Tobii AB

STO:TOBII

Earnings Call Transcript 2022-Q1

[Anand Srivatsa, executive]

All right. Thank you, and welcome, everyone, to Tobii's Q1 2022 Earnings Call. I am joined on this call by Magdalena, the CFO for Tobii, on my left side, as well as Henrik Mawby, who runs Investor Relations for the company.

Now we're going to be taking questions after this presentation. So if you have questions already, please feel free to immediately post those questions.

I wanted to start this presentation as with others by first starting out and providing some context about the company. So first, let me talk about Tobii and Tobii's history.

Now Tobii celebrated its 20th year anniversary in 2021, and we have been a public company listed on the Stockholm NASDAQ since 2015. The company was started 2 decades ago to be a pioneer in eye tracking and deliver a new way to control the computer with your eyes. And over the last 2 decades, we have grown into a leader in this space, with some of the largest companies in the world using our technology.

Over the last 20 years, Tobii's solutions have expanded in a couple of major dimensions to go much beyond eye tracking alone. One, we have expected the biometrics or core signals that we can measure. We have started with gaze or eye tracking, but we've expanded into other signals that can be derived from images of people's eyes or faces, signals like eye openness, head pose, et cetera.

The second dimension is that we have combined these core signals into a new type of signal we call attention signals, which are derived by combining core signals and delivering more insight into human behavior. These are signals, for example, like drowsiness or understanding whether a user is fixed on a particular point on a screen or in the world. We also can understand information about a user, like the level of stress they're under, the level of cognitive load that the user is in, in some cases.

All of these, of course, are put together from a core and attention signal perspective to ultimately deliver user value. And this is manifested in a pretty broad set of places in the industry.

When we take a step back and look at what Tobii is delivering over the last 2 decades, it should be clear to all of us that Tobii is much more than just an eye-tracking company alone. We are definitely a pioneer in a new space we call attention computing, and the value that we deliver spans everywhere from hardware on the bottom of the slide, all the way to user value that's manifested in a set of different market areas. We believe that the opportunity for attention computing is quite broad, and that is actually a substantial TAM that we are chasing relative to where we are at this moment.

Now though, we are seeing increased adoption and acceleration of the adoption of our technologies in 6 key vertical areas. And they are gaming; automotive; health care; education and training; extended reality, which covers virtual and augmented reality; and behavioral studies and consumer research. We address these 6 market areas in 2 unique segments: 1 that we call Product and Solutions and the second, we call Integrations.

The Product and Solutions business is a vertical business, and it includes combinations of hardware, software and services that Tobii is typically delivering to the end customer who extracts the final value from these offerings. This is a vertical business that has different business dynamics than the Integrations business, and I want to talk a little bit about that. We expect, of course, that the Products and Solutions business delivers strong top line growth and will deliver strong gross margin. But in general, the Products and Solutions business has a smoother revenue profile as it achieves this growth. This business is not usually susceptible to individual customer decisions, but there are, of course, macroeconomic impacts that can change the outlook for the business, impacts, for example, like the pandemic or other situations that can have broad sector effects.

The second segment that we typically address the 6 market areas with is Integrations. And this is more of a horizontal solution set, where our technologies are integrated into devices that end customers typically buy. You can think about this as Tobii solutions integrated into a virtual reality headset, our eye-tracking solutions built into medical diagnostic or therapy devices, for example. We expect, just like the Products and Solutions business, for the Integrations business to be a strong growth driver for the future of our company. But in this particular instance, this segment tends to have more lumpy behavior, where both growth and margin can be lumpy over time as customers introduce, ramp or end-of-life their products. There's a strong dependency in the Integrations segment to our customers' success as we are very much dependent on their product shipping to achieve revenue on our end. Like the Products and Solutions business, there is an impact on the Integrations business from macroeconomic conditions, and we have seen some of that play out with the pandemic over the last couple of years.

Let me now switch and talk about Q1 2022 in specific. Now Q1 2022 continued the trend of recovery after the pandemic. We notched our highest ever Q1 revenue for Tobii. This is also the fifth quarter in a row of organic year-on-year growth. This business result was delivered despite a continuation of macroeconomic disruption, with pandemic-related effects playing out in China, especially in the back half of the quarter.

In addition, of course, we have a unique macroeconomic situation with the war in Ukraine. This has created a completely different dynamic for Tobii. While we do not have significant revenue exposure in Russia, Ukraine or Belarus, our teams are deeply affected by the war in Ukraine because we have colleagues in harm's way. We continue to support our colleagues as many of them have moved to safer locations, but the anxiety around the situation continues. And we, of course, hope for a return to peace and an end to the war as quickly as possible.

Now if we take a deeper look at the results in Q1, we achieved a 7% year-on-year organic growth for the quarter, which was led by a 12% or growth in the Products and Solutions business. This growth was despite the fact that we had some late-in-the-quarter impacts with pandemic-related restrictions. We believe that this Products and Solutions growth is going to continue to deliver strong results and continue this growth trajectory over the course of the year as we get back to a new normal post the pandemic.

Now if we contrast that to the Integrations business, our Integrations business declined 12% in Q1. The vast majority of the decline was attributable to lower project revenues, which, in the Integrations business, is the most lumpy aspect of our overall revenue profile. We've also seen in Q1 that we have a mix shift from hardware to software sales. And that, of course, has 2 effects: one, that it makes top line growth a little bit harder. But at the same time, we see quite positive results of that from a gross margin perspective.

Beyond the financial aspects of the Integrations business though, what I feel very encouraged about and what gives me a lot of confidence going forward is that the underlying business dynamics around Integrations has strengthened substantially in the quarter. And I'll talk about 2 of those things in more detail, specifically virtual reality and the progress we've made in the Automotive Driver Monitoring Systems market. I expect that while the Integrations business will have variations in quarterly revenue performance from a growth perspective, on a year-on-year basis, this business should be delivering strong top line growth, and I'm quite confident that we will achieve that in 2022.

Our operating results for Q1 was minus SEK 45 million, which was very much in line with our internal estimations. And I'm going to allow now Magdalena to give you a little bit more color, both on the operational results we had as well as other financial aspects of our results. Magdalena?

[Magdalena Andersson, executive]

Thank you, Anand. Yes, starting out to look at our revenue. This quarter is the highest in Q1 in Tobii history, as Anand just mentioned. We had an organic growth of 7%, where our sale towards universities developed positively, and even more so, our sales towards companies focusing on internal research and studies flourished. Gross margin was 71%, down slightly versus last year's 72%, so not any large movements in total. However, we had some deviations within the segments, and I will get back to that on the next slide.

After taking down costs during the pandemic, our sales and marketing expenses are now growing, thanks to a normalization within the society. And this reflects our increased focus also on commercialization. And then our G&A costs are higher than last year as a result of the split, but they have now also come down from the levels we showed in Q4 2021, where we had some one-off costs. This leaves us with an operating result of minus SEK 45 million compared to last year's SEK 37 million.

And then let's look into our 2 segments. Products and Solutions had an organic growth of 12%. Development within research was positive towards universities and especially strong towards the enterprise community. Sales did, however, remain hampered by the new restrictions in China. Gaming peripherals did not grow this quarter. Bear in mind, though, that in Q1 2021, Star Citizen had just recently been launched -- or launched eye tracking, so it is a tough comparison here. But our wearable research solution and flagship product Glasses 3 was the shiny star in this quarter with a very strong performance. Gross margin in the quarter was 70% versus 74% last year, and it was increased freight and component costs that made up the difference here.

For Integrations, the organic growth was minus 12%. Here, we have product revenues with variations between quarters. So this segment is still smaller, but with the ambition to grow bigger soon, we'll continue to show lumpiness between quarters also going forward. Gross margin for Integrations was 76% in the quarter, where the growth from previous year's 68% came through a change in product mix as we see a trend towards more software.

And regarding our balance sheet and cash flow. The solidity is strong, with an equity of over SEK 800 million and an equity ratio of 71%. Our free cash flow during this quarter was minus SEK 48 million and in line with expectations. Last year's free cash flow was minus SEK 11 million, and the difference between the quarters came through at the change in working capital. We ended the quarter with SEK 402 million in cash and cash equivalents. And as a reminder, as we mentioned on the Capital Markets Day we had in October last year, with this balance sheet, we are fully funded for our organic business plan going forward.

And with that, back to you, Anand.

[Anand Srivatsa, executive]

Thank you very much, Magdalena, for the details on our financial performance in Q1.

Now if we sum up Q1 from a financial perspective, I think we have made a solid step forward towards achieving our long-term ambition. One aspect of this, certainly, there's a financial performance with an all-time high in Q1 revenue. Again, this points to our belief that we are starting to get back to a new normal post the impacts of the pandemic on our business. But underneath that, there are, of course, other strong indications that we are building the foundation for our future success.

We continue to reaffirm our belief that we are entering an era of sustained, faster-than-historical growth. And I want to spend a few minutes now talking about a couple of those engines that will help us achieve the growth that we intend, specifically virtual reality and Automotive Driver Monitoring Systems.

Now in Q1 2022, the momentum in the virtual reality market has continued to accelerate, building on all of the positive momentum from the market in 2021 as a whole. Notably, in this quarter, Sony has unveiled the PSVR 2 and started to the headset at the Game Developers Conference in March this year.

Now the new headset is going to enable a new level of immersiveness for games as Sony's focus with this headset is enabling new types of capabilities, like foveated rendering. We expect that this technology and eye tracking in this headset will create a new baseline expectation of immersiveness in games and the need for eye tracking as a standard technology element in consumer VR headsets moving forward.

Specifically for Tobii, there are 2 sets of implications with the drive that Sony is pushing. First is that there is an opportunity for us to get potential direct revenue. And we announced in Q1 this year that we are in negotiations to be the eye-tracking technology provider with Sony for the PSVR 2, and those negotiations are ongoing.

The second, of course, is that as a market maker, Sony is establishing the de facto floor for what is going to be expected from VR experiences going forward. And the acceleration of adoption of eye tracking technologies in consumer VR headsets means that we have a much larger market for us to plan, and this is something that is translating already to higher levels of customer activity for us as well as a stronger potential for near-term revenue that is incremental coming from this space.

Beyond Sony, of course, the news around VR continues to be strong and come from other tank titans in the space as well. You see the quote behind me from Mark Zuckerberg from Meta's recent earnings call, April 28. And once again, Meta continues to reinforce the importance of new user-sensing technologies in the headset, and they specifically call out eye tracking as being one of those capabilities that they intend to include.

We believe that the industry momentum in virtual reality right now is undeniable, both from an overall market perspective, but also specifically for Tobii in the attention computing space, the opportunity for us to deploy our technologies into this marketplace is much, much more compelling, more mature and will be realized, in our view, in a near-term sense, very much in line with our expectations that we set in Capital Markets Day, where we see scale opportunity in virtual reality in the next 1 to 3 years. We very much feel that the momentum that we've seen this quarter continues towards that trajectory.

Now let's talk about the second engine that will help create the foundation for our future success and future growth. And that is around Automotive Driver Monitoring Systems.

We announced our intention in August of last year to build a leadership position in the automotive driver monitoring space. And at the time, we also announced the acquisition of Phasya, a multimodal AI software company that helped us broaden our Driver Monitoring System offering and also accelerate time to market of the solutions for us. I'm very happy to share that in the months that have followed, we have successfully completed the integration of Phasya. The Phasya teams are now fully part of Tobii, and the Phasya software is already running on Tobii's core DMS signals.

In addition, in this quarter, we have started to put our DMS solutions on demo cars and be able to shop them around with customers. And I'm very happy to note that the feedback from customers seeing our solutions is very strong and positive, specifically around the performance and robustness of our solution. We are currently participating in multiple RFQs with Tier 1s and OEMs, and based on the progress that we've made in Q1, we are on track to meet our goal of being in design wins, with a target of start of production in 2025. Once again, if you recall what we said in Capital Markets Day, we believe that our investments in driver monitoring is something that we intend to scale into revenue in the next 3-plus year horizon. And what we have done in the last quarter gives me continued faith in our estimates that, that is where we will see this business bear fruit for Tobii.

With that, I would like to then switch over and summarize our performance in Q1. So if we look back, where we are right now is we have delivered the highest Q1 revenue in Tobii history despite macroeconomic challenges. I think that's a very strong positive note for us about how our business is recovering, setting up the opportunity for continued future growth. We also see strong underlying business dynamics that will help us set the foundation for multiyear success, and specifically, in virtual reality and Automotive Driver Monitoring Systems, the progress we've made in Q1 2022 is quite significant. We are exiting Q1 now with substantially increased confidence for 2022 and the years beyond that.

With that, I would like to open it up to questions. Henrik?

[Henrik Mawby, executive]

Thank you. [Operator Instructions]

And I will start now with a few questions that have come through the Q&A function already. This is from David. Henrik, the former VP always talked about the fact that the market penetration takes a lot of calendar time. Would you say that we are a lot closer now than before? And how is your view about the development in the VR segment in general and, in more specific, in Tobii's role in making progress?

[Anand Srivatsa, executive]

Sure. Let me take that question. So absolutely, I think the characterization we've shared in the past that it does take time to penetrate into these markets is absolutely fair. We have been talking about VR for almost 5 years now, and we're finally starting to see that market mature in 2 sets of ways. We have already had success in the enterprise VR portion of the market, where eye tracking is a de facto standard feature in those kinds of headsets. But we've always felt, of course, that for us to have success in this marketplace, we need to see the growth of consumer VR headsets and the penetration of eye tracking and attention computing into those headsets. That trend is now absolutely clear, and a lot of that has happened over the last couple of quarters.

And so I would say that where we are in terms of realizing the benefits of that market change, we are very much within that window of the next 1 to 3 years. And so in that case, we are much, much closer to realizing the potential of that business, but it has, of course, taken us 5 years to get there.

[Henrik Mawby, executive]

Thank you for that. And then we have a few questions from Daniel Djurberg with Handelsbanken. Integrations growth was weak, partly due to tough comparison. How about the pipeline?

[Anand Srivatsa, executive]

Yes. I think there's 2 things. As we indicated, the Integrations business is typically lumpy. It's lumpy for a couple of sets of reasons, but one aspect that especially drives the lumpiness is around project revenue. In this particular quarter, that was the major driver of the weakness in the Integrations business.

Now if you look at sort of the pipeline going forward, we're very, very happy with the pipeline. We're driving specifically in places like virtual reality. We have, of course, a broad pipeline with other sets of customers we announced. We talked about the fact that in our earnings report, we have 3 design wins this quarter as well. So we feel that the pipeline continues to expand. In certain areas, we think that, that pipeline will turn into revenue with much higher velocity. And an example of that would be virtual reality at this point in time.

And of course, we're also building a longer-term pipeline. When we think about the automotive driver monitoring solution space, while we make design wins this year for that business, with the start of production of 2025, that revenue will manifest itself in the 2025, 2026 time frame. So in the Integrations business, the business dynamics can manifest in revenue in quite different ways depending on the vertical that we have design wins in.

[Henrik Mawby, executive]

And continuing with Daniel Djurberg. Negative impact still from COVID-19 and component shortage, are you expecting that to continue?

[Anand Srivatsa, executive]

Do you want to take that, Magdalena?

[Magdalena Andersson, executive]

Yes. We are -- negative impact also on the margin, as we speak about. And we are focusing now on securing inventory, and with that comes high prices. And we have managed so far, and we will continue to focus on that, which means that -- and we expect it to continue during 2022 and probably into 2023 as well.

[Henrik Mawby, executive]

And how flexible is the salary cost base for the Integrations business? Are you talking about percentage of cost to consultants? I assume, Daniel [indiscernible].

[Magdalena Andersson, executive]

With this new Tobii, we are not actually dividing the cost base specifically into Integrations and Product and Solutions. That's one of the benefits now that we actually can use of the costs in both segments. So in that sense, the flexibility lies within the total company for the same -- in the same manner as within Products and Solutions.

[Henrik Mawby, executive]

Thank you. And then the freight costs were very high in the quarter, hurting gross margin, a full 400 basis points. Is this as bad as it gets? Or should we prepare for even an even worse impact? And how are you -- how can you -- or how are you working to mitigate this?

[Magdalena Andersson, executive]

We are working and following the situation. But of course, with the macroeconomic situation we are in, we are expecting this to be an issue, especially within Q2 now as well. It does not maybe specifically mean that we will see the exact amount of variations within the gross margin because we have other things also impacting the gross margin, but we will expect to see impact from higher freight also going forward.

[Henrik Mawby, executive]

Thank you. And with that, let's see if Daniel Thorsson is on the line.

[Daniel Thorsson, analyst]

Yes. Can you hear me?

[Henrik Mawby, executive]

Yes.

[Anand Srivatsa, executive]

Yes.

[Daniel Thorsson, analyst]

Excellent. So I'll start off with a question related to VR products. Looking at other rumored headsets coming to the market from, for example, Meta or Apple, the guesstimate, what I can see on prices, seems to be extremely high, like a couple of thousands U.S. dollars per unit. Do you think these potential headsets coming in, say, 2023 with eye tracking will be able to address the consumer market with that price point? Or are you aware of any lower-priced headsets, which will have the same features coming out?

[Anand Srivatsa, executive]

Yes. I don't think we can share a specific customer road map type of conversations. But again, I think if you look at the rumors that people talk about, whether that's Meta, Cambria or Apple headsets, a lot of those have been defined or, at least, described by the press as being more prosumer or a little bit more professional-oriented from a headset perspective. And the price points there, in many cases, are similar to enterprise headsets that are already on the market today, whether you look at the headsets that are from HTC or from Pico as well.

Again, I think one of the reasons we're so excited about the activity and the engagement that we have right now around consumer VR headsets is that as game developers really lean into the new PSVR 2 headsets and develop games around the foveated rendering technologies that are enabled there, that should really drive a lot of strong trends in having those technologies in the consumer VR headset as well. And of course, we expect that those headsets will be much closer and priced to where today's consumer VR headsets are.

[Daniel Thorsson, analyst]

And do you think these are expected to be launched in '23 as well? Or will the prosumer or enterprise headsets come before?

[Anand Srivatsa, executive]

Yes, I don't think that we can specifically comment on where some of these headsets are.

[Daniel Thorsson, analyst]

Okay. Right. And then another question on the former pro business, which we can't really follow that specifically now. But like the university market, the consumer brand customers, which were quite a lot affected by the pandemic, what are the current trends for these businesses in terms of growth and also profitability, please, for what you can see today?

[Anand Srivatsa, executive]

Yes, should I take the first part of that question? So specifically in Q1, we saw a very strong positive growth in the commercial part of the behavioral studies business, the old Tobii Pro type of business. So they had a very strong bounce-back quarter year-on-year. Keep in mind, of course, that part of that comparison is against the year where we had pandemic-related effects, but we're quite happy to see that there is a return back to this type of studies happening on the commercial environment.

Did you want to talk a little bit about the gross margin from that side of the business?

[Magdalena Andersson, executive]

Yes, gross margin-wise, we don't.

[Daniel Thorsson, analyst]

Or EBIT margins? [indiscernible]

[Magdalena Andersson, executive]

Yes, it's not a big -- as you know, we don't follow sort of EBIT now. Since we divided it in Products and Solutions and Integrations, we are working on the gross margin part and then work, as I said before, with the cost all over the company. But I understand what you're after. And of course, we continue to see the universities market as a good market for us also going forward, profitability-wise.

[Daniel Thorsson, analyst]

Okay. And you -- are you back to profitability, if we call it the former pro business today? Because it was slightly below 0 at the last quarters before the spin-off, I guess.

[Magdalena Andersson, executive]

And then I said, we don't measure it like that anymore.

[Daniel Thorsson, analyst]

Exactly. Okay.

[Anand Srivatsa, executive]

Yes, Daniel, that's one of the big changes we've made. Again, there was overlap, I think, in both parts of the business in actually each parts of the new segment. I mean if you think about Products and Solutions, the way we define the business going forward, that is a vertical business. That has a lot of what was previously Tobii Pro, but it also has some of our consumer eye tracker solutions, for example, that would have previously been in Tobii Tech. And there is an element on the other side as well, where some of the engagements we would have had in Tobii Pro in the past would not fit into the Integrations side.

As Magdalena says, the way we've restructured the company, costs like R&D expenses, et cetera, are now across the entire portfolio. And so we think the right way to go and describe the business is to look at the revenue profile of these 2 types of business, 1 vertical, 1 horizontal, as well as the gross margin structure and then look at cost really from an overall company perspective because we think there's a lot of leverage in having R&D, and in some cases, even sales help drive both parts of the company.

[Henrik Mawby, executive]

Thank you, Daniel. [ Eric ], are you on the line and wish to ask questions? Please go ahead.

[Unknown Analyst]

Yes. So first off, just a quick one on the capitalization rate. I mean it is a bit of an uptick. And I'm just curious, should we extrapolate SEK 42 million? Or is there sort of a seasonal pattern to account for, I guess, Q2 and Q3 should be lower? Is that fair to assume?

[Magdalena Andersson, executive]

No, you should see this as a new level.

[Unknown Analyst]

Okay. Great. And then just, I guess, on the longer-term picture, I have a few questions. Just first, I think it's interesting that you hardly mentioned the good progress in automotive in Q1, and we have discussed VR and AR before. But in your CEO letter, you write that you expect to take large steps in 2022, first, towards the breakeven target in '23 but then, of course, towards the revenue target in '25. And of course, you can't talk details. So there is an information asymmetry, and it is what it is, but these large steps that you are implying, just to get a feeling what you're referring to, would you say that the progress in Q1 is an example of such large steps? And do you think that these large steps are something that we, from the market side, will be able to digest and understand? Or is it mainly related to internal development and interactions with potential OEMs and such? Do you understand my reasoning there?

[Anand Srivatsa, executive]

Yes. And let me see if I can try to answer the question, [ Eric ]. As we've shared it before, but maybe give you some context on at least how we think about it.

So one, again, we've been quite clear that we believe we are entering an era of sustained, faster-than-historical growth. And as you mentioned, we've put out expectations on how the business should develop, one that we're going to reach profitability -- EBIT profitability during 2023 and SEK 1.5 billion of revenue in 2025.

If we look at what we've done in Q1 '22, I think it's very fair for the external investor community as well as yourself to see the progress we're making in VR as being both a support for our ambitions in 2023 as well as, of course, the revenue growth that we expect to achieve by 2025. When we look at the automotive side, we expect, of course, to get design wins but with a start of production in 2025. So from a contribution perspective, OEM design wins with that type of start of production will have some revenue contribution in the [ intervening ] years, but it's, again going, to be more project-type revenue as we work through the Integrations side.

So I would say that the automotive design wins will not be a very strong contributor towards that 2025 goal, but that is something that we should be able to signal to the market, the foundation we're building for revenue in 2025 and beyond. And this is very much an industry standard practice that when those designs would come in, you can sort of talk about some parts of that. And given that the automotive market is more stable, I think those are easier to describe in terms of potential revenue impact. And so that's likely how we would talk about the progress we make in automotive this year and next year, et cetera.

[Unknown Analyst]

Great. Crystal clear. And just on the automotive side. In your meetings with potential partners and so, what do you think drives interest? We know that there are players with existing design wins. So how do you approach the market and showcase that you are better or we can compete with these established players in these initial talks? Is price a factor? Or is there other stuff as well?

[Anand Srivatsa, executive]

Yes. I mean, I think, the first part is, of course, the driver monitoring space is still being driven by a lot of innovation. Some of that innovation is needed to go and take these solutions from sort of maybe the more premium car models that they exist in today to the needs of meeting Euro NCAP and GSR by 2026, which means that you have to think about miniaturization, you have to think about total cost of ownership of that solution. So that certainly is something that is important. In addition, of course, we should think about driver monitoring having more features coming forward. We've talked about the fact that in the United States, legislation for driver monitoring is considering drunk driving and looking at how you can monitor drivers for that type of behavior. And that's something that isn't in the European legislation at this point in time.

So one aspect is certainly innovation. What we have said when we've approached the space is that we can demonstrate both the fact that we are a leader in attention computing and eye tracking, with a proven track record of delivering solutions into different spaces. That credibility very much is reflected back from the customers. So they definitely expect our solutions to have high performance. When they've seen our solutions in the car, they have, of course, validated that our performance is quite strong.

But we also believe that our approach is quite disruptive and will allow them to achieve these lower-cost type of implementations, both in making it easier to integrate the solution into a car but then, of course, also to reduce the potential needs of hardware, which is a big driver of the solution, whether it's the quality of the camera or the amount of compute. These are things that, again, coming from that consumer electronics space that we do, where cost is super important, thinking about the holistic solution and being able to architect that, that, we believe, is quite a strong asset for us, and that is also something that the customers are reacting very positively, too.

[Henrik Mawby, executive]

Thank you, [ Eric ]. Let's dive into some questions from Mikael Laséen with Carnegie.

A question on the VR vertical. How large part was this of the Integrations segment in Q1? And how should we think about revenue drivers in the coming quarters?

[Anand Srivatsa, executive]

Yes. I don't think we're breaking out VR specifically for Q1. Again, we talk about Integrations overall. I would say that in the past, a lot of the project revenues that you've seen has been VR-related. Again, we talk about project revenues being derived from integration work, and we have announced wins with multiple VR headset makers in the past.

Going forward, of course, we think that a significant portion of the growth of Integrations will be because of VR in addition to the other design wins that we have scaling into the marketplace. But this is, again, part of our view that as we think about long-term growth for Tobii, one of the big drivers of that in the next 1 to 3 years is VR. So that should be something that will become a more significant portion of our Integrations revenue going forward.

[Henrik Mawby, executive]

Thank you. And then here's a question. Do you expect design wins from automotive customers in 2022? And I think you answered that question earlier that -- yes.

[Anand Srivatsa, executive]

Yes.

[Henrik Mawby, executive]

Activity in China was weak during the COVID restrictions. How large is China as a percent of sales? And where in China do we have our main operations and customers?

[Anand Srivatsa, executive]

I can give a little bit of that, and maybe, Magdalena can jump in as well. So again, from a Products and Solutions perspective, it's less than a quarter. We have 4 major regions that basically drive our overall business. So China is less than a quarter, but China has also been in the space where we've seen quite strong growth. We think, of course, the dynamics of the marketplace, both in terms of the university side, where there's a very large university base, a large set of research being conducted there as well as, of course, leading commercial entities. This represents very strong growth opportunities, and that's something that we have seen over the last couple of years. So from that perspective, the fact that we see continued restrictions, that's quite a significant impact for us in terms of our ability to reach customers.

Now from our own locations there, we have, of course, like many other companies, sales distributed in many spots in the country, but Shanghai is one of the places we have a sales office. And we also have some other resources in China that are quite close to Shanghai. So to the extent that we see some lockdowns there, that has been a particular concern from our perspective.

[Henrik Mawby, executive]

I don't know if you had anything else, Magdalena, to add?

[Magdalena Andersson, executive]

Nothing to add.

[Henrik Mawby, executive]

Good. And one more from Mikael. Coming back to the lower gross margin in Products and Solutions. Can you discuss a little bit the impact from transportation and components costs? And how should we think about the gross margin in the next couple of quarters? And what can you do? Are you raising prices? Are you -- have we got other -- or to mitigate the negative margin effect?

[Magdalena Andersson, executive]

Yes. As mentioned, we -- you should think that we will continue to see increased costs, both for freight and for components. We are looking into prices. We do that on different products. We do that on different markets and see where do we have potential and where we see we can do it. We'll do that as well.

[Henrik Mawby, executive]

Good. Thank you. And let's come back with some questions around VR. These are from Peter.

Can you give a view whether your product role in the Sony PSVR 2 is fixed now, if they are demonstrating the headset already? Any comments on other eye-tracking implementation opportunities for other high-volume customers? Let's start with those 2, Anand.

[Anand Srivatsa, executive]

Yes. Again, on the Sony and the PlayStation VR 2, our negotiations with them are still ongoing, as we announced earlier in Q1. I don't have anything more beyond that to state at this particular time.

Now again, I think the impact of the momentum in the VR market is that we are seeing lots of companies look at VR much more seriously. This is quite different than a year ago. And of course, many of those companies are looking at how they integrate solutions that they need, both for enterprise as well as for consumer VR. We're not ready to, of course, announce any design wins at this point, and we did not get a design win for a new VR headset in Q1. But again, we see much more customer activity, and we absolutely believe that, that will translate into near-term revenue that we will see from a Tobii perspective in the next 1 to 3 years.

[Henrik Mawby, executive]

And then again from Peter on a bit more technical level around these agreements. To what extent are agreements like the structured as royalty-like payments or as development revenue?

And then secondly, what is the timing between signing an agreement and the actual market launch of a customer's product?

[Anand Srivatsa, executive]

And I would say that for both questions, the answer is it depends a little bit. The way that we have typically engaged with VR customers is there is an element of development or project revenue. You can think about this, in some cases, sort of like automotive. There is work to go and customize the solutions that we provide into the particular geometry of the headset, the specific needs for the headset maker. And so from that perspective, there's a certain amount of revenue that we get even from a development perspective. But the bulk of the revenue is a royalty- or license-type agreement. And so there is a portion of both.

And of course, from a business model flexibility perspective, you could see money maybe pool into both buckets depending on the best way to structure the deal. But we should really think of both of those things being covered in terms of the lifetime of the revenue that we get.

The second question, I think, was around...

[Henrik Mawby, executive]

What is the timing between signing the agreement and market launch?

[Anand Srivatsa, executive]

Yes. And again, that also is a little bit of a depends question. Again, there are 3 aspects to these things. One is when does the agreement get signed or when does a design win officially get awarded, something that we would count. We typically look at that as a full agreement on commercial terms, et cetera, and getting to contract.

When the contract is signed, it doesn't mean that we typically have the rights to go and announce these kinds of customers at all times. And so there's a time between when the contract gets signed, when it can be publicly announced and then when the headset itself goes to market. And I think these are quite different for the different markets and different headsets. In the VR cases, we've seen a pretty broad range. And even if you see sort of on the PC space, for example, we've had examples of design wins that we announced in Q4 showing up in products that are launched by the PC customers even 3 months later. And so depending on the vertical, depending on whether it's a consumer headset, depending on the beat rate of the road map cadence of the customers, you can see pretty broad variation in how much time there will be between an announcement and products being out on shelf.

[Henrik Mawby, executive]

Good. We have 2 questions, one from David and one from anonymous. And one is you always say that you have discussion with every player in the VR community. Can you be a bit more specific?

And I think I can answer that question. No, we cannot be more specific. We have discussions with almost every player in the VR community.

And anonymous is asking, is there a substantial risk, say, 20%, 30% that Tobii will not receive a design win with Sony PSVR 2?

I can probably answer that too and say that we will not comment on specific probabilities for the discussions with Sony.

And then let's finish off with 2 last questions from Daniel Djurberg and staying with VR here. Going from hype to production dynamic foveated rendering is obviously a key USP for Tobii. Still, can you comment on the competition with regard to peers also offering this feature and, if possible, also comment on if technology highs or price seems to be most relevant for the likes of Sony?

[Anand Srivatsa, executive]

So again, I think let's talk about sort of dynamic foveated rendering. Again, the power of this particular technology -- implementation of this experience for the user is, effectively, it is something that is related to every single game that a user will play on their VR headset. So we should expect that the adoption of dynamic foveated rendering will be very broad across the PlayStation VR 2 game ecosystem. As of now, we have 8 announced games, another 7 or 8 rumored games that are coming in. All of them are going to want to offer the best graphics performance for the user in the space. And foveated rendering is sort of the magic that allows that to happen.

When you think about what it takes to deliver dynamic foveated rendering, there's actually 2 pieces: one, which is maybe obvious for everyone; the second one, which is sort of more foundational. The first one is performance of the signal. How good is your fidelity? And again, we believe that is a company that's been in the space for the last 2 decades. We have established a very clear leadership position in delivering a signal that is high quality. Keep in mind that if the graphics don't render properly, if you're looking at the wrong spot on your headset, you're going to feel like the headset is broken. So the performance of eye tracking to make dynamic foveated rendering work is critically important.

But then the second aspect, which is more foundational, is that this, of course, then has to work across population. If you're selling a device that is a consumer mass market device, you have to make sure that almost everyone enjoys the kind of performance you need for foveated rendering to actually be applicable. And that's the other metric that I think Tobii has really built credibility in the marketplace. We think that we have the experience to actually not only measure and demonstrate that performance but to also deliver it in scale.

So these are the things that we believe make us very attractive in these mass market opportunities, both in the cases of VR but even as we talked about -- when we talk about these kinds of metrics with automotive customers, they definitely give us a lot of credit and credibility that we understand the problem of how to get this out into market.

[Henrik Mawby, executive]

Thank you. And we're running short of time here. So we only have time for one last question, and it's coming from Daniel Djurberg. How confident are you that your net cash position of SEK 402 million will be enough up until Tobii starts to generate positive cash flows preinvestments? I guess M&A is what he means by investment. Has the recent events changed the monetary planning?

[Magdalena Andersson, executive]

No. As mentioned, we are following our plan here in Q1, and the business plan we have ahead of us with the money we have now, we see that this will support our organic growth here.

[Henrik Mawby, executive]

Splendid.

[Anand Srivatsa, executive]

Perfect.

[Henrik Mawby, executive]

Any concluding remarks?

[Anand Srivatsa, executive]

No. Again, I think we talked about Q1 overall. I think it's great to have an all-time high Q1 revenue. I think that's quite important. And again, I think if we take a click-down, I'm even more happy on the underlying business dynamics, which speaks to our potential to meet our long-term objectives.

So all in all, a solid step in Q1 and increased confidence in our long-term projections.

[Henrik Mawby, executive]

Thank you, everyone.

[Anand Srivatsa, executive]

Thank you.

[Magdalena Andersson, executive]

Thank you.