Invisio AB

STO:IVSO

Earnings Call Analysis

Strong Order Intake Sets New Records

INVISIO reported its strongest order intake in history for a single quarter, exceeding SEK 500 million. Over the past 12 months, the company has achieved an order intake of approximately SEK 1.5 billion. This robust performance highlights the increasing demand for INVISIO's products, particularly in North America and Europe, which remain the key geographical markets.

Revenue Growth Amid Seasonal Challenges

In Q3, INVISIO achieved revenues of SEK 350 million, marking the strongest third-quarter performance to date despite the typical slowdown associated with summer vacations in Europe. Year-to-date revenues reached SEK 1.212 billion, indicating significant growth. If adjusted for a substantial radio order in Q1, the revenue figures reflect a healthy upward trend.

Operational Efficiency and Margins

The company's operational expenses (OpEx) increased to SEK 145 million, primarily due to hiring for R&D and sales. However, the EBIT margin remains strong at 16.3% for the quarter and 17.1% year-to-date, exceeding the company's targets continuously for seven quarters. This efficient cost management, alongside a healthy gross margin, suggests a solid operational foundation.

Significant Backlog and Future Deliveries

INVISIO reported a strong order book valued at nearly SEK 870 million, with an anticipated 80% of this backlog expected to be delivered within the next 12 months. This forecast reflects the company's preparedness to meet future demand, supported by a strategic inventory level of around SEK 300 million, providing a competitive edge in fulfillment times.

Market Opportunities and Product Launches

The company is poised to benefit from anticipated increases in military spending from 2025 onwards, particularly from NATO member countries. INVISIO's new products, including the INVISIO X7 in-ear headset and the V6 ADP control unit, are gaining traction and expected to drive revenue growth going forward. A recent SEK 170 million order from the U.S. Department of Defense for Racal headsets further validates this positive outlook.

Future Earnings Guidance

Looking ahead, INVISIO anticipates its gross margin to stabilize above 60% by 2025. This projection aligns with the strategic focus on enhancing product offerings that meet current market demands and customer preferences. Additionally, cash flow remains strong, driven by timely payments from customers, underpinning financial stability.

Employee Growth and Corporate Responsibility

Since the beginning of 2024, INVISIO has added over 40 new employees, with a commitment to achieving a more gender-balanced workforce. This initiative reflects the company's broader CSR goals, ensuring that its growth is paired with social inclusivity.

Earnings Call Transcript 2024-Q3

[Operator]

Welcome to INVISIO's Presentation of Interim Report for January to September 2024. [Operator Instructions] Now I will hand the conference over to the CEO, Lars Højgård Hansen. Please go ahead.

[Lars Hansen, executive]

Thank you very much, and welcome to our earnings update for the third quarter. And this is one of the strongest quarters in INVISIO's history that we are reporting. Our order intake was in excess of SEK 500 million for the first time in a single quarter if we exclude the exceptional order we had on third-party radios in the first quarter.

And if we look at a 12-months rolling scale, our order intake is now pacing around SEK 1.5 billion. Also that is a record. And even our revenues were strong in the quarter, the strongest ever for a third quarter, where we traditionally have a little bit of impact from vacation periods around Europe. Our revenues amounted to SEK 350 million.

Other highlights was our OpEx and EBIT margin that remained stable. And also that our order book is now very strong, and we have a high capacity for speedy delivery of volume orders given our inventory levels. So all in all, we are still very well-positioned to take advantage of the opportunities that we see in the dynamic market that we operate in. So a few more details on the order intake.

Our demand continues to be strong across our full product portfolio and also in our main geographical markets, which are North America and Europe. It is very pleasing to see the continued success for the products sold under the Racal Acoustics brand, especially in the U.S., where we received large order during the quarter.

And as we have said many times before, we anticipate increases in military spending from '25 and onwards. Very many countries within NATO are announcing and have announced increased spendings that we think will benefit our business as well. We can see that many customers are increasingly opting for solutions that are field-proven and ready and that does not need any type of customization. The more than 15 years of, let's say, market experience that we have with our solutions is definitely giving us an advantage from a competitive point of view.

Our order book, as I said, is high at a value of almost SEK 870 million, and we anticipate about 80% of that will be delivered within the coming 12 months. We have a high inventory of standard products to a value of around SEK 300 million. And the strong order book we have, together with the inventory level indicate significant future revenues.

The inventory level is something we have built over time consistently, and we think this is a major competitive advantage for us. Also in the given climate today, both for customers in the U.S. and in Europe that we have inventory levels close to the customers that we can deliver on short notice.

Turning to revenue. Revenues around SEK 350 million, highest ever for a third quarter. And if we look in comparable currencies, it was SEK 355 million. The revenue year-to-date was also seeing significant growth. We are at SEK 1.212 billion and a little more than SEK 1 billion if we exclude the radio order we received in Q1.

So a good development there. And as I said, in the third quarter, we normally have a few weeks where there are summer vacation period in Europe that sometimes impact our deliveries. But still, we managed to deliver more than SEK 350 million.

Our gross margins are still healthy, a little bit lower in this quarter, mainly because of product mix. We had a little leftover regarding the radio systems in Q3, about SEK 10 million with a very low gross margin, and there was also a little bit of product mix in the total here. But this is just the, I would say, normal fluctuations that we sometimes see in quarters depending on product mix where we still have certain products of older dates that have a little lower gross margin than the ones we have recently launched. So all good.

When we look at our costs, our OpEx, it is a stable trend for the last 5 quarters. In the second quarter this year, we had a few one-off costs related to a cyber incident in our company in the U.K. and also to ESG activities. But apart from that, the trend is stable. Our OpEx was around SEK 145 million, so a little higher than last year. And the majority of the increase is related to people, more people in R&D and sales, which is in full accordance with our growth strategy.

So far in '24, more than 40 new colleagues have joined INVISIO and 25% about this are female, and this is in alignment with our ambitions to try to achieve a more equal gender balance like many other tech companies, especially in defense-related industries. There is less females than males, and we are trying to balance that over time with our new hirings.

EBIT margin is above our target and has been so for the last 7 quarters. This quarter, we ended at 16.3%. And the operating margin for year-to-date was 17.1%. And cash flow in the quarter was very strong, impacted by sales that we did in the last part of second quarter and where payments were received in Q3. So yes, a bit unusually high, but again, related to that we invoice in the late part of the quarter and that our customers pay on time in the following quarter.

A few major activities during the quarter. Our largest U.S. trade show of the year takes place in Washington, D.C. in October every year. And this year, the attendance was a record high, more than 45,000 visitors and 750 exhibitors from more than 100 countries. And as usual, this is a great opportunity for us to showcase our wide portfolio of products, including the newer ones that we have recently launched, including the new INVISIO X7 in-ear headset, which we believe over time will be a very important growth driver for INVISIO and a great contributor to our order intake and revenues going forward.

But also the new control unit that we call V6 ADP, Audio Data and Power, which is designed to address the demand for digitalization is also a product that creates a lot of attention and interest and trade shows. And in addition to that, I would say, state-of-the-art and new product line we have across both Racal Acoustic product lines and INVISIO product line. We are well suited with our product line for 2025 and onwards. 

As you recall, one of the big opportunities for our Racal branded products are in the U.S. And here, during the quarter, we secured an order for SEK 170 million from the U.S. Department of Defense for 2 different racial headsets, the RA 5001 Raptor and the 4000 Magna, which are intended for use in combat vehicles. And this order has come on the backbone of extensive product testing for a long time with the Department of Defense in the U.S. So we are very pleased that they have chosen our solutions and of course, hope and believe that this will lead to further orders over time. 

So in summary, it's a little bit boringly put, business as usual. We are in an industry where significant investments are coming over the next 10 to 15 years. We expect market activity to remain very strong for many years. The market trends are definitely in our favor with a significant need for modernization of communication and hearing protection solutions across all of our markets. And we believe that we are well positioned with our product portfolio and our customer base to capitalize on the opportunities presented in this very dynamic market. So this concludes the short summary of INVISIO's Q3 report, and we are now open for questions, please.

[Operator]

[Operator Instructions] The next question comes from Daniel Thorsson from ABG Sundal Collier.

[Daniel Thorsson, analyst]

Lars. I have a question on the order book here. You mentioned a number. I didn't hear that. Was it 80% of the order book is ready to be delivered within 12 months?

[Lars Hansen, executive]

Yes.

[Daniel Thorsson, analyst]

Was that right?

[Lars Hansen, executive]

Yes, that's approximate. Yes, correct.

[Daniel Thorsson, analyst]

Excellent. Can you also elaborate a little bit how much of the order book is ready to be delivered in Q4 here, given that deliveries in Q3 were a bit lower than I expected at least, and the order book is strong and inventory is up, as you mentioned.

[Lars Hansen, executive]

Yes. So as you can see, we have good inventory, and we are well prepared. So lots of the time is actually also more related to customer requirements and when they are ready to receive the goods and the products, yes, pending training activities and what else they have. So I don't have a number in my head, but I would say a good part of the existing order book will be delivered in the fourth quarter. But we work very closely with customers and try to meet their requirements as close as we possibly can.

[Daniel Thorsson, analyst]

Yes. Understood. And then on the gross margin, the underlying adjusting for this radio order was just below 60%. Anything to be aware of just about mix or the new products you mentioned that typically have lower gross margins or anything else we should keep in mind?

[Lars Hansen, executive]

No, it's more related to older products that sometimes as you might recall, also partly sometimes we have a little bit of third-party sales. There's also when we required Racal Acoustics at the starting point, the gross margin for Racal products were somewhat lower than INVISIO. We have brought that up now, to comparable levels, but there are still products in the portfolio from the past where the gross margin are a little bit lower, also sometimes because they have been sold through system integrators for that reason. But the new product lines we have launched recently all have very good gross margins.

[Daniel Thorsson, analyst]

Yes. I see. So based on what we know as of today, a gross margin in 2025 just above 60% is still reasonable?

[Lars Hansen, executive]

Definitely possible, yes.

[Daniel Thorsson, analyst]

Yes. I see. Okay. Good. And then just a technical question here. Net financials that was negative in the quarter here despite your net cash position, and that has not been negative before. What was that, if you have the detail?

[Lars Hansen, executive]

Currency, that's because of currency.

[Daniel Thorsson, analyst]

Okay. Okay. I see. And then a final question on the competitors here. It seems to be a competitive advantage for you to have a short-term notice on deliveries. Do you see any signs in the market of competitors also being able to deliver with shorter-term notice than half a year ago or so? Or is that still an important edge?

[Lars Hansen, executive]

No, I think we are -- I don't know details of all competitors, but I would think that this is -- I don't know of anyone in our industry that has comparable inventory levels to what we have. I think that is a very strong advantage we have. And also from planning purposes for a customer point of view, it is a great help that we are able to deliver within a reasonable short amount of time.

[Operator]

The next question comes from Hjalmar Ahlberg from Redeye.

[Hjalmar Ahlberg, analyst]

So a question on the order intake, which was very strong. I believe you had the Racal order, but can you give any more flavor on what drove this? Any special orders or a large global?

[Lars Hansen, executive]

Yes. I think the development we have seen over the last, actually after COVID pandemic is that the very large orders of SEK 170 million for Racal is more irregularized by the exception now, whereas we get a lot of orders are medium-sized, smaller size, SEK 10 million, SEK 20 million, SEK 30 million in that ballpark. So I think this is a very good sign for us because it's a really broad customer base that we have across all geographies, but also across all of our product lines. So even though it is maybe a little more cumbersome for the sales team than getting large orders, I still think it's strong for the company that we are not so depending on individual large orders, but we can actually. Yes, we really have a broad customer base now.

[Hjalmar Ahlberg, analyst]

Got it. And you already partly answered it, but just a follow-up on the deliveries for Q4. Would you say that kind of visibility is better than normal in terms of strong deliveries in Q4?

[Lars Hansen, executive]

Yes. I mean it is clear, of course, that we have a very strong order book, and we have good inventory. So unless customers decide that they don't want to work before Christmas and only want to start working in January, I think there's a good likelihood of a very interesting [indiscernible].

[Hjalmar Ahlberg, analyst]

All right. And just shortly on OpEx, I mean, you told us that it is kind of trending as usual, hiring 40 people. What kind of, I mean, do you see the same kind of hiring need in 2025 or anything to consider here looking forward?

[Lars Hansen, executive]

Let's see. I think we take a little bit step by step, and it is much. It's very much activity driven and also where we see the sales team being stretched too thin, then we do add a little people, a few more people there. 

And also on the R&D side, when we see that the support for certain projects or activities are a little thin, then we add a few people more. So it is very activity driven. So I think we take it a little bit quarter-by-quarter and follow what order intake and revenues we have and then follow up on the activity side.

[Hjalmar Ahlberg, analyst]

All right. And maybe just a final one on OpEx. I mean, sometimes you have had this kind of impact from bonuses when you deliver strong numbers and considering the deliveries this year, have you set off all costs for that? Or could that be something that impact in the short term?

[Lars Hansen, executive]

I think so, depending on, of course, what happens in the last 3 months of the year, but it is, of course, something that we accrue for during the year.

[Operator]

The next question comes from Tom Guinchard from Pareto.

[Tom Guinchard, analyst]

Just a question on the geographical sales split. Can you remind us if there's any specific seasonality across the geographies or products that you're selling currently?

[Lars Hansen, executive]

It's a little hard to say. I don't think there is that much. When we look at it from an end of year perspective, then the U.S. has end of year in September. And sometimes there's a little bit of end of year money being spent in September in the U.S., but it's not to an extent where it makes a huge difference. And then, of course, as you know, most European countries have end of year in December. And then we had the U.K. where it's end of year in April from a military budget point of view. So it's spread out a little bit. So yes, so there's not that much seasonality. We sometimes, as I say, see a little bit of effect on the deliveries in Q3 because of vacation period and so. But other than that, there's not a clear seasonality pattern.

[Operator]

The next question comes from Yiwei Zhou from SEB.

[Yiwei Zhou, analyst]

Lars, I have 3. Firstly, looking at the U.S. business, the revenue decline in the quarter. Do you see any like reluctance among your customers procurement during the election period?

[Lars Hansen, executive]

No, not more than normal. I think what we have seen in the U.S. for quite some time is that in October, November, there has been disagreements between the 2 parties around coming year's budgets, and then it has taken a bit of time to resolve that. And that sometimes have a little bit of an impact. But normally, there is what they refer to as a continuing resolution, which means that the military can still continue to spend at the same level as the previous year's budget. So it is more, that they do not normally start a lot of new projects during this period of time until the new budget is approved, but they can still buy from something similar to the old budget.

[Yiwei Zhou, analyst]

Okay. Great. Very clear. And secondly, regarding X7, could you indicate the average selling price and also the gross margin for this product?

[Lars Hansen, executive]

The gross margin is definitely in line with our competitive reasons, I am not going to give you that number, but it's of course, one of our flagship products where we, of course, also have a good gross margin. And selling prices varies between configurations and volume. But as a rule of thumb, our headsets are in the price range between EUR 1,200 to EUR 1,400.

[Yiwei Zhou, analyst]

Okay. Great. Very clear. And lastly, you recently launched this wireless device for Intercom. If you could maybe elaborate a bit more on what is sort of a new pattern or selling pattern on the vehicle product portfolio?

I understand it was designed as sort of a portable solutions. Now it seems that it's more or less just mounted on these vehicles. And with this new device, do you see sort of the increase or how much increase on the value per vehicle?

[Lars Hansen, executive]

That's a good question. And you're absolutely right. When we launched the Intercom, we thought it would be a portable solution mainly, but we have found out that our customers have other ideas, and they would actually like to have it in vehicles. And most of what we have sold so far of Intercom has been in vehicles. It doesn't mean that they have to drill and screw into any vehicle, but it can be mounted in a safe way inside a vehicle, and that's what many do.

And then luckily, many of our customers are also very, very helpful and innovative and they've come back and said to us that, hey, the product is great, but it would be fantastic if we could also be allowed to move around the vehicle wirelessly and then talk back to the Intercom in the vehicle. And that is a capability that we don't really have today in a smart and efficient manner.

So that's why we developed the LINK product, and it's now in testing with several customers, and we expect it to be commercially ready somewhere in '25. And I would say, yes, definitely, it does add to the total value per vehicle if you can get the wireless part there as well. It's a significant value add to each system, but also a significant performance addition to the system.

[Yiwei Zhou, analyst]

Is it possible to indicate a bit about the selling price range?

[Lars Hansen, executive]

No. Again, we would have to do that later but for competitive reasons and other, we will not release any price, but it is a significant amount of business because you would be able to have up to 8 to 10 users. And of course, those users would also have the INVISIO headsets and control units and everything with it. So the average price per user will be significant.

[Yiwei Zhou, analyst]

Great. If I can ask one more question regarding your R&D spending. So is it possible to split your R&D spending to sort of upgrade on the existing product lines and then a completely new device or new solution as this wireless device or the maintenance CapEx?

[Lars Hansen, executive]

Let's take that question with us and look into it. I don't have that number at the top of my head, but we will take that and see if it makes sense for us too and we are able to do it in a meaningful way.

[Operator]

[Operator Instructions] The next question comes from Jakob Marken from Danske Bank.

[Jakob Marken, analyst]

Lars, most questions already answered, but if I can maybe take a final one. If you could help us with the split on the order book, that will be very helpful. So between Racal and rest of INVISIO.

[Lars Hansen, executive]

Yes. I mean we don't normally disclose that because some of it is tied together where INVISIO products are also sold together with Racal products and Racal headsets are sold together with INVISIO Intercoms. So for us, it's not that important whether it's one or the other. But if I should just shoot from the hip, it is probably, I don't know, 60/40 in the favor of INVISIO at this point in time. But of course, it varies between quarters and a large order like the one we received for Racal products now could change that split in the coming quarter. But something like that, I would guess.

[Operator]

There are no more questions at this time. So I hand the conference back to the CEO, Lars Højgård Hansen, for any closing comments.

[Lars Hansen, executive]

Thank you, and thank you all for calling in and I look forward to talking to you again in February when we have our fourth quarter and full year report ready. Thank you. Bye for now.