Invisio AB

STO:IVSO

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's presentation of INVISIO Fourth Quarter Report 2018. [Operator Instructions] I must also advise you, meeting is being recorded today on Friday, the 15th of February, 2019.And it is my pleasure to hand the meeting over to your host and the presenter today, Lars Højgård Hansen. Please go ahead, sir.

[Lars Højgård Hansen, President & CEO]

Thank you very much, and welcome, everyone. Thank you for calling in to our conference for the fourth quarter and full year 2018. We have 2 highlights that we have focused on in our report. First of all, another important breakthrough in the U.S., where we received so-called GSA contract after the end of the quarter. And another highlight is the fact that we received the first smaller order of our new intercom system.The course I look for were impacted by several orders and deliveries that was currently delayed. We have talked about this earlier, for these delivery models have been diminished into the first half of 2019, announcing which has impacted the quarter and the full year 2018. This is, as we've said many times, the effect of the long lead times in our industry.We have, during 2018, worked very focused, according to our strategy. We have initiated and carried through some of the largest investments in the company history in both the R&D, product development and also in sales. And we are certain that these initiatives and investments will lead to growth opportunities going forward in the form of new product launches that we will see during 2019.I will go to Page #4, where we have the overview. Our revenue in Q4 was high in the year, but lower than the same quarter in 2017, which was actually one of our best quarters ever. This led to a full year revenue result which is a little or almost in line with 2017 as certain expected orders and deliveries have been pushed into '19. So that did impact the full year revenue result as well.Our gross margin in the fourth quarter was also a little lower than we normally see, which is due to the higher amount of so-called third-party projects. We often deliver through systems in packages to our customers, and as we act as a technical integrator or system integrator, this sometimes includes third-party products that have been integrate with our systems. And that does impact our gross margins and we have a higher amount of these third-party products. But for the full year, the gross margin improved to 56.4% compared to 55.3% last year. We expect that the gross margins will -- or can continue to fluctuate between quarters, depending on the product mix and whether we sell direct or not, but we also estimate that the gross margin going forward, in average, should be above 55%.Our operating profit was lower in the Q4 and also for the full year. This is the impact of the many investments we have made in both R&D and in sales. We are convinced that this will help us in the years to come. We'll get back to that.In the next slide, #5, we have the usual overview of the sales development and the operating profit. Not so much to say. This is self-explanatory. We are more or less at the same level as last year for the reasons that mentioned, around delays in certain orders and projects. And the operating profit is largely impacted by the large investments we have made in terms of the organization.On Page 6, we show the sales and order backlog on a rolling 12 months. For sales, you see a positive trend. But in last quarter, we did have a quite good order intake in Q4 of SEK 70 million. And [ amid ] that sale, our order book was quite low compared to earlier quarters, SEK 56.1 million, about SEK 100 million less than last year at the same time. But as said many times, we know that this fluctuates due to the large procurements we see and that they come in at irregular intervals. And again, we have certain projects that we expect will arrive shortly, and that also will have a positive effect on our order intake and on the order backlog going forward.Turning to Page 7. As I said, we have diligently pursued our strategy during 2018. One of our major focus areas is to continue to grow in our existing markets in Western Europe, North America, Oceania. We saw very good development there. Our old sales teams totaling for the U.S., France and Italy had a good year with a good development in the order numbers from those existing and new customers.We continue to deliver on contracts that we hold in these countries, and we also did see additional orders from, for instance, the U.S. Army Security Force Assistance Brigade, the so-called SFABs. In Denmark, we got a new 5-year framework agreement from the Danish army. It was a continuation of the agreement we had all the way back in 2012, so a long-lasting relationship with our home market.As said, we did get a smaller order for our INVISIO intercom system. I'll just get back to that as well. And at the end of the quarter, we got the so-called GSA status and contract in the U.S. Now this is a very important development for us in the U.S. market. It is a 5-year contract with the potential of 3 5-year options, which means a total of 20 years. And if we turn to the next page, it's -- the GSA status basically means that all federal, state and local government entities and customers are able to efficiently purchase the INVISIO equipment at the pre-negotiated terms and conditions. So normally, it takes quite a period of time to obtain a GSA contract, if you can get them all. But we have had sponsors among important U.S. customers that have been supporting us in obtaining the GSA contract. So after a very short period to implement the terms of these contracts, we are certain that the new GSA status and contract will make it a lot easier for customers in the U.S. to place orders with us and would benefit us in terms of the numbers of orders we receive from the U.S. market, so a very positive thing for us.Turning to Page 9. Another part of our strategy is geographical expansion into certain areas of Asia, Middle East and South America, and we have continued to be present there. We've had many meetings. We've worked with partners and reselling entities and have had a good progress during the year. We see the same business pattern. And as we see in the Western part of the world, that across the world, we see orders from Special Forces that are normally smaller orders, and then that will eventually lead to larger order from army customers. And we are at point now where we do expect, at least, first larger orders to arrive shortly and maybe other -- a few more during the next quarters. So you can see a positive development in these new markets as well.On Page 10, our first strategic priority is broadening our product portfolio. And I would definitely say that -- and the issue is driving the market through our very innovative product development, the news we recently we bring to the market. In 2018, we had historic highs in the investments we have made into new products, and that will lead to a number of new product launches in 2019, both within a -- systems and new product categories. And as you all well know, on the next page, 11, we have a new product category called Intercom, portable intercom systems. It's just on its way to the market. And where we, in the fourth quarter of '18, received the first small order from a defense customer in Europe. This little unit will make it possible for our customers to have a seamless integration between when they are in a dismounted, i.e., in the field, scenario and when they are in a mounted scenario, i.e., in a vehicle like both a helicopter or some kind of vehicle. So it is a lightweight system that can be carried in a backpack or mounted in a vehicle. We are in the final stage of development where we must test some are being performed internally the last -- also what we call, environmental tests are being performed. We do expect to see other smaller orders in the second half of 2019. But as lead times are long in our industry, large volumes orders will not be until we get into 2020. But it is definitely a very exciting product category that we expect will have the potential of becoming as large as our current category for dismounted communication and hearing protection systems.So all in all, even though the revenue numbers in Q4 were a little lower than expected due to certain delays, we believe that we are in a very strong position to see continued growth and development for, at least, here in the coming years. We had a good strong market position. We have invested heavily in new products that we will start seeing the effect from in 2019, and we do have some certain projects that have improved into 2019 that we should soon start to see the outcome from. So all in all, we are very positive on the continued positive development for INVISIO.And that also leads to my last slide, #12, where our Board of Directors share the positive business around our continued development. And they, therefore, proposed that the dividend is increased from EUR 0.60, 6-0, per share up to EUR 0.70 per share for this year.And with that, I conclude the presentation of Q4 and the full year. And operator, we are now ready to take questions, please.

[Operator]

[Operator Instructions] And we do have a question from the line of Viktor Westman of Redeye.

[Viktor Westman, Analyst]

Okay. So as I read your report, you mentioned one large contract during the next quarters and then at least 2 more later during 2019. Is that correct?

[Lars Højgård Hansen, President & CEO]

Several was done. I think when you -- when we said the least -- we said at least one from new geographies and several more later in the year. But in addition to that, we have the ones that we have been waiting for from existing markets in the last quarter. So it's several.

[Viktor Westman, Analyst]

Okay. And can you give the geographical mix of this new quarters?

[Lars Højgård Hansen, President & CEO]

No. The majority of what we have been waiting for is related to existing markets, which is also, as we talked about before, the reason why we had a fairly high stock level of products ready to be shipped as soon as these orders arrive. We do believe that the fact that we now have the GSA contract would be able to speed up some of these orders that we have been waiting for, for a while.

[Viktor Westman, Analyst]

Okay. And I also want to ask about the old contracts that you have. Is there any ramp down in the end of these contracts ahead of new procurement?

[Lars Højgård Hansen, President & CEO]

Not as we see it. So I think they are -- each contract is living its own life, so to speak, and it's very country-dependent on how they -- but we do see, as you can see in Q4, we had about SEK 70 million in order intake that was not announced, which means that no order were greater than SEK 20 million. So there is a lot of smaller orders from existing customers and programs that are continuously coming into us. So each program is still alive, and we do get orders from them on a regular basis.

[Viktor Westman, Analyst]

Okay. Just the last one on the operating expenses. They were a little bit lower now in Q4. Are there any positive onetime effect? Or is this that you're having a little bit lower investments from now on?

[Lars Højgård Hansen, President & CEO]

Well, technical in nature. In the same way where in Q2 -- in Q2, we had a little higher operating expenses due to the fact that we accrue for vacation payment to staff. In Q4, our salary payouts were a little lower than expected due to the fact that we did not meet our own internal target, and therefore, for instance, bonus payments are much lower. So these are some of the internal effects that we have.

[Operator]

[Operator Instructions] And we also have a request from the line of Zhou Yiwei, SEB.

[Yiwei Zhou, Analyst]

It's Wei from SEB. A couple of question from my side. I'll start with 2. Firstly, you mentioned there would be more product launches in 2019. And could you elaborate a bit on this? Is it a new -- within the new product category or just your existing product category? And then on the new product intercom, and you're saying still doing environmental tests. And how could you receive this order, I guess, which is a couple million, before you have finalized or passed all the tests?

[Lars Højgård Hansen, President & CEO]

Thank you. Good questions. On the first one, I would say that -- without giving any details to competitors, I would say we have a number of product launches coming in both our existing categories as well as really, in the intercom area. And that is as much as I will say at this point. But we have, I think, a very exciting year ahead of us with a number of new things coming. When it comes to the order for the intercom, I think we have -- as I tried to describe, a very high interest for the new products we have made. In this particular case, there is a customer who has been putting money aside for a certain project that they have in 2019, and they have been willing to put an order in with us even before they have the final product in their hands. So they have very high faith in us. It is one of our existing customers that have been using our other products for many years. They have high faith in us, and they are willing to put in an order before they have seen the final product. They do, of course, know what we are delivering. And as I said, we are in the final stages of fine-tuning the product, which means like any other very advanced electronic products, there is always some software upgrades, changes, debugging that needs to take place when we do our very final test. And that's also environmental test, which are related to the different military standards that it speaks to. We are doing that always externally to make sure we comply with all these test requirements. So we see -- again, the products will be gradually introduced during 2019 to select customers that we know are very interested. And then a little bit later in the year, it'll become generally available to a broader audience.

[Yiwei Zhou, Analyst]

Okay. Just to follow up on the new product launches. You mentioned a couple of products in both existing and new product category. Is it fair to assume you have [ viewed ] the product together with your customers or we should expect seeing something completely new you want to introduce to the market?

[Lars Højgård Hansen, President & CEO]

No. I would say that they completely new copies, of course, the intercom category. But the other things we do is a continuation of our total -- and expansion of our current product portfolio. And everything we do is in close collaboration with customers. We are very, very good at working with our customers who have a very deep understanding of the environment they operate in. And all new features, all new products we do are always based on customer input and feedback along in the development process. So yes, there is, based on customer feedback.

[Yiwei Zhou, Analyst]

Okay. And then just for me to understand this. So the first order on intercom, is it fair to assume -- you said that the customer has set the money aside to -- for the product. But I -- from what I understand, so this first order you received in Q4 is already in your order book.

[Lars Højgård Hansen, President & CEO]

Yes.

[Yiwei Zhou, Analyst]

Okay, okay. And this is conditional or is confirmed order.

[Lars Højgård Hansen, President & CEO]

Confirmed.

[Yiwei Zhou, Analyst]

Okay, fair enough. All right, okay. And I have 2 more questions, if you have time.

[Lars Højgård Hansen, President & CEO]

Yes.

[Yiwei Zhou, Analyst]

So one's on the R&D capitalization. I can see has increased significantly in Q4, and I guess that also helps on your EBIT margin in quarter. So what is the reason here behind this? I mean you say it's SEK 9 million in the quarter, and last year same period, you had only SEK 3 million. And that is 3x. So could you elaborate a bit on this?

[Lars Højgård Hansen, President & CEO]

I mean, basically, as I said, we have invested historically high in product development in 2018. And the numbers, in themselves, are, of course, related to the IFRS rules about how you activate and so on. So this is only to confirm that the development in new and totally new products is at a historic high level at this point in time. So it is -- so that, for instance, when we -- if you can take an example, when we develop something completely new, we activate -- we should activate a very large part of it. If we do a modification to an existing product, then we do not activate on it. And that's according to the rules. So the fact that activations are high is due to a very high level of new product development.

[Yiwei Zhou, Analyst]

Okay. So this increased R&D capitalization is related to the modification or new upgrade of your existing products, which you will introduce in '19? Is it a fair assumption?

[Lars Højgård Hansen, President & CEO]

Not modifications, new development, completely new development.

[Yiwei Zhou, Analyst]

Okay. From what I understand, normally, you -- if you have early-stage R&D, then you have to expense it, or if it's later stage with high risk relative, then you're allowed to capitalize. Is it a case here? So now you can increase your capitalization in Q4 this year. So it's close to the launch, that's why you have...

[Lars Højgård Hansen, President & CEO]

Do you want to comment on this, Thomas?

[Thomas Larsson, Chief Financial Officer]

Yes. I mean, we have started a lot of new products. This is Thomas Larsson. We have started a lot of new projects, and that's why we can activate them more.

[Lars Højgård Hansen, President & CEO]

We can also say, Wei, that we have also been -- we always have been very conservative and not trying to get more activation than absolutely possible. So you should only see this as an indication that the development, as I said, of new products is at a very high level and also related to the fact that we have -- of course, a lot of the -- most of the activation is, of course, also related to new people that we get onboard that work on new products, so.

[Yiwei Zhou, Analyst]

Okay, okay. Yes. And then amortization for those capitalized development cost is the same compared to last year.

[Lars Højgård Hansen, President & CEO]

Yes. But they could be -- they could then be higher going forward, once we start launching products.

[Yiwei Zhou, Analyst]

Okay, okay. All right. So this -- it would be back to normal level after you launch it, right, the capitalized development cost.

[Lars Højgård Hansen, President & CEO]

Yes, unless we decide to start even more new products. So let's see about that.

[Yiwei Zhou, Analyst]

Okay, okay. And then the last question, the leasing accounting, the IFRS 16. So the financial statements you provided in the report, is it reflect that the new source -- the IFRS 16?

[Thomas Larsson, Chief Financial Officer]

No, it's not. It's not.

[Yiwei Zhou, Analyst]

Okay. And then you will -- and you will update from Q1, I guess.

[Thomas Larsson, Chief Financial Officer]

Yes.

[Operator]

[Operator Instructions] And we have a question from Mr. Averson from -- we don't actually have the company name here. So please, Mr. Averson, please state your company name.

[Jesper Birch-Jensen]

This is Jesper at ABG. And I just had a question regarding the tender from the U.S. Marine Corps. Has there been any updates on that? And do you expect to receive words during 2019? Or is it [ moved ] in 2020?

[Lars Højgård Hansen, President & CEO]

So far, there's no update that have been communicated around. It's still -- everyone has -- they still put up the RFI. We have responded to the RFI. And for the time being, as we understand, they are reviewing the RFIs and are looking at what the next steps would be.

[Operator]

[Operator Instructions] And we have no further questions at this time. Please continue.

[Lars Højgård Hansen, President & CEO]

So that concludes the presentation of Q4 and 2018. Thank you, everyone, for listening in, and have a great day.