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Ladies and gentlemen, welcome to the Doro Q3 2018 Conference Call. Today, I am pleased to present Robert Puskaric, CEO; and Carl-Johan Zetterberg Boudrie, CFO. [Operator Instructions] Speakers, please begin.
Good morning to all of you. Robert Puskaric speaking. I have Carl-Johan Zetterberg Boudrie here next to me. And we would like to present our Q3 report to you.And for day -- today, we have 3 agenda points. It's a bit of a general market update and some trends that we have spotted on the markets, the actual third quarter report, and then we round off with some concluding remarks and open up for a Q&A session.So if we go to the first block then, that is a market update. We'll start looking at a bit of current key market dynamics. We do have indications that we have a continued decline in the European mobile phone market. And this goes both for smartphones in general and for feature phones. Has nothing to do with the senior segment, but we don't -- if you look at units sold, the decline continues in Europe.If I were just kind of mention a bit of the Q2 numbers for you, because Q3 is still so hot, so we don't have access to those numbers per market. But basically, on feature phone segment, you look at a decline between 13% to 17% on the mainstream or the total markets. While on the senior segment's feature phones, we basically have a market that is either flat or down somewhere between 5% to 7%. If you keep that, kind of, in mind and you look at Doro's performance, that is, of course, indicating then that we're taking market share and increasing our share of the total markets when it comes to feature phones. And that's also why you will see later on in this presentation, we actually have a growth in the Product category as well. So a strong performance in a declining market, we can say.And we also see that there is strong interest in the kind of emerging digital health space. And there is, of course, a lot of companies that are active in this space. And there are companies that are well known, global companies that are enrolling into this space, but there are also kind of less-known companies for the general public. And I would say that one of those companies, which is then showing the interest in this segment is GreatCall. It's a U.S.-based company that is providing social care services across the United States and also have a range of products, phones, but care services that are oriented towards consumers. This company got bought by Best Buy, a well-known retail chain of consumer electronics in U.S., for some SEK 800 million. And they have approximately 1 million subscribers to their base. So there is a very big interest, I would say, in the digital health space at the moment. And of course, that is the segment where Doro really wants to play, and we are moving into stronger and stronger with a strategy that we have communicated.And if we move to another space, which is kind of also very close, is the Connected SmartHome products. And right now, they are kind of very much oriented towards the general public. And we see that there is a huge increase in connected speakers and home assistants, the likes of all the -- Amazon Alexa and Google Home. And we see that the forecast is basically that it will reach 100 million connected devices of this type during this year. That is a growth close to 40%.So why is this important? The importance in this lies into that more and more of also social care services that we will see in the future will be voice-controlled. So it will not only be from a hardware perspective that you need things to act as a service, you will be able to talk, not only press different type of red keys and pull cords, but it will be very much voice-dominated. So this is something to look into and continue to follow. And we also see then that Apple that launched their new watch also have included pulse, EKG and full detection into the functionality. So there's a lot of companies looking into this space on how to kind of provide technology for invalid, you can say, or adapted to the invalid or that could be used for the invalid segments.And so we have a lot of evidence that people have started to understand the benefits that technology can provide to provide social care solutions. And the adaptation of these services is increasing, both in Europe but also in the U.S.Talk a little bit about market dynamics. If we move over to the third quarter as such and start with the category Products, the first thing to kind of highlight there would be that we are back on growth in general in the category, and -- but primarily driven -- not primarily driven, but strongly driven by a good sales in North America. And of course, as we have reported earlier, as we had problems in North America because the range of products that we were offering in that market did not really suit what the customers wanted going forward, we have been working really, really hard to bring forward those products that the market desire, still being senior products, of course. And with the product called the 7050, which is a senior 4G clam, the first one we have brought to the market, we are now back on track in North America. And that is giving us a growth that is coming down from, you can say, low comparison numbers, but it's still 116% up versus last year. The category itself is up some 2.4%. And we still have to say that the marketing is challenging, as I said in the trends. And so I think that with all the kind of fact that we have at hand, Doro is growing the market share and strengthening the grip on the feature phone market in terms of senior product. But we are, in Europe, the clear #1.As I said about North America, it also goes for Europe. We have now launched a 4G clam also for the European markets, where we have good traction and have managed to sign a number of customers to take this product going forward. And there's a slight difference in name. It's called 7060 in Europe.We also participated in one of the bigger consumer electronic fairs in Europe, IFA in Berlin, with very good feedback from customers and media. So that was a pleasure.If we move over to business highlights on the consumer -- on the Service category, we see that we have a very strong growth in the category, which, of course, we're very pleased about. So we have a growth of 68%. And this is not only due to Welbeing, but of course, much thanks to Welbeing where we then added 76,000 subscribers -- subscriptions, summing now after that, Doro has approximately 200,000 monthly subscribers to our Care services. The integration of Welbeing is progressing according to plan so that we are really happy and pleased about. And we are now ready to launch the first consumer-oriented social care service, which we then call Response by Doro, which is quite strongly linked to our range of the phones. So we will connect our phones and our services in bundled packages to the market to drive that, but we're also progressing really well on the service called SmartCare, which is more, kind of, IoT-oriented home system to monitor the behavior of a senior citizen and detect if there is things that are then out of the normal and should be attended to in order to kind of prevent some bad stuff from happening to our loved relatives.And we have started the friendly trial with SmartCare with a few users, and we are on track to launch this service, which then consists of -- which is a service but also consists of a bit of a hardware component.And if we then move on to the quarter in itself and start with net sales, we do have, which we, of course, are very proud of, a growth in the quarter, which is the first time since Q1 2017. Revenue is up 9.3%. Excluding Welbeing, we are up 4%, so that you can say then organic growth. As I mentioned on our category Products, despite the weak mobile phone market in Western Europe, we are up 2.4%. And this is even though we have a development of our smartphones which is not to our satisfaction due to that we have -- to bring this to the market, we have a bit of delay when it comes to acceptance testing with a number of operators because this is the primary channel for this type of product. So there we are hit a bit by not being where we want to be.And when it comes to -- and to mention a bit, of course, much of the growth is then coming from North America, Western Europe, you can say, and the U.K., but we will come back to that.On the category for Services, here we have done a very large growth, a big growth of 68.2%. This is, of course, primarily then driven by adding Welbeing to the quarter, which we didn't have last year, but we do also have an organic growth of the -- or the previous kind of Care business that we still have, which is in Sweden and Norway. So that has gone well. We have defended a number of contacts and also added new contracts to all this. So that has been a very solid performance when it comes to the care side.The Service share out of the total is now up on 16% versus 10% -- 10.5% last year. And as I said before, we now have approximately 200,000 subscriptions that are then monthly subscriptions in our category Services business.Okay. If we then move over and look at the sales per market, we have Nordics that is up 2.4% -- 3.4%. So the overall region is reporting growth. We have a positive development of Services, and this then comes from extended and new contracts or renewed contracts in the Care segment. And even if we have slight decrease in the Product category, we do have good traction of the introduction of our 4G feature phone clam, the smart 4G feature phones that we are now bringing into the market. So that's good.Central and Eastern Europe. Here, we have a decline. It's a weak market, we have to say. We would have done a -- we have done a good performance in the market, but nevertheless, the market is really weak. The thing is that we actually see a decline in all, you can say, segments, both when it comes to the care-oriented hardware sales as well as the more consumer-oriented hardware sales. So -- and it is primarily then coming from Germany, to be more specific.Eastern Europe. We have a slight growth, but it's from very low numbers.U.K., Ireland, up close to 42%. Excluding Welbeing, we should point out that we then still have a growth of some 6.3%, so very strong performance in a tough market. And then we were then impacted of the kind of delayed acceptance testing for our latest smartphone, 8035, in the U.K. and Ireland markets.And to also point out Western Europe, France, going well in a tough market; South Europe, meaning Italy and Spain, a bit weaker. But all in all, the region is up 4.5%.So all in all, I think that we have done a good performance if you look at -- across the board in our geographies, where basically Germany being weaker and tougher markets and also the product-oriented business in the Nordics.Okay. Profitability. I will hand over to Carl-Johan to take that part. Carl-Johan?
Thank you, and good morning, all. So on profitability for Q3 and margin, compared to the same quarter of last year, an increase in the gross margin of 2.1 percentage points, up to 31.5% in gross margin. An increase, year-over-year, is supported by so then increased share of sales coming from Services. More looking at margin quarter-over-quarter, there's a slight decline in gross margin, primarily explained by mix effect from both geographies, products and customers and also sort of not-as-favorable FX effect in the third quarter compared to previous quarter this year.Looking at profitability. I would say it's a solid profitability improvement that continues in the quarter, and it's actually the seventh consecutive quarter where we show [ elite and ] improved profitability. So now profitability in terms of EBIT margin, up 1.9% to 6.5% in EBIT margin. And the improved profitability is driven by, one, the increasing share of sales from Services, improving gross margin. And two, I would say, a good cost control in the quarter and in the year, especially if we then reduce for the restructuring costs that we have in the quarter of a bit more than SEK 4 million.So that takes us to the transformation program that we're doing and that we communicated in last quarter. And that program is progressing according to plan, where we see that we are doing the necessary improvements. Having that said, and as we mentioned in the last quarter, and I think where we are increasing our focus, the -- so new management team and the organizational structure, we'll come back to, sort of, emphasize that, but we are accelerating our transformation over to a service and platform business. And of course, that transformation and that sort of accelerated pace will also require new resources and new competencies into the group.And that brings us back to then as we said, the new management team and the organizational structure to very much support the accelerated focus on transforming the business and increasing our focus on the -- especially the Service business.So then moving over to cash flow for the quarter. And cash flow-wise also continued positive cash flow trend. So in the quarter, free cash flow was SEK 31.4 million. That's SEK 25 million improvement compared to the same quarter last year. And that also means that we have a continued healthy debt level and decreasing debt level, of course, supported by the positive cash flow.So I think that sums up from a profitability and cash flow perspective. And I give over to Robert.
Thank you, Carl-Johan. So then some concluding remarks, and then we move over to Q&A, and we open up for you to ask questions.So if we conclude, this quarter, of course, on the positive side, we are -- we have had a quarter of growth of 9.3% and, excluding Welbeing, 4%. We have growth in Products and we have growth in Services. I would say that our growth is primarily driven by Services since that is coming up to some 68% in comparison, while Products is 2.4%. And we have reinforced our leadership team to increase the focus on our business, our customers and the transformation that we have ahead of us. And beneath, we are increasing the speed of the transformation, which is needed. As Carl-Johan also pointed out, it's the seventh consecutive quarter of improved operating profits, and EBIT is up to 6.5% compared to 4.6% a year ago. So that is really positive.On the challenging side, yes, we do have a European mobile phone market that continues to contract, which is, of course, is a challenge. But with the performance that Doro is having on the Product side is clearly showing that we are taking market share and strengthening our grip, the #1 provider of communication devices to seniors. The challenge has also been then Central Europe, specifically Germany, where we have had a decline in the markets, even if the team has worked really, really hard. The market is extremely tough. And then we have been also impacted by the delayed acceptance tests for our smartphones to start ramping up in volume in a number of markets around in Europe. So those are the challenges, and we are working really hard to tackle them and to continue on our strategic transformation track.The priorities ahead, things we have talked about, I think, for quite some time now or at least for 1 year since the Capital Markets Day, which are the consumer-oriented social care services. And the first service out is Response by Doro, which is then linked to our phones and the unique alarm key that we have on the backside of every phone we do. This will launch now in October, starting Sweden. And when it comes to SmartCare, we have started the first friendly trials with [ reen ], as you say customers, seniors that have this installed in their homes. As Johan also -- Carl-Johan also pointed out, we continue to drive the transformation program. One very important component is to add the competencies that we need going forward in the transformation, which are very much oriented towards services, service creation, service launch but also more towards cloud competencies, artificial intelligence, data analytics, machine learning and software in general. So in the transformation, we are also adding these type of competencies to Doro.And outlook for 2018 remains unchanged. We still stay on the range when it comes to sales between SEK 1.9 billion to SEK 2 billion and operating profit in the range of SEK 105 million to SEK 135 million, and this is then including Welbeing but excluding any further acquisitions or restructuring costs.So with that, I would like to open up for the Q&A.
[Operator Instructions] And first question is from the line of Christian Lee from Pareto Securities.
I was wondering if you could clarify what the organic growth was in the quarter for Products.
So you said the organic growth for Products?
Yes, excluding for currency effects.
Okay. So the organic growth in the quarter was 2.4% for Products. And then excluding currency, that's not something we have disclosed separately for Products and Services.
All right. Could you please give us the organic growth for the total group?
So for total group, as we said...
Excluding for currency effects and the acquisition of Welbeing.
So I think -- certainly as you said, and I think you could -- so the -- adjusting for currency effect, I think, but including Welbeing, the growth was 1.6%. And then as you say, if we exclude it, but including currency effects, the growth was 4.0%. I think that -- then exactly what the growth was excluding FX and Welbeing? That's not disclosed here.
Yes, okay. Could you then please disclose the gross margin adjusted for currency effects?
It's a good question, but I think for the gross margin excluding FX, that's not something we have disclosed here exactly what the gross margin was excluding the FX effect.
Okay. Fair enough. You charged restructuring costs of SEK 4.3 million in the third quarter. Will there be another cost in fourth quarter?
There could potentially be some additional costs, but I would say that it will be no significant restructuring costs in the fourth quarter as it looks right now.
Next question is from the line of Viktor Westman from Redeye.
Yes. So can you tell us a bit what's going on in smartphones there? You mentioned the problem, but how bad is it? Is the Christmas sales in danger, for instance?
No. Christmas sales is not in danger. We have a weak sales of smartphones at the moment, and you can say that the ramp is delayed by prolonged acceptance tests. So we're having -- I mean, there's nothing wrong in the phones, just that we are -- as you think about that, it's just that the complexity of, we should be specific, testing the voice over LTE and voice over Wi-Fi with a number of leading operators in Europe takes a bit of time for us since it's the first time we do it. And that is kind of the delay that we have. We should also remember that at this point in time last year, we had a few more active number of products in the smartphone category that we were selling versus the quantities -- the quantity of models, unique models that we're selling now. So of course, we are impacted a bit by that as well. But no, Christmas sales is not in jeopardy.
Perfect. One more question then. You mentioned the GreatCall also, which I thought was very interesting. Can you just talk a bit more in general about their offering? They do a lot of different things. I mean, do you see any learning there, something that you could do, something that are in demand maybe from your customers?
I would say that GreatCall is a very interesting company. I have personally been in contact with them even before this acquisition because I think it's a nice setup they have. What they -- I mean, they have their own cellphones like we do. Maybe not -- their range is maybe not as broad as ours, but they are primarily a social service offering company that then they kind of couple that with products that you need to access their service. So they have kind of turned it the other way around. It's exactly, I will say, the direction where Doro is heading. So our strength is that we do have products, do have alarm-receiving centers in 3 countries now, and we're then bundling our product, our services with a platform, which is My Doro, is to really go the same way as GreatCall have done.
Next question is from the line of Simon Granath from ABG.
I just have one question regarding the gross margin. You mentioned that the quarter-on-quarter decrease is due to a less favorable mix effect as, let's say, well, FX effect. Would you say that the current levels are more sustainable going forward in Products?
I would -- it's of course, it's always hard to say because there is an element of FX impacting gross margin. And I will not try to give you an indication of what we think of FX going forward in terms of the relationship between different currencies. Having that said, I think gross margin in this quarter, based on mix, so leaving currency aside, but based on mix, it's a little bit negative in the quarter from a mix perspective.
[Operator Instructions] And we have no further questions registered, so I'll hand the call back to the speakers. Please go ahead.
Thank you very much. Thanks for attending our Q3 report call. Thanks for all the questions that you asked. I hope we clarified the things that you wanted to know. Our next report, which is then the Q4 report, is due on February 14, 2019. So until then, take care, and talk to you then. Thank you very much.
Thank you.
This now concludes the conference call. Thank you all for attending. You may now disconnect your lines.