Tobii AB

STO:TOBII

Earnings Call Transcript 2018-Q3

[Operator]

Good day, and welcome to the Tobii AB Q3 Interim Report 2018 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Henrik Eskilsson, CEO of Tobii. Please go ahead, sir.

[Henrik Eskilsson, Co]

Thank you, Anna. Hi, everyone, and welcome to our earnings call for the third quarter. As usual, it will be me and Johan Wilsby, our CFO, who will do the presentation, and we will open up for questions at the end as well.It was a good third quarter for Tobii, and the group's net sales grew by 14%, adjusted for currency effects, especially positive was the strong growth in Tobii Dynavox and the acquisition of Smartbox, which was announced in the quarter. In Tobii Pro, we continued to strengthen our offering to meet the demand and need for the broader range of customers through several new product launches. Sales growth, however, was unusually low due to reasons I'll get back to a little bit later. And for Tobii Pro, the most significant event was the strategic customer agreement in VR, which we announced now in October. We're also strengthening our footprint in gaming and in eSports. As usual, let's go through each of the business units, starting with Tobii Dynavox. So next slide, please. Tobii Dynavox is the global leader in assistive technology for communication. We develop and sell communication devices and software used by people with disabilities to communicate and to access computers. For those of you who see the slides in front of you, the woman that you see in the picture here, Catherine, she lives in Germany and is a very long-standing user of Tobii Dynavox product. Catherine has severe cerebral palsy, and she has to use an eye-controlled communication device to be able to speak and express herself.Quite fantastically, Catherine just graduated university. She is the first nonverbal user with this technology in Germany who has received a Masters Degree ever. And yes, she did receive an A on her thesis paper.We have several tens of thousands of users. Every one of them an amazing individual just like Catherine. But we're still only scratching the surface. There are 50 million people worldwide with severe speech impairments who need assistive technology in some form to be able to communicate effectively. We have a very important mission here to bring a voice to many, many more people. And this is also why we believe that this will continue to be a growing market for us for a very long time.Next slide, please. Tobii Dynavox is in a strong and positive sales trend, which is great to see. In the third quarter, net sales grew year-on-year by 21% adjusted for currency effects. We continue to see very positive market response to the new touch devices and software that we have launched in the past year. We have made extensive investments in training and educating many thousands of prescribers and other professionals in this industry to make sure that they are familiar with our products and assistive technology for communication in general.In the third quarter, sales of our upgraded portfolio of touch devices grew strongly, and sales of our eye control devices also grew nicely. The sales growth was the strongest in the U.S., in part because this was simply the first market where we launched the new product. In the third quarter, we also had a good growth in Europe as products have now been localized for 7 countries and languages.Overall, this is a great confirmation that we are now getting leverage on our product strategy, which we can boil down to 3 bullets: first, to keep our leading position in the reimbursed part of the market and, in parallel, expand into the private pay and school segments where there is no access to reimbursement; and second, to keep our leading position in eye control devices and to take leadership in touch-based devices; and third, to offer the gold standard software and language system that our users want to use and grow with.In the third quarter, our communication software Snap+Core First was localized to Chinese, Norwegian and Spanish, and is now available in 8 different languages. Each new language is a significant effort since we need to localize the entire vocabulary and language engines. Localization, however, is necessary to enable sales in local markets and to gain full leverage on our newly launched devices.In R&D, we're focusing on maintaining our product portfolio and making sure it's up-to-date in all its parts. We continue to invest in the development of both touch and eye-tracking devices as well as communication software and special education software. You can expect us to continue to deliver a good pace of product launches and improvements going forward. We also invest in a standard customer support to ensure that we provide the best possible conditions for our users to use these devices to the fullest.Let's go into the next slide. During the quarter, we announced the acquisition of Smartbox Assistive Technology. Smartbox is a U.K.-based assistive technology company with about 70 employees. Up until a few years ago, Smartbox was one of Tobii Dynavox's strongest resellers of communication devices, and we've known each other for a long time. This is a strategically important acquisition for us. One key asset is the communication software, Grid, which complements our industry-leading portfolio of communication devices very well. We also strengthened our sales presence in key geographic markets where Smartbox has a strong foothold. Financially, Smartbox has a similar profitability profile as Tobii Dynavox, and therefore, our long-term financial targets will remain intact. The size of Tobii Dynavox business will increase by approximately 15% through this acquisition. This closing date was October 1. The acquisition did not have any impact on the third quarter numbers.We also see clear synergies both in sales, R&D and in operations. And with our combined teams and expertise, we will have the capacity to develop even better solutions that would help even more people with disabilities to communicate.We are, however, waiting for approval from the local competition authority in the U.K. called CMA before the actual integration work will start.With that, Johan, over to you and the financial overview.

[Johan Wilsby, Chief Financial Officer]

Thanks, Henrik, and hi, everyone. As communicated the last couple of quarters, Tobii Dynavox is now back in real growth mode when the new product and localization efforts are starting to impact the wider market. Adjusted for currency effects, revenue grew in third quarter by 21% compared to last year. Although one should remember that last Q3 was a weaker quarter for a number of reasons.Gross margin were in line with previous quarter, but down 3 points year-over-year, primarily driven by product mix and the related effects from different revenue recognition under IFRS 15. This is primarily driven from the material services component, which is part of our sales offer in the medical grade product segment.Our operating expenses were up in Q3 and included several onetime costs in Q3 that affected our EBIT in the quarter. Headcount growth was 8% over last year. And in addition, we have increased R&D efforts and increasing sales commission.At Q3, EBIT margin was up versus last year, but slightly down sequentially. In the first 9 months, the business units delivered FX-adjusted growth of 9% and an EBIT margin of 9% as well, which is up from '17. Over to you, Henrik.

[Henrik Eskilsson, Co]

All right. Let's move over to Tobii Pro. Tobii Pro provides comprehensive eye-tracking solutions and services that enable thousands of companies and academic research institutions to gain deep insights into human behavior, consumer experiences and professional performance. Tobii Pro is the undisputed market leader in this space with a global market share of over 60%.Next slide. Tobii Pro continuing to strengthen its offering to meet the needs of a broader range of customers. In the third quarter, we added Tobii Pro Lab 360 software for user testing in VR environments, and we launched Tobii Pro Sprint, an entirely new product, which I'll get back to in just a bit.As expected, the exceptional sales growth that Tobii Pro has had over the past year slowed in the third quarter. The higher level of sales has now been established, but the positive effect that we achieved by taking over a large portion of the customer base from our former competitor, SMI, is now behind us. Usually, sales in Tobii Pro shows a clear seasonal pattern. Sales has historically been the strongest in the fourth quarter, and weakest in the second and the third quarters because of customers' budget years. In 2017, in last year, we did not see this pattern due to the effect of taking over SMI customers and due to unusually high sales to government organizations in the U.S., specifically in the third quarter last year. Nevertheless, we continue to see strong underlying demand and prospects are good for continued growth, in line with our long-term financial targets for Tobii Pro.Next slide. Tobii Pro Sprint is a new web-based SaaS solution which we have just recently launched. This solution facilitates quick and easy user testing of digital products and services such as websites, e-commerce and software applications. The first of its kind eye-tracking tool gives UX designers and developers who are working in agile, fast-paced environments, needed insights into user behavior and how to optimize their designs. Tobii Pro Sprint allows UX designers to view and record the test participant's eye movements while using their service or product on a computer equipped with a Tobii eye tracker. The recording can be easily shared with other stakeholders either live or replayed later. So simply put, eye-tracking takes the guesswork out of usability testing, and with Tobii Pro Sprint, we have developed a tool that makes eye-tracking much more accessible, much easier to apply in the design process. With a product like this, we can reach a larger customer base because it's so easy to use and it has a relatively low price point compared to the more advanced analytics software that we offer, for instance, to scientific researchers. The prospect customers can be found in many different areas. Basically, any company that has digital assets and does any form of user testing on these. And our first customers are Swedish companies such as H&M, the IT consultant, Knowit and the trading platform provider, Avanza, just to mention a few examples.Johan, back to you.

[Johan Wilsby, Chief Financial Officer]

All right. As Henrik mentioned, the exceptional sales growth that Tobii Pro has had over the past year has slowed down as expected. And in the third quarter, revenues grew by 1% adjusted for FX. The effect of taking over a large portion of our former competitor, SMI's customer base is now behind us. In addition, revenues from government organizations in the U.S. was also unusually high during third quarter of last year.Gross margin came in at 76%, which is flat year-over-year, but up sequentially. Average gross margins over the past few quarters is around 74%, which is probably a good proxy for the coming quarter. Operating expenses showed continued growth due to investments both in sales coverage and product development. The acquisitions of Acuity earlier this year and Sticky last year also contributed to discrete increases in operating expenses. The key driver behind the operating expense growth is to capture long-term growth opportunities that we see for the business unit.EBIT margin compared to last year was down 6 points. We tend to have a strong seasonal pattern, and therefore, it can be more appropriate to look at the 9-month period where EBIT margin in Tobii Pro is 8% up this year -- or is 8% this year compared to 3% in '17.In the first 3 quarters of '18, Tobii Pro has delivered an FX-adjusted revenue growth of 31% and an EBIT margin of 8%. Over to you, Henrik.

[Henrik Eskilsson, Co]

All right. Moving on to Tobii Tech. Tobii Tech is the world's leading supplier of core eye-tracking technology and solutions for integration. Tobii Tech sells and licenses eye-tracking technology in the form of system designs, algorithms, platforms, ASIC chips, sensors and cameras, application software and IT. Tobii Tech addresses several very large opportunities. Core focus in the near to medium-term, is to build up a solid business in supplying eye-tracking solutions to OEM customers in consumer PCs, virtual reality and a range of niche applications.In the longer-term, we are convinced that eye-tracking will be a major technology across a large portion of all VR and AR devices, PCs, tablets and smartphones.Let's move on and take a close look at the development and our strategic focus areas. For several quarters, we have reported on the growing interest in eye-tracking for VR and that we are engaged in a number of customer integration projects. These product development projects typically span over a long time, sometimes, for as long as several years. This market, looking at VR overall, is still immature, which means a low level of standardization and a high degree of innovation, which in turn means that the integration of eye-tracking requires a lot of customization in close collaboration with each customer.In this context, getting to not only 1 customer integration but 2 during the past few months felt great. We know that many of you are eager to get more concrete information about the progress that we are making here. StarVR One, which was announced in August, is an advanced VR headset, primarily for the enterprise market which integrates Tobii eye-tracking as one of its leading features. It is not shipping to customers just yet but more information about the product is fully available on the StarVR website.The other announcement which was made now early in October was that Tobii has signed an agreement with one of the leading manufacturers of VR headsets for the development and delivery of eye-tracking technology for an upcoming product. This is a result of an extensive collaboration over a long time. This agreement is an important milestone for Tobii in our efforts to establish eye-tracking as a foundational VR technology.Next slide. The markets for VR headsets is expected to grow rapidly over the coming years. Manufacturers are now developing their second-generation devices. In total, the market consists of a handful leading manufacturers and some 10 to 20 additional players.According to the most recent market estimates from IDC, the number of VR and AR units sold, specifically excluding headsets without screens themselves, is expected to reach over 4 million units in 2018, and grow to about 50 million units by 2022.Tobii estimates that a large share of all future VR and AR headsets will have the integrated eye-tracking. As mentioned, interest in Tobii's offering is extensive and eye-tracking is generally viewed as a necessary technology to deliver great user experiences in both VR and AR. Tobii is clearly positioned as a leading supplier of eye-tracking technology for integration in VR headsets. And this is a result of significant investments and a lot of hard work during 2017 and 2018.Let's move onto the PC and gaming market. Next slide, please. We continue to develop our core eye-tracking technology for the PC markets to be able to reach a broader set of devices and form factors. Earlier this week, we officially announced the new Tobii IS5 eye-tracking platform, which marks a significant step forward in meeting the requirements of PC OEM customers to enable them to integrate eye-tracking in a wide array of devices including notebooks, monitors and peripherals.Some of the key features and advancements of Tobii IS5 are, for instance, the brand-new Tobii EyeSensor, which is our custom-design CMOS image sensor that we have specifically optimized for eye-tracking. The Tobii EyeSensor combines very carefully tuned state-of-the-art pixel technology with advanced logics, enabling the IS5 platform to provide a significantly enhanced eye-tracking performance compared to any off-the-shelf image sensors.In IS5, we're also using infrared light illumination wavelengths which makes it completely invisible to the human eye, and therefore, enables much more discrete integration in devices such as a laptop computer. IS5 also has a modular design and a 60% smaller footprint than the previous generation, so we can fit into much smaller and thinner devices. It is also up to 75% more power efficient than our previous generation.With this new platform, we're ready to take eye-tracking to the next level in the PC market. We're already involved in development projects with consumers who are integrating IS5 in products that are expected to be launched during the first half of 2019.Next slide, please. Broadening the benefits of eye-tracking for gamers is a key factor for increasing the awareness and the demand for eye-tracking in the PC market, and ultimately reaching more integration customers, more product models and, of course, higher volumes. Our game studio collaborations resulted in several new titles launched with eye-tracking support during the quarter, including several large AAA games such as Shadow of the Tomb Raider and Assassin’s Creed Odyssey. What is perhaps the most pleasing is that the actual implementations are getting even better for each game and usage is increasing as well.For instance, in the game Tomb Raider, 90% of gamers who try playing the game with eye-tracking keep on playing with eye-tracking for extended time. Parallel to these immersive gaming experiences, Tobii Tech is developing eye-tracking solutions for eSports and streaming. ESports is a very rapidly growing phenomena and industry with 400 million people watching eSports worldwide and over 200 million people practicing eSports. This is also closely connected to game streaming where people watch other people playing games streamed to platforms such as YouTube and Twitch. And game streaming in itself is one of the fastest growing forms of entertainment today.Interest in eye-tracking is increasing rapidly within eSports and streaming. One core benefit here is that eye-tracking enables the viewers to see what the gamer is looking at, and thus, giving a peek into the thinking process of the gamer, which simply makes it more engaging and fun to watch.We are also developing concepts where we can take this further and use eye-tracking as a powerful tool for eSports game training. Eye-tracking has recently been implemented by us and major broadcasters into several large professional eSports broadcasting events which are gathering very large audiences. For instance, Tobii eye-tracking was used in several major tournaments recently including ELeague CS:GO, Street Fighter and Tekken and ESL One CS:GO in New York. ELeague was also awarded the best tech in eSports award for their use of Tobii eye-tracking.As the interest in using eye-tracking in streaming and eSports is growing, there are many opportunities to add more value to eSports players and game streamers with eye-tracking, so we continue to work in close collaboration both with our lead OEM PC customers and with a large number of game studio partners around this. So more to come on this topic.Back to you, Johan.

[Johan Wilsby, Chief Financial Officer]

All right. Thanks, Henrik. Tobii Tech's revenues in the quarter were up 35% or adjusted for FX, 21% compared to last year. This quarter, it was project revenues in the VR segment which contributed strongest to the growth.Gross margin was up 4 points to 50%, primarily due to product mix driving a lower cost of goods sold than last year. The operating expenses were in line with Q2 of '18, but we saw a material growth year-on-year and that is in line with how we had grown the organization in Tobii Tech in the past few quarters.Going forward, we anticipate the expansion rate to begin to level off since we have the size needed to execute the strategy, and thus, we have achieved that.Year-to-date 2018, Tobii Tech has delivered FX-adjusted revenue growth of 22% and an EBIT of a negative SEK 230 million, which is in line with '17.Next slide, please. So let's move to the group. The group revenues showed continued growth in the third quarter and increased by 14% adjusted for currency effects over Q3 last year, where Tobii Dynavox and Tobii Tech contributed mostly to the growth.Gross margin for the quarter was 71%, down 2 points compared to last year, but up from first half of '18. Tobii's EBIT for Q3 was a negative SEK 60 million, which was slightly lower than last year due to the ramp-up in resources as well as some nonrecurring items mentioned.On EBIT specifically, I want to call out the FX impact we have since a large part of Tobii Dynavox and Pro teams are based outside of Sweden and that a weaker Swedish krona then inflates our operating expenses to some degree.In the first 9 months of '18, the group delivered FX-adjusted revenue growth of 16% and improved EBIT compared to '17.Next slide, please. So let's wrap up this financial section with a look at our cash flow, which was a negative SEK 70 million in Q3. The change versus last year was driven by the lower EBIT, as mentioned, and an increase in net working capital. We continue to have a strong cash position at SEK 340 million roughly at the end of the quarter. And as communicated earlier, the acquisition of Smartbox will be financed through debt.That concludes the walk through of the numbers. So back to you, Henrik.

[Henrik Eskilsson, Co]

Thanks, Johan. So a quick summary of the third quarter. Again, in Tobii Dynavox, we delivered a very strong sales result with increasing growth driven by great customer response to the new touch devices and software launch in 2017. Tobii Pro saw slower growth, specifically in the third quarter, but still with a strong underlying demand in the market. And Tobii Tech continued to have good momentum and execute with good progress on our plan here.So with that, we're handing back over to you, Anna, and specifically to questions from the teleconference.

[Operator]

[Operator Instructions] We will now take our first question from Daniel Thorsson, ABG.

[Daniel Thorsson, Research Analyst]

So first one on Tobii Dynavox, despite the new construction of the portfolio with lower price product, the gross margin remains in the high 60s. Is that a level that is reasonable also going forward? Or should we see that level coming down a bit more as the new product portfolio emerges with the new lower-priced products?

[Johan Wilsby, Chief Financial Officer]

Thanks, Daniel. I think it's reasonable to expect that, that will continue around that level. It has come down slightly as we had communicated during '18, partly due to the implementation of a new revenue standard. But we expect the current level to be forthcoming as well.

[Daniel Thorsson, Research Analyst]

Okay, that's clear. Another one on Tobii Pro, 1% organic growth in the quarter, you highlighted that the underlying demand in the market is still good, but are there any timing effects in the quarter causing any delay or making the quarter in such a bit weak? Or is it just somewhat slower demand in the market?

[Henrik Eskilsson, Co]

Henrik here, thanks for that question, Daniel. Actually, if you look at the sales number in the third quarter and compare that to the sales numbers in the second or the first quarter, that's actually a fairly normal seasonal pattern for us. It's rather so that the third quarter last year was the exception. Again, due to this very unusual buying pattern that we saw from government customers in the U.S. Specifically what happened was that with the new administration in place in the U.S., there was a lot of talk and discussions and threats that funding for major scientific research funding bodies would be reduced at the end of next year. So there was almost like a panic scrambling to do certain purchases et cetera in Q3 last year. And that, of course, means that in Q3 this year, we have a very tough comparison against Q3 last year, so that's the biggest effect. If you exclude that, then we would have seen a more normal growth rate also in the third quarter this year.

[Daniel Thorsson, Research Analyst]

Okay. That's clear. What end-markets within Tobii Pro are growing the fastest at the moment? Is it professional? Or is it commercial? Or what do you see?

[Henrik Eskilsson, Co]

We see -- generally, if we take the first 9 months this year, for instance, we see good growth in all of the different market segments. So both the scientific research and market research and user testing and in professional performance and we see good growth in essentially all of the different geographic markets. But the strongest growth trend is, exactly as you indicated, in what we call the professional performance segment.

[Daniel Thorsson, Research Analyst]

Okay. And then the final one on Tobii Pro, the OpEx was quite flat in Q3 over Q2, any seasonal patterns there? Or is that the level that you can remain into Q4 as well?

[Johan Wilsby, Chief Financial Officer]

Excuse me, the question was around Tobii Pro, right?

[Daniel Thorsson, Research Analyst]

Yes, Tobii Pro, OpEx flat Q3 over Q2, relatively flat, is that a reasonable level into Q4 as well? Or are there any seasonal patterns?

[Johan Wilsby, Chief Financial Officer]

There is a seasonal pattern then you typically have a lower Q3 due to vacations, et cetera, so you should factor that in when you look out as well. And I think we have had a fairly material headcount increase in the Tobii Pro area, which also will be meaningful in the coming quarter as well, I would say.

[Operator]

We'll take our next question from Mikael Laséen from Carnegie.

[Mikael Laséen]

I have a question about the IS5 opportunity and the integration products that you're working on. Can you be more specific maybe what type of activity that you have there? Is it's very early and what could come out of this? Is it the same type of customers or new ones that are looking into this? If you could elaborate a bit on that part.

[Henrik Eskilsson, Co]

Hi, Mikael, thanks for that question. I think the -- one way to respond to that is the initial implementations and products that integrate IS5 are likely to be in the areas and with partners that we are engaged with since before. So we are implementing the new IS5 platform both into products, in the other Tobii divisions, but we are also already engaged with integration product or integration project for new products in the PC space. We do see clear opportunities for significantly increased volumes based on product integrations with the IS5 platform, and I also expect and anticipate that we will see gradually expanding base of actual customers and customer names as well over 2019, 2020.

[Mikael Laséen]

Okay. Is the interest for this platform better than the last one, the IS4?

[Henrik Eskilsson, Co]

Yes, the platform definitely resolves a couple of key pain points for customers, specifically the form factor that has made it challenging for many potential customers to simply fit the eye-tracking sensor into sleeker form factor devices. And also the fact that with the new IS5, the actual illumination is totally invisible to the user, whereas in the previous platform, you could see a faint red flicker which caused some concerns from some customers. I think those are a couple of key points that make a significant difference. But then, of course, added to that is the gradual continued strengthening of the content and the value proposition of using eye-tracking, with more and more games incorporating eye-tracking, with adding streaming and broadcasting and even going forward adding things like eSports training tools, et cetera that also increased the actual benefit for the gamer end-users.

[Mikael Laséen]

Okay. But speaking about the eSports, can you explain the revenue possibilities that could come out of that. I mean, obviously, it's a marketing method for you, but what about revenue?

[Henrik Eskilsson, Co]

So there is 2 sides to the eSports. One is using eye-tracking in eSports competitive professional broadcasting as well as in game streaming of eSports and eSports game. And those are fantastic tools for, as you say, marketing and driving awareness and exposing a lot of very good target audience to eye-tracking. Specifically, streamers is -- there are a lot of streamers out there, so that in itself is an important customer base. They need to -- need eye-trackers enabled to be able to do the streaming, so that also drives sales volume of our own Tobii-branded peripherals as well as our sales of our customers' devices like laptops and monitors with built-in eye-tracking. Long term, we believe that there are also interesting and exciting possibilities for us to monetize on streaming and broadcasting as eye-tracking becomes a bigger and bigger phenomena in game streaming. But then there's also the other side to eSports which is eSports training because again, there is more than 200 million people out there who practice eSports and are doing eSports themselves, not necessarily as pros, but as happy amateurs doing eSports. And we are working together with partners, both with the device manufacturers and studios, to develop solutions for eSports training using eye-tracking. And this, we believe, has significant opportunity to become a clear value proposition to a very broad base of gamers. And that, of course, would enable us to drive significant sales volumes to our OEM partners.

[Mikael Laséen]

I have a couple of more questions about Tobii Tech, if I may. The VR side here, can you talk a bit more and explain a bit more the integration projects that you are working on? What type of magnitude that, that really is for you? For example, what type of market share do they have? They, I mean, to get a sense of the size -- the potential size of these types of partners. And, of course, the new contracts, what is the sort of the actual change from the integration projects to an actual contracts because we don't know who it is, so it's difficult to know, I mean, the impact.

[Henrik Eskilsson, Co]

First of all, we are engaged in integration projects, to integrate eye-tracking into VR headsets with several more players than StarVR and this other not named contract that we have announced recently. So those are 2 integration projects that we are working and several more integration projects than those, of course, in line with what we have also communicated previously. And if you take all of those players that we are actively working with today, in some form of -- or some stage of project maturity. And if you take all of their VR products, and I'm not saying necessarily that we are, today, working with all of them on all of their products. But if you take all the players we are actively engaged with, you take all of their VR products that certainly represents half of the existing global VR market.

[Mikael Laséen]

Okay. The new contract, when do you expect that to have any effect on your revenues first half? Late in the first half? Or in the middle? And how will they ramp-up?

[Henrik Eskilsson, Co]

We don't have the possibility to provide specific details on that today.

[Mikael Laséen]

Okay, fair enough. Just one more, I was just curious about the cash flow profile ahead for Tobii Tech. If you can say something about that in the coming quarters. So I guess, it's about maintaining this cost level and add more revenues from VR and PC, but what about the cost level that you have today and the cash flow -- negative cash flows ahead, if you can talk about that, would be great.

[Johan Wilsby, Chief Financial Officer]

I think that's a fair assumption, Mikael, as we said, we -- the growth in our organization has leveled off. So from a cost envelope perspective, you pretty much have the level, and then obviously, we're now at a juncture where we should start to see revenues from the various segments growing as well. So that's how you should think and probably are modeling things as well.

[Operator]

[Operator Instructions] We will take our next question from [ Joakim Hedlund ], private investor.

[Unknown Shareholder]

I have a few questions then. Sometimes, when you speak numbers, it's very hard to understand because I think now you put the number on the VR market that it should be in 2019 at 50 million units, is that correct?

[Henrik Eskilsson, Co]

IDC estimates that the combined VR and AR market will reach approximately 50 million units by 2022.

[Unknown Shareholder]

Okay. That's very good, that we have some numbers to reach for. And I think it's good to be specific about this. And I also wondered, this is for the VR and smartphone, do you have the same numbers for smartphone? Because you consider this a special business area.

[Henrik Eskilsson, Co]

For smartphones, obviously, the number of smartphones is a huge number.

[Unknown Shareholder]

Huge number doesn't mean anything, can you put numbers on things?

[Henrik Eskilsson, Co]

Yes. I mean, the smartphone market is, well, is in the range of 1.5 billion units, annually, so that's, of course, a very large volume. The key question is rather what is likely to be the adoption of technologies like eye-tracking into smartphones. And I think that is, today, still very difficult to estimate. And as far as I know, there are no publicly available research reports or market estimates of that.

[Unknown Shareholder]

Are you in discussion with some smartphone manufacturers?

[Henrik Eskilsson, Co]

Yes. We do have dialogues with smartphone manufacturers and there is interest in eye-tracking technology from smartphone manufacturers. We expect it to take some time for the smartphone market to evolve and mature. So it is still clearly less concrete. And for us, today, a significantly smaller investment than the initiatives that we're doing in the PC and the VR markets.

[Unknown Shareholder]

Yes, okay. Because VR market is good because there you have some numbers. And when you talk about computers and PCs, what's the numbers there?

[Henrik Eskilsson, Co]

So you have in the range of 200 million laptop PCs being sold annually. So that's the total numbers that we're looking at as long-term addressable markets. Obviously, in the near term, we are focusing primarily on the gaming PC market. And if you segment that into high-end gaming PCs, that's roughly in the order of 20 million gaming PCs that are sold annually if you count high-end gaming PCs.

[Unknown Shareholder]

This is the market you're addressing for gaming PCs, 20 million?

[Henrik Eskilsson, Co]

If you include both gaming laptops and desktop monitors for gaming PCs, then yes.

[Unknown Shareholder]

Okay. It's good that you have some numbers, and you expect, as a market leader, to reach the possibility to take half of this 20 million units?

[Henrik Eskilsson, Co]

I think that we have a very strong market position compared to any competitor in the PC space. I mean, today, we are really the only player that can offer high-quality eye-tracking technology for consumer PCs. So I think we have really, really good chances there to reach a very high market share. The interesting question is rather how fast will the adoption be of eye-tracking technology into, first, gaming PCs, and then beyond that, into mainstream PCs.

[Unknown Shareholder]

Yes. And -- but gaming desktops, you have started already with Acer?

[Henrik Eskilsson, Co]

Correct.

[Unknown Shareholder]

Yes, and how many units is this?

[Henrik Eskilsson, Co]

So gaming desktop and laptops together is roughly 20 million units per year.

[Unknown Shareholder]

That is very interesting for an investor to know. And then if you're reaching for 50%, I have heard sometimes you say you can reach 50% in the end if you succeed.

[Henrik Eskilsson, Co]

I think that's fully possible.

[Unknown Shareholder]

Yes, great. Okay, and I also have a question about your Swedish colleague, Smart Eye, and they are picking design wins in the auto industry all the time. Is this a market that you have put aside? Or are you going to try to get into this market for auto industry? Or are you focused on VR, smartphone, computer PC and gaming?

[Henrik Eskilsson, Co]

In the near term, we are focusing on PC VR and the range of niche markets. So in the short-term perspective, we have taken the decision to not proactively invest in the automotive space, that's correct.

[Unknown Shareholder]

Yes, okay. Well, very good. But it was good to get a number for the 20 million, so we have something to put on the calculator.

[Henrik Eskilsson, Co]

Absolutely, [ Joakim ]. You can find more information like this, for instance, if you check out the annual report.

[Unknown Shareholder]

Because I think sometimes people get confused about how big is this market and how many eye-trackers is it possible to sell and so on. Like the Smart Eye, CEO, he goes very far. He communicates the order and the possibility of the value of the whole order. As you, on the other hand, very on the other side, so it was good to get this number today.

[Operator]

We take our next question from Daniel Thorsson, ABG.

[Daniel Thorsson, Research Analyst]

Just final 2 questions. One related to Dynavox. What were the costs related to the Smartbox acquisition in Q3? And then finally, Tobii Tech, how should we think about future design wins near term and potential press releases? Are there any clear projects out there that we should keep an eye on, for example?

[Johan Wilsby, Chief Financial Officer]

So I'll take the first one. We have some costs in Q3 related to the preparations of the acquisition, obviously. I haven't called out that specifically in the report, but that's included in what I call the nonrecurring items.

[Henrik Eskilsson, Co]

On your question on design wins, Daniel, yes, that's an interesting one. But, of course, as an investor in Tobii, you should expect Tobii Tech to have a regular communication of new design wins within the different market segments that we address there.

[Operator]

It appears there are no further questions in the telephone queue at this time. I would like to turn the call back for any additional remark.

[Sara Hyléen]

We have a few questions actually from the webcast participants, quite a large number of questions at this time, and we will not have time to answer all of them here in the call. So if you feel that you haven't got an answer to any of your questions, we will, of course, provide those in e-mail afterwards. But I would just like to highlight a few of the questions that we've received.The first is related to the technology advantage, and if you could perhaps elaborate a little bit about the potential threat from tech giants and thresholds for other participants or eye-tracking companies to reach the same level of technology as Tobii has today. Do you understand the question?

[Henrik Eskilsson, Co]

Yes. It's a good question. So, in general, eye-tracking is a type of technology that if you have a talented development team and access to some resources and a little bit of time, you can develop an eye-tracker that is going to work at least okay, in a confined lab environment. I think this is one of the reasons that we see, for instance, that we have actually a fairly large number of smaller competitors in the eye-tracking space. Because with a relatively small team, you can come up with an eye-tracker and it kind of works okay in the lab environment. The real challenge with eye-tracking, what makes eye-tracking really, really difficult is to make the technology work on everyone all the time, under all the different types of situations and environments where you actually use eye-tracking in a product equipped with eye-tracking. And in particular, when going from niche markets into mass markets, this characteristic and this capability of reliable and robust always working eye-tracking becomes much more important and actually a necessity for a successful consumer product. And the challenge on a technical level to accomplish that with eye-tracking is actually extremely high. So making eye-tracking work all the time on everyone is really, really, really difficult. And then in particular, when you want to combine that into a technology that can be manufactured at very low cost, with low power consumption, very low small form factor, et cetera, to fit into small consumer devices, et cetera, it's even more difficult. And this is one of the areas where Tobii really shines and excels and is superior to our competition out there. And these are also areas where we have a lot of IP and patents in technologies around how to accomplish this difference. That is important to and critical to most of our customers.

[Sara Hyléen]

Okay. The next question is related to the Tobii IS5 platform that we have been talking a bit about. And more specifically, about when to expect to see material revenues from that platform.

[Henrik Eskilsson, Co]

We expect to see revenues for the new platform starting in the first half of 2019, and then growing gradually into the second half, and of course, into larger numbers into 2020.

[Sara Hyléen]

I don't think we have time for more questions right now, but thank you very much for the questions that we have received. We will inform you via e-mail as I said.

[Henrik Eskilsson, Co]

All right. So big thanks, everyone, for attending the earnings call today, a full hour, and thanks for all of the good questions. And bye for now. See you in our next earnings call.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.