Tobii AB

STO:TOBII

Earnings Call Transcript 2023-Q2

[Anand Srivatsa, executive]

Thank you, and welcome to the Tobii Q2 2023 Earnings Call. With me are Magdalena Rodell Andersson, the CFO for Tobii; and Henrik Mawby, who heads our Investor Relations. We will be taking questions right after this presentation. So feel free to start posting them if you have any already. Like our previous earnings calls, this is going to be quite condensed, focused on our business results. If you're looking for more background information on Tobii, please feel free to go to our Investor Relations site where we do have a lot of background material to give you a broader sense of who we are. But let me first start just by giving a quick overview of the company. Tobii's first and foremost, a Swedish company, and we've been traded on the Swedish NASDAQ since 2015. Our headquarters are here in Stockholm with offices globally. And first and foremost, we are very much a technology company.

Today, we are over 600 Tobiians, which includes both employees and consultants. And over the last 2 decades, we have built ourselves to be the world leader in the field of eye tracking. We, of course, continue to push the boundaries of who we are and who we intend to be, and we are now also a pioneer in the new field of attention computing, a field we believe has substantial opportunity as you saw in our video. The mission for our company is to improve the world with technology that understands human attention and intent. Let me shift focus now and talk about the business results for the quarter.

When we look at Q2 2023, this was a decent overall quarter from a financial perspective, with 5% organic growth. We had quite different performance in our 2 segments. If you look at our Products & Solutions segments, we delivered 31% organic growth, which is one of the highest growth results for us over the last few years for this business. Magdalena will talk a little bit more about the financials underpinning the segment performance. On the integration side, we saw a decline of 26% organically on a revenue basis.

But if you think about the effect of a difficult comparison in Q2 2022, we see that this segment also had pretty strong underlying results. And again, Magdalena will hit that when we talk about our financial results in more detail. When we consider the results in Q2 beyond just financials, I am very encouraged with the progress we have made. In this quarter, of course, we received our first automotive DMS design win. This is extremely important for us as we demonstrate that our technology is now mature enough to win against competition.

And of course, the first design win in this space is significant for us to build credibility with customers and partners that we are indeed in this space for the long term with the ability to win in a pretty large new market. Apart from the automotive design win, we also received 3 design wins in the quarter for our Tobii Ocumen middleware solution, which is used in VR visual health applications. We continue to grow our portfolio in the XR space, both with design wins on devices, but also in middleware solutions like this that are extending our opportunity into adjacent fields like medical applications.

I'm also quite proud of the fact that while we continue to deliver on our business, we are quite focused as a company to ensure that we are a force for good, both in the way our products are used out in the industry, but also in the way we run our business. And I'm very encouraged that in Q2, we saw multiple signs of recognition of this fact. The first is Sustainalytics upgrading Tobii on their ESG risk score from medium to low. The second is that the Allbright report once again highlighted Tobii in their green list for gender equality and management. We were, in fact, ranked the #12 company out of 361 companies that the report surveyed.

So again, very positive momentum here on the ESG space and something that we will continue to keep an eye on and continue to focus on as we deliver the business as well. Finally, one major notable event for us in this quarter externally was the launch of the Apple Vision Pro, we believe that this has a substantial tailwind effect for us, both in the VR and AR space and also in our broader technology ambitions. And I'll talk to that again at the end of this presentation. But first, I'd like to hand it over to Magdalena to talk about the financials in more detail. Magdalena?

[Magdalena Andersson, executive]

Thanks, Anand. Yes. And as Anand just mentioned, we had an overall good traction in this quarter, and let's dive into the segment details first. Products & Solutions achieved a strong growth of 31%. We saw broad-based improvement in sales across most regions and customer segments. Most notably, we had a very strong growth in China and to the academic customers. Our gross margin improved to 71%, up 4 percentage points as a result of the strong growth. As we said last quarter, we do have a strong belief in this segment long term. We have a strong market position with plenty of opportunities to grow. Our already strong product portfolio is gradually being complemented with new innovative and more accessible software. But then as the macro environment still is somewhat uncertain, it is too early to say if this quarter's growth is a sustainable improvement in business conditions or not. And then looking into the integration segments.

Revenue declined 26%, which, of course, is a weak number. However, we do have mitigating circumstances. It is very important to note that in the second quarter of 2022, we had very large upfront license purchases from Sony related to the PS VR2 launch. And of course, these type of prepurchases are nonrecurring by nature. Adjusted for the PS VR2 license revenue, we achieved a really robust growth. This is mainly a result of high nonrecurring engineering revenues from multiple customers in the XR segment. And in addition to this, as a perk, we also started to generate our first revenues from automotive DMS in this quarter.

Gross margin declined somewhat, but remained on a relatively healthy level at 92% compared to 96% last year. And then on the group level, Yes, that's the group level. The 2 segments summed up to a revenue of SEK 185 million, up to 5% organically versus last year. And I must say, I'm really happy that we managed to deliver organic growth despite the major year-on-year decline in license revenues within the Integration segment. And this is thanks to the solid performance in Products & Solutions in the quarter.

Gross margin remained robust, albeit with a minor decline by 2 percentage points to 77%, and this comes as a result of the mix shift towards products and solutions in the quarter, which has a lower gross margin. EBIT was minus SEK 48 million in this quarter with an EBIT margin of minus 26%, which was a minor improvement versus Q2 last year. OpEx increased in absolute terms with 2%, mainly due to increased R&D investments, which is in line with our expectations as we continue to keep prudent cost control to secure a lower cost growth versus revenue growth. Given that Q2 typically is a seasonally low point, the financial performance in this quarter has turned out overall in line with our expectations, and we are happy about all the progress that we are making in various areas. And then lastly, our balance sheet and cash flow.

The cash flow of the continuous investments was minus SEK 67 million. And where we were with the 2 last quarters have had extraordinary positive effects from tax deferrals related to COVID tax reliefs from the Swedish tax authorities, we have nothing on the calendar in this quarter. So with that, we ended the quarter with SEK 360 million in cash and cash equivalents and a net cash position of SEK 347 million, excluding IFRS leases. And as mentioned already last quarter, we have also secured a SEK 50 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]

Thank you, Magdalena. I want to highlight a couple of specific aspects, external events that are starting to demonstrate the benefits of our technology starting to go into a mainstream adoption in 2023. We highlighted this even at the end of last year, the 2023 was going to be quite a significant year for Tobii because for the first time, our eye-tracking technology would be available for millions of people this year, very much anchored on the PlayStation VR2 launch. The benefit of having this footprint, of course, is that you start to see the ecosystem innovate around the technology that is available and in front of many, many users. And a couple of those tangible examples are on the slides that you can see.

These are 2 examples of Game Studios starting to deliver compelling new experiences around eye-tracking in many ways, creating the future of what's possible. The game on the top is a game called Switch Back from Super Massive Games. It's a game for the PS VR2. And the specific mechanic it uses in this horror game is to increase the level of tension as enemies animate when you blink your eyes which is why you see sort of the call out of don't blink.

This is a kind of effect that, of course, makes the game play much more immersive, much more exciting for game players, something that doesn't exist without the help of eye tracking. And I'm super excited to see more types of studios look at this kind of game play.

A second example is from a VR game called Synapse, which is also launched with the PS VR2. And here, the game uses the eye tracking capability to provide a much more immersive telekinetic experience, the ability to control objects in the game with your gaze, making you feel almost like you are a true life Jedi. I'd like to share the words of 1 of the reviewers of this game who says that after getting your bearings, you quickly feel like a god amongst men. It is an unending joy and something players just have to experience themselves to comprehend on a visceral level.

Again, these intuitive controls that eye tracking brings into these games, they are incredibly powerful as gamers get to understand how they naturally use our everyday expressions and behavior in order to control the gameplay itself. Already in the first 6 months of the launch of the PS VR2, we're seeing many game studios innovate and try out new ways to bring exciting experiences. And again, this is very much because of the fact that this technology is starting to get into mainstream adoption. I'm really excited to see what these studios will do in bringing new and more clever experiences over the months and quarters to come.

The second major aspect about eye tracking going mainstream can almost not be understated. And this relates to the launch of the Apple Vision Pro on June 5. Now the Apple launch was notable for multiple aspects. The first is that Apple describes their new device as a new era in computing in a field that they call Spatial Computing. The second aspect is, along with this innovative new device, Apple has also created a new operating system to power the device called Vision OS. And for this new Vision OS, they have created a brand-new 3D UI, which Tim Cook, the CEO of Apple describes, has been controlled in the most intuitive and natural way possible with the user's eyes and their hands and their voice.

Apple's launch, of course, has significant implications for the industry, but it also has specific impact on Tobii, and I wanted to speak to 3 of those impacts to you. The first is that we have already started to see Apple's launch reinvigorate interest in the AR and VR device space. We expect that more and more companies will consider bringing in solutions and of course, to bring in new experiences for these devices that are coming out into the marketplace to take advantage of the momentum that Apple is creating.

The second is that the 3D user interface and the use of eye tracking in there means that for AR and VR devices, this technology becomes even more of a must-have, and this creates incredible tailwinds for us. We're starting to see the impact of this Apple launch already in the inbound interest we have to include eye tracking into devices even in the second quarter. But of course, I think the dramatic aspect for us with Apple's new device is the impact it will have on verticals far beyond VR and AR. We have to think about the massive changes Apple has brought into the computing environment with previous such innovations, whether they're touch, whether there are voice assistants like Siri. They start in one particular device in one particular category, but the impact of this innovation is felt very broadly on many, many technology verticals.

And for us, of course, this is very, very meaningful as the leading provider of these technologies into a set of a variety of verticals already in the space. So, we believe looking forward, both the combination of the scale that the PS VR 2 is achieving for us and the validation of companies like Apple about the power of eye tracking and attention computing, these will accelerate more innovation, more adoption, more business for us going forward. And this is a very, very meaningful result for us in Q2.

Now let me summarize the quarter then. If we look at the overall quarter, we see strong momentum in the year, both from a financial perspective but also from an underlying business trend. We are cautiously optimistic for what this will mean in the second half of the year. From an external perspective, we are seeing increased market excitement around attention computing and eye tracking. We believe this lays the foundation for our long-term growth ambitions. While we continue to deliver the business, I'm very proud of our team that we focus on also doing our part in the world to be a force for good. And in Q2, of course, I'm very happy that we've been recognized externally for the efforts we've been putting in.

Finally, as we consider the second half of the year, we continue to be confident and committed to our financial goal of being EBIT-profitable once again in Q4 2023.

With that, I would like to turn it over to questions, if there are any.

[Henrik Mawby, executive]

Yes. Thank you, Anand. [Operator Instructions]. And while we wait for that, we have a few questions already. So let me start with one. You commented on OpEx growth of 2% in the quarter. What should we expect here going forward?

[Magdalena Andersson, executive]

As we started out already this for saying that we see that we need to be more cautious with our costs. We had -- during last year, we had a growth in the cost base from Q1 into Q4. We worked through that last fall and sort of moderated the growth pace down. And with that, we see that we will keep the level of growth, much, much lower than we saw in 2022 and also much lower cost than the revenue going forward.

[Henrik Mawby, executive]

And second question is how penetrated is the automotive DMS market at the moment? How much potential do you see for new design wins?

[Anand Srivatsa, executive]

I think when we look at the focus of where DMS has been, a lot of the adoption previously has been in more luxury type vehicles. Of course, with the EU mandate starting in 2026 that new car models needed, we see a significant increase in driving DMS into broader sets of vehicles that are targeting the EU. I believe that there are 2 sets of considerations when we look at the penetration of DMS in the marketplace. One is whether models in the EU have already been sourced. And in some cases, we continue to see new models or new platform years coming up for RFQ, both in 2025 and beyond.

The second aspect, of course, is that while the EU is leading the adoption of DMS with legislation, we see different types of requirements coming in other geographies, some of them with either recommendations like in China, with their GBT standard or under discussion in the United States. I think that as more regions pick up these legislation, there will be more penetration. So today, I would say the penetration is more concentrated towards Europe, but I think there's an opportunity to significantly take advantage of increased penetration as it goes into other markets as well.

[Henrik Mawby, executive]

And then we have a question from Carlos who's saying, are you still confident that Tobii will be and stay cash flow positive before it will be necessary to raise more capital from the shareholders to keep the company going.

[Anand Srivatsa, executive]

Yes, I think we've reiterated this before. At this point in time, we believe that our cash position is sufficient for our organic business plan. This does not, of course, include the potential need to raise capital if we do mergers and acquisitions. M&A is a part of our strategic toolbox, and it's something that we think we will execute over time, but for our organic business plan at this point in time, we believe our cash position is sufficient.

[Henrik Mawby, executive]

Thank you, Anand. And I see we've had one more analyst join the call. [Operator Instructions] Otherwise, I am moving on to the last question we have. What is your thoughts about the fact that despite all your progress, the value of the company is almost at all time low?

[Anand Srivatsa, executive]

I think it's quite hard to comment about value in sort of any near-term type of time horizon. I think what we are focused on very much is to go and strengthen our business fundamentals. You can see that over the course of the last couple of years as we've improved our overall profitability. We know that over the last couple of years, we've seen, of course, changes in the macroeconomic environment that have created more uncertainty after the pandemic. This has impacted our Products & Solutions business for sure.

We've seen, of course, weaknesses in other parts of the market as well that are starting to stabilize now so my view is that there is, of course, a keen focus from our investor base and the market to go get to profitability, especially in the current environment where cash is expensive. We're absolutely executing to that. We're still on track to our previously stated goals.

At the same time, I think that we are starting to see signs that many of our long-term bets are actually starting to pay off, whether that is with our technology starting to get to mass market volumes in VR, starting to see the VR market become more exciting with launches from Apple, et cetera, or seeing us being able to demonstrate that we can win in automotive DMS.

I think those things will take time to prove out into the value of the company. And I believe that over time, the business momentum we are creating will show up in the value that the investors provide for the company overall.

[Henrik Mawby, executive]

Great. Thank you, Anand. And we have a few questions from analysts as well. Let's start with Daniel [ Toansa ].

[Unknown Analyst]

Okay. So you responded to 1 of the first questions that your cash position is sufficient for the organic business plan. Does it also mean that your organic business plan is sufficient to reach your sales target of SEK 1.5 billion in 2025? Or is it necessary to do M&A and therefore, capital raises to get there?

[Anand Srivatsa, executive]

Yes. Again, I think, Daniel, as we look at how we can get to SEK 1.5 billion, I think we've been asked this before, there's multiple different paths to get there. Some of them are dependent, of course, on things like our customer scaling in verticals like VR. For some of those aspects, there isn't actually the need to go and raise capital. If we see our activity in VR turn into large volume designs as we expect, and those are in time for 2025. That is certainly one route in there. Another route, of course, is that we have a very large Products & Solutions business over the last year, plus it has been depressed given the macro environment. We have, of course, a path there where we have very mature products that can scale.

There is, of course, a scaling effect on the revenue side, but it is also under very positive gross margins. And so those things also accrete very easily to our bottom line. So I would say that we have paths on both ends. I think certainly, an M&A can be part of a way to go and increase our overall portfolio and increase how we can go and serve the market and make it easier for us to get to SEK 1.5 billion. But I would say that it's not a requirement necessarily that an M&A is a way to go there.

At the same time, I think when we think about our overall strategic position here and the ambitions we have in attention computing, we think, of course, that it is not likely that every single piece of the technology puzzle will come internally organically from Tobii. So we think that this M&A tool is a very important part of our strategic toolbox in order to go and win the market.

[Unknown Analyst]

I see. Okay. That's clear. Secondly, on product solutions, why are you so cautious on continued growth in that segment? Is it because you know that it will be somewhat weaker in Q3 and Q4 for some reason? Or is it because you think there is a risk that it will be weaker?

[Anand Srivatsa, executive]

I don't know if you want to take that and we can jump.

[Magdalena Andersson, executive]

It is more like when we -- now, which we are very happy about, have a figure of 31% growth, it's more like coming from the difficulties of trying to understand how the world acts right now, it's more like we ourselves are not confident in that, yes, now we have 31% growth going on, and that is the scene that we sort of want to forward that we have had a number of quarters with actually negative growth. Now we have a really good growth and we are trying to maneuver in this landscape and understand where we are heading.

[Unknown Analyst]

Yes. So I just interpret that as you say that there is a risk that it will be weaker. It's not that you have got indications or lower order intake or worse customer discussions that you already now know that it's going to be weaker in Q3. I guess that is what I should say.

[Anand Srivatsa, executive]

Yes. And I think, again, to add on a little bit to Magdalena's point, of course, the Products & Solutions pipeline is much shorter than what we would have with something like integrations on a design win where you understand sort of the business that's there. There's a contractual framework for how revenue will look going forward, even if it's not always guaranteed. I think one of the difficulties, of course, with Products & Solutions is over the last year, 1.5 years, we've seen a lot of variations in each of the different geographies that have their own sort of trends, whether it is inflation peaking or rising in one scenario we've had, of course, holdover effects of pandemics or pandemic-related investments coming through.

One of the places that has been a little bit more stable over the last couple of quarters in the Products & Solutions context has been Asia. We are, of course, happy to see that there are more stable growth in other parts of the world as well in Q2. But again, I think taking 1 quarter data point in extrapolating it out, I think that's a little bit maybe too aggressive.

[Unknown Analyst]

Okay. Fair enough. Next question. In my book, at least, you guide down somewhat on Sony's revenues for H2 here when you're saying that they will be lower than last year's second half of the year, what's your visibility on that really? And what is causing you to do that statement already now?

[Anand Srivatsa, executive]

Yes. Again, just to give context on that, we won't specifically speak to details of this deal. But I think just to give you some context here, Daniel, we don't have forward-looking guidance from Sony on what they intend to manufacture. We do, of course, see what they have also shared publicly in terms of sell-through. We see sort of a backward-looking indication. We believe that at this point in time, it is a fair estimation for us that the second half of this year will be lighter than last year. And then we should probably get to more normal levels by either Q4 or Q1.

[Unknown Analyst]

Does it mean that we have reached a peak for Sony revenues? Or does it mean that they may come down here in H2, but then we should expect a good growth in 2024 again? How do you see that turning out ahead?

[Anand Srivatsa, executive]

I would say from a Tobii perspective, we are absolutely expecting that '24 will be a higher billing revenue year than 2023 for Sony. Of course, the actual performance is going to depend very much on the sell-through of the PS VR2. Sony is increasing the number of games that they have. I think for the first time, they're going to be able to go into a holiday season with this product. They haven't had that yet. So we'll see the effect of promotion. They continue to be very strong in sort of driving PS5 footprint. And of course, we're also seeing more excitement in VR in general.

In fact, just recently, I believe that Sony announced a $2 billion investment into experiences for XR. So again, I think there are many factors here that you could say lend potential for positivity going forward, I think -- but we have to weigh that with the fact that we don't have forward-looking guidance from them on what they expect to build.

[Unknown Analyst]

Okay. Fair enough. Final question, in Q2 here in integration, can you share with us how much was Sony revenues? And also how much was DMS revenues? You mentioned that you actually recognize some from DMS?

[Anand Srivatsa, executive]

Yes. I would say that DMS, we've talked about the fact that license revenues are going to show up in 2025 and beyond. And so what's notable is that we've got it. It's not actually the amounts, I would say that we should expect a very negligible impact on DMS in terms of the overall number for the rest of the year.

On the Sony side, I think the only thing we've said is last year, we expected them to be 10% of the revenue for the full year. I would say that we don't have any specific guidance on Sony for integrations for the second half of this year.

[Unknown Analyst]

Okay. But in Q2 here, can you say how much were recognized from Sony in Q2 only?

[Anand Srivatsa, executive]

No, I would say that it's substantially lower than it was last year.

[Henrik Mawby, executive]

Thank you, Daniel. Mikael Laseen, I see you want to ask a few questions also, but I can't see you logged in here. So you may have logged in on the wrong invitation. So try to log in using the invitation we have sent to you.

Daniel and Stefan Mayer, your questions on the visibility and outlook in Products & Solutions, I believe we have answered that with our previous comments on the questions from one from [ Toansa ] and the other chat questions. So please indicate if you still want more clarification there. Otherwise, I will jump in, we have a few more questions coming in. [ Lucas Pazuki ], are you confident that you will be able to secure more design wins in Automotive during the second half?

[Anand Srivatsa, executive]

Yes. Again, I think we've said that we expect to close multiple design wins in Automotive this year. And of course, we closed our first one in Q2. Based on the activity we have, I'm actually quite confident that we will be able to get to that multiple level through the end of the year.

[Henrik Mawby, executive]

And Daniel Kroger, I think also your question on the target for 2025, we've covered in previous answers. And then there is another Daniel here asking, would it be fair to pencil in breakeven EBITDA for 2024? Or is this an aim for you?

[Anand Srivatsa, executive]

So at this point, I don't think we're going to give other externally visible targets at this point. Again, what we've said is we want to go and make sure that we deliver on our financial targets for Q4 this year. I think at that point, it would be a very good timing for us to consider the next set of external financial targets we would like to go and share publicly.

[Henrik Mawby, executive]

Thank you, Anand and let's see, I think we have one last question here. Hypothetically, looking at the eye-tracking heavy Apple Vision Pro, would it theoretically have been possible for Tobii to supply the eye-tracking related technology, hardware or software features? Or are there any major differences?

[Anand Srivatsa, executive]

Again, the Apple Vision Pro hasn't launched yet. It's not available for broad testing or other kinds of aspects. I would say that our expectation is the way that the technology works in the Apple Vision Pro given that Apple had acquired one of our competitors a few years ago. We believe that the type of technology that's there is probably very similar to how we approach wearable eye tracking and so I think that the technologies are quite similar.

[Henrik Mawby, executive]

Good. And I'm not sure if we have Mikael Laseen on the line. I don't think so. [Operator Instructions]. No, I don't think that will work. Mikael, you'll have to take these questions offline after the call. And with that, the Q&A is completed.

[Anand Srivatsa, executive]

Thank you all very much, and have a great summer.

[Magdalena Andersson, executive]

Thank you.