margin in this segment. And we see it's also improving over time.

So looking at annual recurring revenue. So we ended the year of $4.2 million, which is up 16% year-over-year overall, but with the Airthings for Business share was growing 24% year-over-year. We have much more than 80% gross profit margins from our ARR. So this will help drive improved gross profit margins for Airthings in the foreseeable future.

We are guiding the first quarter '24 ARR to be between $4.2 million to $4.5 million. And this is mainly going to be driven by continued new sales in Airthings for Business.

Then I'll set it over to our CFO, Magnus to dig a bit more into our financials.

[Magnus Bekkelund, executive]

Thank you, Oyvind. Looking first at the income statement. And as Oyvind mentioned, we recognized revenues of USD 10.3 million for the fourth quarter, which is up 9% year-on-year, and full year revenues came in at USD 36.6 million, which is up 3% compared to 2022. Gross margin for the quarter was 63%, which represents an improvement from the fourth quarter last year of 4 percentage points. For the full year, gross margin came in at 61%, up 2 percentage points from 2022. And this is mostly driven by the strong margins in the Airthings or Business segment.

We saw an EBITDA loss of USD 1 million for fourth quarter, resulting to an EBITDA margin of negative 9% compared to negative 29%, the same quarter last year. For the full year, the EBITDA loss came in at USD 6.8 million compared to a loss of USD 11.8 million in 2022, reflecting a reduction in both payroll and operating expenses of $3.6 million. In terms of EBIT, it came in at negative $1.3 million for the quarter and negative USD 8.3 million for the full year. And this represents both amortization of right-of-use assets as well as amortization of internally generated intangible assets. The reported net loss for the fourth quarter was USD 1.5 million, and we reported a net loss of USD 6.3 million for full year.

Turning to the inventory situation, and this remains a key focus area. In the fourth quarter, we saw a decline of USD 400,000 in overall inventories from the third quarter. We also saw a modest decline in average days of inventory from 392 to 386 days. And looking at the full year of 2023, the value of the inventory has been reduced from USD 18.7 million to USD 15.3 million, which represents a reduction of 80 days. And this reflects the active steps we have taken in terms of promotional activities and a reduction in inbound supply. However, we will continue to focus on reducing the inventory levels over the next quarters and further achieve reductions will be a source of capital going forward.

Moving on to the balance sheet and looking first at significant changes to the assets. The deferred tax asset has increased due to losses in 2023. And as discussed in the previous slide, inventories are down USD 3.4 million. Trade receivables are on the same level as they were a year ago despite higher revenues this quarter compared to the fourth quarter last year. Cash is above its level a year ago, but down $900,000 from the third quarter, and I will cover the cash flow movements 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. And trade payables and other current liabilities were also up compared to 2022, which demonstrates an improvement in our working capital position.

Looking at the cash flow statement, and we reported a cash balance of USD 14.6 million, down $900,000 from the third quarter. And this is mainly driven by a negative cash flow from operating activities of USD 1.3 million due to net loss before tax, partly offset by net financial items. In terms of cash flow from investment activities, this was negative USD 100,000, mostly related to R&D and internally generated intangible assets of USD 300,000, offset by interest received on our cash balance of $200,000. And cash flow from financing activities was modest, negative USD 200,000 with a positive net foreign exchange difference of $700,000.

We have also received credit approval for renewal of the revolving credit facility with Danske Bank. The size of the new facility will be reduced from USD 8 million to USD 6 million as we have an improved working capital situation and thereby, we would like to reduce the facility cost. The new facility is subject to documentation and closing procedures, which is expected to be concluded in March.

And with that, I'll leave the word back to you, Oyvind.

[Oyvind Birkenes, executive]

Thank you. So we'll have a little summary and outlook. So revenue came in at $10.3 million for the fourth quarter of 2023 with an annual recurring revenue base of $4.2 million and gross profit margins of a strong 63%. We see reinforced improvements with our Airthings 3.0 strategy with increased revenue, improved gross profit margins and reduced operating costs and consequently closer to profitability.

Consumer segment has performed very well in a challenging market with 9% growth year-over-year. And Airthings for Business revenue is up slightly in the fourth quarter, which is also affected by timing of our large deals. We won another contract in Airthings for Business with a top Fortune 500 enterprise customer. And we saw that the ARR from the Airthings for Business segment grew by 24% year-over-year. So we'll continue to see fluctuations in this segment, but there is some strong proof points in the case to drive long-term growth in Airthings for Business.

We see continued improvement in overall inventory levels. So in the number of days of inventory, but it's still modest. And this is a focus, as Magnus just explained. We will continue to drive down these inventories and convert it to cash. And it's a balance of incoming inventory while also selling out existing inventory. And we see that we will continue to improve on this over the coming quarters. We are also then stabilizing our cash position supported by reduced inventories, improving our revenue and gross profit margins while keeping control over operating expenses and keeping them at a lower level.

Looking at the outlook for the first quarter, we are estimating a revenue to be between $9 million and $11 million, which is up year-over-year. The annual recurring revenue is expected to grow and be between $4.2 million to $4.5 million by the end of first quarter of 2024. And I also want to note that Emma Tryti will take over as the new CEO on March 4 of 2024.

And then I just want to end this that Airthings is really supported by lasting megatrends and factors. Fresh healthy air and energy optimizations of buildings will still be very important over many, many years to come. Just in the U.S., 25 million people have asthma, and there are 1.6 million emergency visits per year due to asthma. Our Airthings Renew monitors of air quality like View Plus is going to help many of our consumers to breathe healthier air.

We see an increased number of wildfires and that wildfire seasons, especially in North America, are getting longer. We see that millions of people die due to air quality every year. And more than 41,000 people, according to statistics, they die of lung cancer due to Radon gas in U.S. and Europe combined. And most people around the world, they have their sleep affected by their air quality in their bedrooms. And if you look into the commercial buildings, most of existing buildings out there today are not very smart. There are huge opportunities to save energy of these buildings with our solutions and our advanced analytics and software experiences.

So with that, I'm going to set it over to a Q&A session. Thank you.

[Unknown Executive]

We have no questions from our online audience.

[Oyvind Birkenes, executive]

No online? Some from the physical audience?

[Unknown Executive]

No questions from them either.

[Oyvind Birkenes, executive]

All right. That's clear. Thank you.