Invisio AB

STO:IVSO

Earnings Call Transcript 2023-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the presentation of INVISIO's First Quarter Report 2023 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Lars Højgård Hansen. Please go ahead.

[Lars Hansen, executive]

Thank you very much, and welcome, everyone, to our first quarter update. I have a slight cold today, so I apologize if my voice is a little rusty.

The headline for this quarterly report is that we see it as the best quarter in INVISIO's history. We saw a very strong order intake, sales and profit level during the quarter. So it was a very strong start to the year, both order intake and revenue exceeded SEK 300 million, and we are back to good profit level with an EBIT margin of 27%.

As we've said many times before, this development reflects a high market activity and the significantly increased focus on defense and security, especially in Europe. We also think that this development is likely to continue for a long time to come during the new geopolitical situation in Europe.

But we also believe strongly that the development is a consequence of our own doings in terms of the number of new products and the adjustments increases to the organizations that we have done over the past 3 years, where INVISIO today is a much stronger and more broadly founded company than we were some years ago.

So on the next page, the order intake on a rolling 12-month basis exceeded SEK 1 billion for the third quarter in a row. And it is very pleasing to see that we have a greater proportion of medium-sized orders and they are from all areas, dismounted soldiers, vehicles, Intercom and police and law enforcement. So it's well spread. And we have more close to SEK 200 million in unannounced orders. So strong order intake of SEK 350 million. However, a little lower than last year, where we did have some very large announced programs in the early part of 2022.

When we look at the order book, it is a record high. It is the fifth consecutive strong quarter. And we, as a consequence of this, has also decided to increase our inventories somewhat. We hear and see from many customers that speedy delivery is a competitive advantage and is something that is very much appreciated in this period of time.

And as we mainly do standard products, we see basically no risk in increasing our inventory to a little bit higher level. It also reflects the fact that our new Intercom is a little more expensive, and therefore, the inventory values are affected by that. But it's a strong part of our business execution that we have inventory and that we are able to deliver on customer requests with a fairly short notice.

Turning to revenue. We saw more than 100% growth, actually 127% compared to same quarter last year and 119% in comparable currencies. On a rolling 12 months basis, we are at SEK 949 million. And it is, of course, no secret that we are aiming to get up to the SEK 1 billion target as soon as we can.

So sales is definitely a higher level than before. But it's also fair to say that the sales trend is a little smoother than order intake, and that is because we are very good at running an efficient production planning with our partners. But also that we, of course, always deliver according to customer wishes and requirements.

But I think it's a stronghold and a strong point that we, from first quarter '22 to first quarter '23, are able to increase our revenues this much because it has still been a year where component shortages and some spot market buying has been part of the equation. So our supply chain has done really well in being able to increase our deliveries this much.

Our gross margin is at very good level this quarter, 62.5%. We often say that we would like to be somewhere between 60% and 65%. And there is, of course, a number of components to the gross margin. In this quarter, the product mix has definitely had a positive impact. We have sold a number of Intercom systems and also some of our other newer products with a higher gross margin, so the product mix in itself.

But we can also see that due to the fact that we deliver from stock, we have not yet seen the full effect of earlier price increases by our suppliers. So going forward, we still think that we are on the road to be between 60% and 65%, without giving any further details on that.

Operating expenses, primarily our team salaries, and it correlates well with a number of employees. As we said before, recruiting is driven by business opportunities. Those business opportunities are on the sales side, where we can see that more and more customers are interested in our newer products like the Intercom, and therefore, in some areas, we need to add a few more sales people. But we also constantly have smaller product ideas and variants that customers are asking for that needs a few more people on the R&D side or on the operations side. So we will continue to, of course, look at our expense levels as part of how fast our revenues are increasing.

So turning to Page 8 on the margins. It is very clear, as we've said before, the business model that we have. Sales has a direct impact on margins as OpEx is a slow-moving mass. And the increase we are seeing now demonstrates the scalability of the business model with our outsourced manufacturing.

You can see also here that we suffered quite a lot in the COVID years, where we decided to continue to invest forcefully in both new products and organization. And now we are fortunately seeing the good effect of what we did in those years, and that the market is returning back to high activity levels. And I think it's quite an achievement of the organization that our EBIT margin improved from minus 2.8% in first quarter '22 to plus 26.9% in the first quarter. We are quite content with that.

So turning to a few highlights from the quarter from a business point of view. We continue to see strong interest in the Intercom system, even though, as always, any sales process takes time in our industry. But we did get another major follow-up order from an existing customer, value totaling SEK 40 million from a European nature country. And we can now see that the combined value of the orders to the customer has exceeded SEK 100 million. So this is a really good step to -- and also to use as reference case towards other interested parties. But this is a real proof of our products being valuable in everyday activities for our customers.

We also had a breakthrough order for our Racal Acoustics headset, the Magna 4000 in the U.S. Order value of SEK 42 million. And here, deliveries will be in first 3 quarters of '23. As we have said before, a major competitor have decided to leave the military market, and this has opened up opportunities -- more opportunities for the Racal products, especially in the U.S.

And the new Racal Magna 4000 headset is a state-of-the-art, modern headset that can be seen as the first introduction of a new active noise reduction tactical headset for vehicles in the U.S. for the last 25 years. So this is really a technology leap for the customers. And we are quite sure that we will continue to see very good orders from the U.S. market and European markets as we go forward for the Racal portfolio of headsets.

We also received another army -- a new army contract in Europe from a non-NATO country. First order worth about SEK 40 million, and this is for our new generations of control boxes, the Gen II systems, with our X5 headsets. Delivery is in 2023. In this country, the Special Forces are already customers of ours, and we see, as usual, good potential for follow-on orders.

So the market development in general is favorable to our industry and to INVISIO. According to official data, we have seen the largest increase in military spending in Europe in 30 years during the last year, and this is likely to continue for years ahead. We see a great need for modern communication equipment as part of this military spending. And we believe that the larger budgets will allow for a faster rollout of our type of products. So in the long term, we are certain that the higher budgets and the focus on modern military equipment will definitely mean an increased demand for INVISIO type products.

We have a strong momentum right now, an active market due to increased geopolitical insecurity. But we're also doing a lot ourselves, we have doubled our resources within R&D and sales over the last 3 years. We are taking a fast pace on a journey from only hardware to products that are based on software and artificial intelligence. We have seen a broader and wider product portfolio evolve over the last 3, 4 years. And we are now targeting not only military customers, but also police and law enforcement. So we have a strong momentum, and INVISIO is a different company than what we were a few years back.

Coming to the expectations for 2023. I think as a summary of what I've said, we believe that we will have a very good year. The order book that we have on hand, the strong market, mean that we are able to predict continued strong sales, order intake and good profitability in 2023.

So that concludes the presentation of the first quarter. And operator, we are open for questions, please.

[Operator]

[Operator Instructions] Now we're going to take our first question, and the question comes from the line of Daniel Thorsson from ABG Sundal Collier.

[Daniel Thorsson, analyst]

Yes. Lars, a very strong quarter, obviously, and a positive outlook. My first question is really to understand more your investments going into 2023. Now with the strong momentum, the scale, profitability, you have the opportunity to increase more investments in both OpEx and sales activities. What are such activities that you think are going to yield the highest results in 2023? Is it going to be customer-specific meetings? Is it going to be trade fairs? Or anything else, where we will see you being more active here in '23 to capture the market growth?

[Lars Hansen, executive]

Yes. Thank you, Daniel. I think it's a little combination of everything that you mentioned. I think the presence that we have at trade shows is dramatically increased also after the pandemic. We -- I think in total, if you look at both smaller and larger trade shows, we participate in more than 100 trade shows during the year. And actually, next week, there is a very large trade show in Florida for special operations forces that we are taking part in. But we do have a different presence at trade shows with more people present and more activities.

But we -- I think the trademark and the hallmark of INVISIO has always been to work very closely with our customers and listen to their needs, and really try to develop products and variants and other things that are catering to their needs. So we continue to do that and have a very close dialogue with a large number of our customers to see where there are opportunities for us to further expand our product portfolio, both on a shorter term but also on a little longer scale.

So we will probably continue to invest in more product solutions. It could -- I talked about having 4 legs: dismounted soldier, and then the vehicle systems and the Intercom, and police and law enforcement. We could be adding 1 or 2 more legs to that over time, both in terms of product solutions, but also in terms customer groups, so to speak. So it will be a broad range of activity going forward.

[Daniel Thorsson, analyst]

Yes. That makes sense. And how are the plans -- related to that, how are the plans in increasing the organization in 2023 given the strong momentum? Do you feel that you have a lack of salespeople or more because product development is quite large, I guess?

[Lars Hansen, executive]

Yes. Yes. No, we don't have a lack of people. So I think we -- and again, the many investments we took during COVID was to prepare ourselves so we wouldn't be in a situation when things started to go back to normal. So I think we do have a very strong sales organization, and R&D and operation for that matter. So -- but as activity increases, there will continuously be a need for a few people more here and there. And again, it is activity driven that we add a few people to the organization. So I think that's well under control. And we are in a fortunate situation that we are able to find good people in all areas without too much hassle. So that's positive.

[Daniel Thorsson, analyst]

Yes. And that was actually my second question. You have mentioned difficulties to recruit people in the last few years. And has that become less of a problem today given your good momentum, but also the fact that some of your competitors are leaving some markets here and there? Maybe you can find some good people in the U.S. with relevant experience.

[Lars Hansen, executive]

Yes, we can. We don't see any difficulty in recruiting good, strong people with the right background. And also in the R&D organization in Copenhagen and in Harrow in the U.K., we -- there are other industries and companies that are reducing somewhat. So there is a possibility for us to recruit good people.

[Daniel Thorsson, analyst]

I see. I see. Then I had a question on the deliveries here in Q1. It looks really strong both in Europe and the U.S. And we knew some of the deliveries from previously announced orders, obviously. But the rest of them, are there any short-term implications causing this very strong quarter from budgetary impact in a specific country or any specific customer deliveries that eventually landed within this quarter that is good to be aware of for us?

[Lars Hansen, executive]

Not really. I think, of course, a lot of it -- as you know, when we left the fourth quarter of last year, we had an order book of more than SEK 600 million. So you can say it's about half of that, that we have delivered. And then we have been able to get a similar amount of new orders. So -- and the new orders is -- again, it's spread across geographies. It's spread across product areas. So it's a good mix also between existing customers and new customers.

So there will always be some variance between quarters. Even if we have now had 4 quite strong quarters in terms of order intake, there could still be variations between quarters due to certain delays or certain customer orders ending up in 1 quarter instead of the other. But in general, I think we are at a higher level than we used to.

[Daniel Thorsson, analyst]

Okay. That makes sense. My final question is on the military budget increases in 2022. I guess that we haven't really seen that, that is not causing a strong momentum right now and we will see that in the future. How long are the lead times really for this? When do you expect to see the effect of the yield into firm orders for -- from the increased military budgets in Europe last year?

[Lars Hansen, executive]

Yes. I think this will be a progression that could be very individual from country to country, also in terms of what type of products do they intend to procure first and so forth. So I think, again, we're not going to see any sort of catch-up effect at our end. It will be a progression of increase. But almost every day, we hear about new increases in certain countries and so on. But we know it takes time. So it won't be -- but it could also be that -- I mean, in one country, it could be the vehicle market that progresses first. In another country, it could be the dismounted market. So yes, it's quite individual.

[Operator]

[Operator Instructions] Now we're going to take our next question, and the next question comes from the line of Hjalmar Ahlberg from Redeye.

[Hjalmar Ahlberg, analyst]

I can start with a follow-up on the last part there. And then maybe if you see anything, if you compare like the sales pitch to final order currently compared to, I guess, both recently but also a bit more COVID maybe. Is this the kind of -- do you see any effect on the budget increases that the sales pitch to final order is quicker than historically?

[Lars Hansen, executive]

Yes, Hjalmar, I think we do see that, but that's more related to smaller and medium-sized orders. And we also see a little bit more demand for faster deliveries than we did before. So that's also why we have now decided to increase our inventory levels. Because we can see that when customers make a decision, they are asking us if we are able to deliver somewhat faster than what we normally have as standard delivery terms. So yes, there is definitely a little bit of a need for that.

[Hjalmar Ahlberg, analyst]

All right. On the gross margin, you did mentioned product mix, but also supplier price increases and therefore, the [indiscernible]. If that, I mean, has a big impact? Or do you feel that you can maybe push this onto customers when you see this increasing in...

[Lars Hansen, executive]

Yes. Yes. Again, I think we're a little reluctant to give any indication for coming quarters. We always have been. Because there are many ingredients in how the final gross margin turns out. But I think the general trend is that when we launch new, more advanced products and -- we will have a better gross margin, especially in the beginning. And so in general, we should be moving from where we have been at 58%, 59%, up towards somewhere between 60% and 65%. There will be maybe bumps sometimes because of certain contracts or product mixes. But in general, we are -- I think the trend is towards a higher gross margin.

[Hjalmar Ahlberg, analyst]

Right. Right. And you had highlighted in the quarter report that you are increasing more software compared to hardware. Is that also something that drives the gross margin? Or could that be additional upside from the...

[Lars Hansen, executive]

No, we see it as a package today. We don't sell software separately, and it is part of the product and the solution that the customers get. Software is not as easy to upgrade in our customer areas as it is, for instance, for consumers. So it is a little bit of different dynamics there. But it's more a statement that the products are much more advanced than they were previously.

[Hjalmar Ahlberg, analyst]

Right. And maybe just one more on the cost level. I mean you say that you have pretty much what you need in the short term, at least. But are there any other things to think about going into the next quarters here? Will you see kind of a wage increase maybe in Q2 and stuff like that? Or any input there maybe?

[Lars Hansen, executive]

Yes. We will -- our annual increases in wages is in -- from April and onwards. But yes, I think that we will see a natural progression in the OpEx that is related mostly to the activity level and should also be covered by the increase in revenues that we see. So yes.

[Hjalmar Ahlberg, analyst]

And then -- I mean, taking a longer-term view and now we have a very strong margin compared to your target or in the very -- a lot higher than the lower range, so to say. Do you think that you kind of raised the bar for the lower range? Or yes, you put everything to the longer term?

[Lars Hansen, executive]

A little too early to say. I think just coming out of a couple of difficult years where we were definitely far below targets. So I think we're just happy now that we've had 2 quarters in a row with very strong EBIT margin. And that's also -- I think we need to be at a good level in order to sustain the continued levels of investment and innovation that we do. So we will, of course, do our utmost to be at good profit levels.

[Hjalmar Ahlberg, analyst]

Yes. And then thinking about your total addressable market. I mean you mentioned that you're a larger company, you have more products, you have Racal. And I guess I can look just in your annual report, but could you kind of discuss the kind of total addressable market over the next couple of years compared maybe to pre-2020, pre-COVID?

[Lars Hansen, executive]

Yes. I think we need -- we probably ourselves need to do that assessment or adjustment at some point in time. It's probably a little early. But I think from a -- from the market size, as we have described in the annual report, there's no doubt that in the -- especially in the mounted area, the Racal products, we, first of all, have a competitor that has left the scene. So therefore, more market is accessible to us. But we can also see that vehicles has a very strong importance for many countries in the purchasing decisions now. So the vehicle market is definitely interesting to us.

And it's also clear that on the Intercom side, we -- the market size has probably not changed, but we can see that we are selling more Intercoms to be in vehicles that -- than in the portable solution that we thought from the beginning. So which is a positive, because the in-vehicle market is much larger than the portable. So there are some good upside in that regard. But we have not updated the addressable market yet, but it is something that we will look at, at some point in time when things have maybe settled a little bit more.

[Operator]

[Operator Instructions] Dear speakers, there are no further questions at this time. I would now like to hand the conference over to yourself for any closing remarks.

[Lars Hansen, executive]

Thank you very much. Again, thank you for calling in to this Q1 conference, and talk to you again after Q2. Have a great day.

[Operator]

That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.