Tobii AB

STO:TOBII

Earnings Call Transcript 2023-Q1

[Anand Srivatsa, executive]

Welcome, everyone, to Tobii's Q1 2023 Quarterly Earnings Call. Joining me today are the CFO for Tobii, Magdalena Andersson; and we also have Henrik Mawby, who's the Head of Investor Relations for Tobii. We're going to focus, of course, on the quarterly earnings results, and we will be taking questions after the session. So feel free to start posting questions if you already have them. If you're looking for more background information about Tobii, please visit our Investor Relations resources on our website or feel free to reach out to Henrik Mawby after this call.Let me start very briefly by first talking about Tobii the company. Once again, we are a Swedish headquartered company that has been traded on the NASDAQ since 2015. We started the company with a focus on being the world leader in eye tracking. And over the last 2 decades, we have done that very thing, become the global leader in this space. We now have an ambition to become the world leader in attention computing with a mission to improve the world with technology that understands human attention and intent. And we are very much on this journey this quarter as we've been over the last couple of years.Now let me shift gears and talk about our Q1 business. Q1 was a weak quarter for us from a revenue perspective. And it comes, of course, on the heels of our record-breaking quarter in Q4 2022 where we saw record revenue as well as record profitability. What we said a couple of months ago when we described our Q4 results was that from a Tobii perspective, the right way to measure our business performance is on a longer-term horizon, whether we have very strong quarters or weaker quarters. And so we continue to believe that the right way to look at our underlying business performance is to take a longer-term view on our results.That being said, of course, in Q1 this year, we saw a 7% organic decline in revenue. We saw this come up in 2 parts of our business, both in the Products & Solutions segment and on the Integration segment. On the Products & Solutions side, we see continued weakness in sales to enterprise customers who are still tightening their belts as they all operate in an uncertain macroeconomic environment. On the integration side, we saw a lower level of nonrecurring engineering revenue in Q1. And we also didn't see any Sony revenue this quarter as they continue to consume licenses that they have bought from us in 2022.Beyond sort of the financial and profitability results, which Magdalena will talk about a little bit more. We're also quite keenly aware of our financing position, our cash flow balance, et cetera, and I'm quite pleased that this quarter, we've taken further steps to improve that. We think this is a critical aspect of us reaching profitability and self-sustainability moving forward. But Magdalena will comment about where we end the quarter from that perspective.Now I want to shift gears and talk a little bit about sort of the long-term progress that we've made this quarter. In Q1 '23, we received 3 design wins, 2 in the PC ecosystem for our Aware software and one for an enterprise VR headset. In the quarter, we also acquired a German company, Oculid. This is a small targeted acquisition, which extends the portfolio that we have available for our Products & Solutions segment. Specifically, Oculid enables us to deliver market research and user testing natively for mobile phones, and that is a gap in our current portfolio. With the addition of Oculid, we are going to be able to accelerate our product development road map and enable our customers with tools that allow them to do research in the ways they prefer, whether it's on the screen with a PC, whether it's in real life, in stores or in public places or, of course, using mobile phone applications.We're looking forward to seeing this small acquisition yield us results in the mid- to long term for the company. In Q1, of course, we also saw a couple of other major notable improvements in our long-term objectives. The first is with the reach of Tobii's technology into mass market scale, and that was with the launch of the Sony PSVR2. For the first time, eye-tracking technology is coming to the masses with millions of users getting to use the technology every single day. I know that awareness of Tobii's technologies, eye-tracking attention computing, our company itself is one of the limiting factors in scaling the business the way we intend to.And I believe that the launch of the Sony PSVR2 will actually improve awareness overall and help us in our business ambitions across our entire portfolio, not just in VR. The most notable aspect of improving our long-term foundation for success is actually the design win that we've celebrated this quarter in Automotive DMS. We made significant progress through the quarter, and I'm quite happy that we broke through with the design win in this new emerging important market for us. We talked about last year that we felt we were making more and more progress with our technology, getting ready to get to a design win. And I will talk a little bit more about automotive at the end of this presentation.With that, I'd like to hand it back over to Magdalena to talk about our financial performance in more detail. Magdalena?

[Magdalena Andersson, executive]

Thanks, Anand. Yes. I must admit, that while last quarter financials where we're pleasure to present, this quarter, I'm not as cheerful about the figures. However, there are, of course, many highlights this quarter as well as there always are within Tobii. So let's start with the performance of each segment. Product & Solutions had an organic growth of minus 6%, which is primarily related to our enterprise customer cutting spending. The sales to our academic customers were okay, although we are not fully seeing the strong growth that we would like to see here either.On a positive note, the gaming peripheral Eye Tracker 5 showed continued strong growth as we continue to demonstrate product market fit with existing games. Gross margin was 68%, down 2 percentage points, primarily on account of the product mix shift to Eye Tracker 5 our gaming peripheral. We do have a solid belief in this segment long term. We have a strong market position with plenty of opportunities to grow and our already strong product portfolio is filled with various development leaps and contributing to this development is also now the acquisition of Oculid as Anand mentioned, which will add a complementary technology that we can leverage across several of our products.And then looking into the integration segment. Revenue declined 9% organically, a low outcome on a low base. And again, we are reiterating the fact that this segment can vary in between months. In Q4 2022, we had an all-time high, but this quarter is not. It is important to note that in this quarter, we had no revenue related to PSVR2 as Sony consumed the licenses procured already in 2022. Gross margin was 91% versus 76% last year, an improvement with 15 percentage points. Similar to the previous quarters, the improvement was derived from a continued product mix shift towards more software licenses.And then on the group level, these 2 segments summed up to a revenue of SEK168 million, but was down 7% organically versus last year. And as mentioned, we continue to see challenging conditions in Products & Solutions and receiving a PSVR2 license revenue in the quarter. Gross margin continued to trend positively, and we improved 2 percentage points to 73% in the quarter. This is a result of a continued mix shift towards more software-related revenues. You should not expect to see this every quarter, but over time, we expect this trend to continue. EBIT was minus SEK53 million in the quarter with an EBIT margin of minus 32%. A small deterioration versus Q1 last year, which is a result of the negative leverage from the revenue decline.OpEx increased 2%, mainly due to increased R&D investments in XR and Automotive. And we are maintaining prudent cost controls as we flagged also in the second half of 2022. Of course, we are not happy with the financial performance in this quarter. However, it should be viewed in the context of a record-breaking profitable Q4 last year.And then over to our balance sheet and cash flow. We had another quarter with positive cash flow. Our cash flow after continuous investments was SEK46 million. This cash flow was now positively affected by SEK63 million in tax deferrals related to COVID tax relief from the Swedish tax authorities. With that, we ended the quarter with SEK439 million in cash and cash equivalents and a net cash position of SEK424 million, excluding leases. We have also secured a SEK50 million revolving credit facility, providing us with even further flexibility in managing our balance sheet.And with that, back to you, Anand.

[Anand Srivatsa, executive]

Excellent. Thank you very much, Magdalena. Now I want to spend a few minutes talking about automotive and our design win that we announced last week. As you see on the slide that we shared from the last quarterly earnings, we talked about the progress we were making in automotive, which was a part of the market we reevaluated and reinvested in starting in 2019. We've been here on a pretty long journey and all through 2022, we were engaged with customers in demonstration and evaluations. We felt through the course of the year that we were making very positive progress with customers, very much on the doorstep of winning business in this space.And I'm really happy that we have finally broken through and now have a design win in the Automotive DMS segment. Now of course, for us, this is super exciting because it is a demonstration of our -- of the value we can create with long-term investments in Tobii and of course, also a validation of our approach to use our core technologies in new market areas. The reason that Automotive DMS is so exciting for Tobii is that this is a segment where we see approximately 100 million new cars, light trucks and commercial vehicles manufactured every single year.Today, DMS has a penetration rate in the low single digits. But by the end of the decade, it's expected to exceed more than 50%. This massive growth creates an opportunity for disruption because as of now, while DMS has very much been in premium cars only, legislation and other requirements are driving the need for DMS in all cars, including the lowest and most economical cars available in the marketplace. This creates tremendous pressure on the cost of DMS systems to become more affordable so that they can be included in all of these new vehicle platforms and models. And that is where the technology that we've developed at Tobii can be so interesting for Tier 1s and OEMs.As we see this market grow, we think this is a huge potential for us to establish ourselves as a leader in this new DMS software space. What I wanted to share with you is some of the findings we've already seen as we've gone through this RFQ process and what we expect as behavior in the market going forward and how you should expect us to communicate our ongoing success. Now what we've seen with the RFQ we announced is that this RFQ that we were awarded is for a new start of production. And what you see in the chart is how this process typically runs. We are usually in a phase of demonstration and evaluation with Tier 1s and OEMs.As we mentioned, we've started this very much in 2022. A lot of our activities are very much focused in the European market. But the feedback from customers, both Tier 1s and OEMs have been very positive. This enables us to start getting invited into the RFQ process. And typically, the RFQs are for new start of production. And what the RFQs are evaluating is both the technical capabilities of our solution, but also the ability of Tobii to deliver a solution that meets the exacting demands of the automotive industry. Now RFQs are almost always competitive bids, in our experience, these can come either from a Tier 1 who's won a piece of business with an OEM.But in some cases, of course, the OEMs or the OEM brand groups are themselves issuing RFQs for technology providers for DMS software. With the RFQs we've seen, we have seen that these RFQ processes can represent quite a different realm of business. They can include multiple OEM brands inside an RFQ. They include potentially multiple models and even multiple platforms. The design win that we have won is for an RFQ that represented 25 separate models. The way that we are going to communicate our progress in this space is to equate an RFQ award with a design win. And that is what we've done with our communication last week, and we will continue to use this metric as a way to describe the progress we're making in this space going forward.Now how do we expect to build a leadership position in this space. Again, I believe our approach, which is quite laser-focused on delivering the lowest cost of ownership is going to be the right angle as Tier 1s and OEMs think about how they have to deploy DMS systems in scale across their full portfolio. So what do we mean when we say total cost of ownership for a DMS piece of software. There are fundamentally 3 components to consider when you think about the cost of ownership of implementing DMS software. The first, of course, is the cost of the algorithm itself. The second is the cost of the components required to go and deliver the performance from a particular algorithm.This could include the cost of the compute needed to host the algorithm, the optical components, the lens, the sensor, et cetera, that are required to get the right quality images for algorithms to run on other elements of the systems to run the overall software memory, et cetera. Typically, these BOM elements in many cases, are high multiples of the algorithm itself, in some cases, up to 10x. One of the benefits of Tobii's approach is that we are able to support lower-cost cameras, lower cost compute, which can help Tier 1s and OEMs reduce the overall system cost to deliver a DMS solution.In addition to the bill of materials, which includes the components and the software, we also see cost in implementing DMS software related to integration programs. What that refers to is the engineering required to take the DMS system and implement it into a particular car model. This could mean that we have to tune algorithms based on a particular optical path that's chosen, a particular sensor with a particular lens. It also could mean that we have to tune the algorithm based on where a camera is placed in a particular vehicle model. You can imagine that in some cars, the best place for a camera could be on the A pillar to the side of the driver. In some cars, these cameras could be placed in the rearview mirror or even on the central dash.Each of these different camera positions provides a different view of the driver. And in some cases, algorithms have to be retuned to deliver the kind of performance expected in a particular system depending on that location. There's also additional integration work that typically is involved, including potentially porting the algorithm to new systems on a chip or new types of operating system. The Tobii approach to DMS software allows us to deliver a more robust algorithm, which prevents the need for expensive data collection when you have to tune the algorithm for either new optical paths or new locations. And this means a less complicated, less expensive integration.This is what we mean about reducing the total cost of ownership for Tier 1s and OEMs. Certainly, an aspect of that is the license cost itself, but there are fundamentally larger sets of costs that we can go adopt. And we believe that our approach is quite novel in how it helps address these problems. Our view is that by focusing on the lowest cost of ownership, we are going to be a very attractive partner for Tier 1s and OEMs looking at how they have to implement a much larger scale of DMS systems across a much broader set of vehicle platforms hitting very, very different price ranges. This is our strategy to build a long-term leadership position in this space. And again, with the size of the market that this represents, I think it's a great opportunity for Tobii for future success and revenue growth.So let's sum up the quarter. Again, from a financial perspective, we believe that the Q1 result was weak. It comes very much on the heels of a strong Q4, and I still believe very highly in our capabilities for the rest of the year as we think of the Tobii performance on a longer-term horizon. Beyond sort of the financial results in Q1, I'm very happy with the foundation we are building for future long-term success, both in achieving mass market scale with our technologies, which is a really important step for us to take to make eye tracking, attention computing and Tobii more prevalent in the marketplace. Taking that step with the Sony PSVR2 is incredibly important to us.And of course, validating our approach of investing in the long term and investing our core technologies to address new marketplaces with the Automotive DMS win. Both of these are substantial progress that we can demonstrate in building the foundation for future success. We are very much committed to our externally communicated goals of delivering improvements in profitability as well as creating growth in the future. And I look forward -- I'm looking forward to capping off this year with a return to EBIT profitability in Q4 2023.With that, I'm going to open it up for questions.

[Henrik Mawby, executive]

Great. Thank you for that [ Anand and Magdalena ]. So in the Q&A, we have a chat function in the team's client that you are free to use. If you would like to ask a question, let me remind you that there are -- there is a small lag here. So post it sooner rather than later, so we don't miss anything. For analysts, please indicate in any way or form if you would like to ask a question, and we will invite you into the call. And with that, let me see -- have any questions here. Erik Larsson with [ SEB ]. And you have indicated you would like to ask a few questions.

[Erik Larsson, analyst]

Yes. I hope you can hear me?

[Anand Srivatsa, executive]

Yes, we can hear you.

[Erik Larsson, analyst]

Great. So a couple of questions on automotive. First of all, congrats, I guess, good news. But after this design win, will associated costs increase? And further, should we assume that any potential cost increases will be covered by project milestones and such?

[Anand Srivatsa, executive]

Yes. The nature of these design wins is that there is an integration program, and we certainly will have that as well. We, of course, did expect to have a design win to some of the costs associated with the design wins that we are going to get have already been factored into our business case. So that is part of the plan. Typically, there is NRE payments based on milestones when you execute to the integration, the level of coverage varies on a per customer basis. But I would expect that as we have more success here and get more design wins that we would need to make investments in engineering to go and deliver on these integrations.

[Erik Larsson, analyst]

Okay. And in customer discussions within automotive, how often have over this last year or so, how often have counterparts pointed out that you don't really have a reference customers in this space? And do you think that type of hurdle will be lowered given this announced design win?

[Anand Srivatsa, executive]

Absolutely, for sure. Again, and I think that we, of course, in the European markets, I think we actually have a significant brand value for the capability of eye tracking and also that I think we're more of a known commodity. I would say that as we think about our engagements outside of Europe, in Asia, in China, Korea, Japan, et cetera, there is more hesitation, of course, to look at a technology provider that hasn't won yet. I think that this will benefit us in Europe, in the United States and certainly in other markets as well. But I think that this is definitely there. We explicitly have heard it from some customers, but I also believe that there are some customers who after evaluating our technology may have reservations that they don't always share with us. But getting this first proof point, of course, is incredibly important that we're demonstrating the ability to win.

[Erik Larsson, analyst]

Okay. Great. A final question on some financials. It seems like CapEx came up quite a bit this quarter and capitalizations in the P&L are up by almost SEK10 million from last quarter. So can you just give some color on what's behind the sudden increase? And is it a new level we should assume?

[Magdalena Andersson, executive]

Well, it's more a buildup. I would say, we started the build up already last year. So -- and it is our investments both in automotive, but also within XR that we can see in the CapEx.

[Henrik Mawby, executive]

Okay. I'll interpret that as a new plateau-ish.

[Magdalena Andersson, executive]

Yes, you can do that.

[Henrik Mawby, executive]

Thank you, Erik. Daniel Thorsson, you also indicated that you would like to ask some questions. Please unmute yourself.

[Daniel Thorsson, analyst]

Okay. Now can you hear me?

[Henrik Mawby, executive]

Yes, we can.

[Daniel Thorsson, analyst]

Excellent. Okay. So first question on Product & Solutions. Can I say something on how China developed in Q1? I guess that was one of the key drivers for the strong Q4 figures.

[Anand Srivatsa, executive]

Yes. So we definitely had a very strong Q4 in China. Again, we thought that part of that was catch-up and maybe some pent-up demand. But the good news is in Q1, China continued to remain strong after very muted last year when there was a lot of COVID lockdown. So we're starting to see China come back. This is especially true for our scientific customers.We see similar trends on the enterprise side in China as we see in other markets that there's still belt tightening. But the education part of our portfolio, the scientific research part of our portfolio had a strong Q1.

[Daniel Thorsson, analyst]

Okay. Excellent. Excellent. And then I have a question on projects. Can you give us an update on ongoing projects within XR? Should we expect any news flow during 2023, for example? Or how does the plan like?

[Anand Srivatsa, executive]

Yes. I think that what we have seen is with the addition of eye tracking in the Sony PSVR2 and the really positive reviews that we've seen so far, more and more customers are very clear that this feature is something that they need to have. So when we talk about engagement with customers, those are going pretty positively. Now the dynamics of announcing wins and things like that are quite different. And as you saw with the Sony news itself, I mean, we announced quite late in the cycle. That is more of a normal kind of behavior in the space. What I see is that where we were last year or the year before, we saw that eye tracking was quite important feature set for enterprise VR headsets.Of course, those headsets don't drive a lot of volume. Where we see it now is that it is becoming much more of a must-have for consumer VR headsets. And I think we are quite well positioned with our technology and track record to be a vendor for those kinds of designs. And that's what we see in the engagements here. Specifically, in terms of news flow in 2023, I think it really depends on a per customer basis. So it's hard to specifically call. But I am still very optimistic on XR as we've been over the last couple of quarters. So I think both automotive and XR right now still stand out as highlights for us in building our long-term value.

[Daniel Thorsson, analyst]

Okay. Excellent. Makes sense. And then a question on the PSVR2 launch within the quarter. Have you got any indications from Sony about the launch? Has it been roughly as expected or any deviation you can share with us?

[Anand Srivatsa, executive]

Yes. We don't actually get any forward-looking forecasts from Sony. And typically, they're not talking about how they're doing on a real-time basis. So what we typically see from them is a report after the fact. So very much, I think the news that we get from Sony is from the press, as you would expect, Daniel, that you are getting as well. Our view, of course, is that when we look at both the tech reviewers, et cetera, the headset itself is reviewed very positively. It's a very high-performance headset. The eye tracking capabilities, the fact that games have included that in their interaction modality is also looked at as very positive.And I think from a press perspective, there are a couple of areas that they would like to see Sony go and improve on, the price point being one of them, more games and potentially, of course, the standard challenge of this being a tethered headset, which limits mobility in that. That, of course, has been known about the PSVR2. But I would say that those things are things that we see, but it's very much with the press reports.

[Daniel Thorsson, analyst]

Okay. I see. And then a follow-up, should we expect any Sony revenues in Q2?

[Anand Srivatsa, executive]

So we do expect Sony revenues for this year. I think it's very difficult to comment on specific quarterly timing because, again, that really depends on their decisions, and we don't get to see visibility on that after until quite late at the end of the quarter. So I would say that we feel like we are going to get revenue for the rest of the year. But I think beyond that to be more granular at this time, I think, is not something that we'd be comfortable sharing.

[Henrik Mawby, executive]

Thank you, Daniel. And we have one question from the chat here. It's from [ Simons ] asking how many auto manufacturers do you have in the pipeline?

[Anand Srivatsa, executive]

So I think we have been talking to multiple Tier 1s. So again, when we talk about where we are from a pipeline perspective, we are talking to many of the Tier 1s that are based in Europe. I would say we still need to scale up now in our engagements on the other geographies. So in Japan, in Korea, in China, et cetera. The good news there is, of course, we do have a substantial presence in those regions from a sales perspective, and that's also where I indicated that in our early outreaches to some of these customers, they've been quite curious and interested in our technology. But at the same time, they're looking for reference customers to prove that we've actually reached the level to go and win.So I would say that in Europe, we feel like we have good outreach already, we've built a decent pipeline. In the other regions, we've started some initial work, but now we would like to accelerate that having this reference design win in our pocket.

[Henrik Mawby, executive]

Good. Let me see. We have some more coming in here as well Simons continuing. What part of DMS market share are you planning to reach, I guess, how large market share are you aiming for? Or what position are you aiming for?

[Anand Srivatsa, executive]

So again, our expectation is that we would like to be in the long term, a leader in the space. And again, we can talk about what the definition of long term is, but these cycles take a while for start of production. So the win we just received was a 2025 start of production. So we're really thinking second half of this decade. In my view, the definition of being a leader is being in the top 2. And so based on how this market plays out, I would say that's the kind of market share that we should expect to win.

[Henrik Mawby, executive]

And then there is one last question also here from Simons again. Can you give us more light on the heavy vehicle manufacturer you have won the design win bid?

[Anand Srivatsa, executive]

At this point, we can't share more than we have shared in the press release. That's sort of what we're authorized to share at this point.

[Henrik Mawby, executive]

And with that, I know there's a very intense morning out there with a lot of reports. So I propose we close this call here and say thank you.

[Anand Srivatsa, executive]

Well, thank you very much. Thank you, Henrik, and Magdalena. Thank you all. Appreciate the time.

[Henrik Mawby, executive]

Thank you, everyone.

[Magdalena Andersson, executive]

Thank you.