Tobii AB

STO:TOBII

Earnings Call Transcript 2022-Q3

[Anand Srivatsa, executive]

Okay. Welcome, everyone, to Tobii's Quarter 3 2022 Earnings Call. Joining me today are Magdalena Andersson, our CFO; and Henrik Mawby, who runs Investor Relations for Tobii. We will be taking questions right after this presentation. So if you have any questions, please feel free to start posting them right now. As usual, what I will do in terms of the presentation is, first, provide some background on the company to set the context for our quarterly earnings.

Okay. So let me first start by talking about Tobii and the history of the company. Tobii started its journey more than 20 years ago as a Swedish startup. And in the last 2 decades, we have celebrated many milestones as we built our position as the world leader in eye tracking.

In the last year, we have, of course, refocused our ambition and expanded our intention to deliver technologies that understand human attention and intent. We believe that we are in a new field of technology that we call attention computing.

So what does it take to deliver attention computing? It starts very much from the hardware that enables us to get high-quality images of a user's face or their eyes. We, of course, as Tobii deliver, in many cases, optimized hardware, but over the last several years, we also work with off-the-shelf hardware that enables us to get the right images of people's faces and eyes to process signals from them. Once we have that hardware platform, we are able to go and deliver what we call core signals, signals that are derived by processing images of user spaces. As a company, we started, of course, with the signal we call eye tracking or gaze. But in the last 2 decades, we've expanded beyond that to deliver signals like eye openness, head position, facial landmarks, facial ID, et cetera.

We also deliver a set of signals we call attention signals. These are signals that are derived by combining and processing these core signals. And they give a better idea of a user's intention or attention. This, for example, can include things like understanding where a user is looking, what we call a fixation or their level of cognitive load or stress. We can even tell if a user is drowsy. Ultimately, of course, the power of attention computing is when it's translated into user value. And what we see with the attention computing is that enables more innovative devices. It enables a user to experience more immersive experiences. And fundamentally, it can unlock transformational insights for research or for business.

Now when we consider where attention computing is being harnessed, we think the opportunities for attention computing are potentially limitless. But what we see as of now is 6 key market verticals where we see increased adoption and experimentation. And these markets are in gaming, in the automotive segment, in health care, in education and training, in extended reality, which covers virtual and augmented reality as well as in behavioral studies and user research.

We approach these 6 markets in 2 main ways, 2 reporting segments that we call Products & Solutions and integrations. The Products & Solutions business is a vertical business where we are typically delivering a full solution for our customer to use. The integration business is more of a horizontal offering, where our customers take the solutions from Tobii and build them into our own -- into their own solutions that they take to the marketplace. These 2 segments have quite different business dynamics. We expect, of course, that both of these segments will demonstrate growth. But we expect that the Products & Solutions business will be more smooth in terms of changes in growth, in terms of changes in margin, but we also believe that the Products & Solutions business is more susceptible to macroeconomic downturns. We've seen that with the pandemic in 2020.

But we've also talked about that in the context of our Q2 2022 results. The integration business is much more customer dependent at this point in time. We see the performance in this segment being more lumpy as customers launch end-of-life products. We think, of course, that at this point, this offers the opportunity for disruptive growth. But if you measure this business over a longer period of time, we will see more stable dynamics in the business, and we continue to see strong growth here from a gross margin perspective as well.

So let me shift gears now and talk a little bit about Q3 2022. From a quarter 3 perspective, we actually delivered an all-time high for Q3 revenue, and it was our seventh consecutive quarter of organic year-on-year growth. But from an organic growth perspective, we delivered only 3%, which is lower than our expectations for our business. Like last quarter, the performance is quite different when you consider the 2 reporting segments, Products & Solutions versus Integrations. On the Products & Solutions side, the weakness that we started to see in Q2, which we saw as macroeconomic challenges have actually deepened a little bit in Q3, specifically related to customers that are enterprise customers of Tobii. We've seen in many cases that these customers are canceling and delaying orders. And that has been a drag on the overall business.

But there has been a balancing effect on the Products & Solutions side, specifically with our direct-to-consumer gaming peripheral business. This business had its highest ever quarter in Q3 2022, and it has been a balancing effect to the weakness that we've seen in enterprise. In total, the Products & Solutions as reporting segment had an organic decline of 6% for Q3 2022.

Now if you consider the Integration segment, the Integration segment had another strong quarter. It grew organically 30% year-on-year. And again, we continue to see this business both show growth but also demonstrate lumpiness. We continue to expect that there will be strong variations in the growth. But if we zoom out and take a longer-term horizon on how this business is progressing, we think that we will see trends that are more stable. If we consider the integrations business from a year-to-date perspective, we are now up 44% organic growth year-on-year. And again, we continue to see strong trends here that we are building the foundation for long-term success in this business.

Now when we consider Q3 as a whole and the macroeconomic challenges we're facing and the overall impact for growth as Tobii, we have taken some actions on the OpEx side to reduce OpEx from our current run rate to ensure that we will meet our previously communicated financial goals for 2023, which specifically is that we intend to be EBIT profitable for Q4 2023.

Now let me talk about some of the significant events in the quarter. One of the very notable ones is our continued collaboration with Sony. Sony has announced their PlayStation VR2. They announced that earlier this year, and they continue to take strong positive steps as part of their overall launch process. Notable for us as we go into this announcement is that they have been public with their launch date for the PS VR2, which is going to be February 22, 2023. I'm going to talk a little bit more about Sony's highlights for the quarter at the end of this presentation.

In addition to the momentum we're building on VR with Sony, we've also seen strong momentum from our side on our automotive driver monitoring solutions offerings. In Q3, we had our first public demonstration of this solution at an event called Incabin in Brussels. And again, I'll give more context about that at the end of the presentation.

In addition to these 2 things, we also saw increased momentum around our overall attention computing offering as we expand our portfolio beyond just eye tracking. A strong example of this is our collaboration with Samsung to bring our drowsiness detection capabilities into the Galaxy smart watch. This particular collaboration uses our capabilities to measure drowsiness using heart rate signals. So it's a expansion from what we have from eye tracking. But again, very much consistent with our ambition around attention computing.

Finally, from a significant event perspective, we had 8 new design wins in the quarter, one of them for medical diagnostic device, 7 of them for gaming and productivity solutions with PC OEMs and we've also seen our momentum in the health care space continue to build with 2 of our customers getting FDA clearances in Q3.

With that, I'd like to turn it over to Magdalena to talk about the financials. Magdalena?

[Magdalena Andersson, executive]

Thank you, Anand. So yes, as Anand already mentioned, we had an organic growth of 3% in this quarter. It is a positive figure, which is good. However, it is not up to our expectations. We expected a higher growth for this year, but we do see that the macro situation is affecting us negatively especially within the Products & Solutions segment. Year-to-date, our organic growth was 30%, mainly driven by the Integration segment. Gross margins continue to trend up and improved 3 percentage points up to 74% in this quarter and year-to-date, the gross margin was 75%, an improvement with 5 percentage points.

We were SEK 36 million EBIT negative this quarter, equaling a margin of minus 20%. This is up somewhat from last year's minus SEK 42 million or minus 28%. However, we are not satisfied with taking all of this small incremental steps towards profitability. Hence, we are now implementing reductions in our OpEx run rate to secure that we will reach our target to become profitable during 2023 despite the dramatically changed business environment. And we are expecting that we will break through to profitability in Q4 2023.

And then looking into our segments. Products & Solutions had an organic growth of minus 6%. We experienced declines in sales of research instruments and software to enterprise customers in all our regions. We are not seeing that we are losing more tenders than normally to competition, but it's rather that we see postponements of orders and customers refraining from making the purchases right now.

On a positive note, our gaming device, Eye Tracker 5, continued its strong performance and had an all-time high revenue this quarter. Year-to-date, the organic growth for the segment was 3%.

Gross margin was relatively flat year-on-year but lower than longer-term history in this quarter. This is a reflection of both the quite strong gross margin pressure from component and freight costs in combination with the shift in product mix. Going over to the indication statements. Here, the growth continued. We saw an exceptional 99% organic growth in Q2, now followed by 30% in this quarter. As we have mentioned before, depending on milestone payments and larger payments of license revenues, it is to be expected that this segment will exhibit large fluctuations in growth rates in its early days.

And for the first 9 months now in 2022, we have delivered an organic growth of 44% in the segment. Gross margin came in high at 90% compared to last year's 81%, thanks to the relatively higher proportion of software versus hardware.

And then over to the balance sheet and cash flow. We now have an equity of SEK 748 million and an equity ratio of 72%. Our free cash flow during this quarter was minus SEK 64 million. And this cash flow was negatively affected by SEK 37 million repayment of COVID-related tax reliefs, without which the free cash flow would have been minus SEK 27 million instead.

And with that, we ended the quarter with SEK 263 million in cash and cash equivalents. And with that, back to you, Anand.

[Anand Srivatsa, executive]

Thank you very much, Magdalena. So now I'm going to talk about a couple of highlights for the quarter that really speak to how we are building our long-term success for the company. The first of these is actually related to our automotive driver monitoring system business. And as I pointed out earlier in this presentation, Q3 was a significant quarter for this business because this was the first opportunity for us to demonstrate our driver monitoring system publicly. And this happened in an event called Incabin in Brussels. Incabin is an event where OEMs, Tier 1s and actually other driver monitoring system companies like Xperi and Smart Eye attend and demonstrate their capabilities as well.

Tobii was one of the companies that was chosen to speak at this event as we talked about our approach to validating driver monitoring systems. And we used the opportunity to make sure that people could see our latest offering in the car that you see pictured behind me.

In that 1-day event, we had over 70 demos with customers and in many cases, competitors as well. And the feedback is overwhelmingly positive. So again, we continue to build momentum in the driver monitoring space as we've gone and built our technology capabilities, and we passed these milestones, first being able to demonstrate our technology to customers at our sites, at their sites now being able to demonstrate these capabilities publicly as well. We continue to believe that we are building the right foundation to be one of the leading companies in driver monitoring systems in the future. And I'm quite encouraged with the progress we've made over the first 9 months of the year.

The second aspect that I wanted to highlight was actually our momentum in VR. And in this space, I want to talk about it in the context of 3 separate trends. First, about how the VR market itself continues to mature and become more tangible and more real. In fact, just last week, the Chinese government announced that they were designating virtual reality as a key industry in their latest 5-year plan. That comes along with an expectation that the government is setting that they want to ship more than 25 million units by the year 2026. If you compare that to where the Chinese makers are at this point in time, they've shipped about 0.5 million units in the first half of this year. So this is a pretty significant commitment.

And as hopefully, all of us understand a government commitment from a government like China has significant momentum behind it as they can bring the weight of their overall economy to make sure that they meet goals such as this. This, for the VR industry, is super notable because so far, most of the VR headsets that are shipped and actually experienced are mostly in the Western world. And so now you have a major market like China, also making a commitment to ensure that VR is an important industry for them as well. So again, a clear indication that the VR market continues to mature, and there's significant opportunity there.

The second aspect is, of course, how does eye tracking relate to this VR market. And what we've seen over this quarter is that more and more brands continue to include eye tracking is one of the offers that they have in their headset lineup. And you can see a pretty broad set of customers that are now offering eye tracking. This again lends credence to our belief that eye tracking is basically a must-have feature for headsets going forward. It, of course, starts with brands putting eye tracking in a few of their SKUs and expanding that footprint, hopefully, to cover all of their SKUs going forward.

The third aspect is Tobii's position in the space and how are we building leadership from an eye tracking perspective in the VR industry. Now all of the headsets that you see on the left are -- that are non-Tobii are actually enterprise headsets. We are the only maker that has consumer headsets that are shipping with eye tracking. And the most notable, of course, of these is the Sony PS VR2, which will be a mainstream consumer headset that includes eye tracking. This means that this headset has to have the kind of technology that covers basically the full population that every single user that uses the headset will be able to experience and enjoy the capabilities that this technology enables.

And what we've seen so far with the PS VR2 is actually very, very, very positive. Sony, over the last quarter has demonstrated their headset to tech reviewers. The feedback has been very, very positive. The software gaming ecosystem has rallied around this device, and so far there are more than 50 titles that have signed up to support the PS VR2. And recently, in fact, over the last couple of weeks, we have seen that Sony has actually announced a launch date for this device, which is February 22, 2023, with preorder starting in November 15 of this year. Once again, we think the VR market overall is a great opportunity for Tobii, and we continue to maintain a very strong presence in this market. And as the need for eye tracking grows, we think we're in a great position to take advantage of this trend.

So with that, let me summarize the quarter quickly before I open it up for questions. So we talked about Q3 overall. Again, Q3 was our highest ever Q3 quarter from a revenue perspective. It was our 7th consecutive quarter of organic growth. But from an organic growth perspective, a 3% result is below our expectations. We see this growth being quite different in our 2 reporting segments. We've seen weakness on the Products & Solutions side for the second quarter in a row as we continue to see the macroeconomic challenges worsen. We've also seen the Integration business continue to deliver strong growth.

We believe that our work over the past 9 months and in Q3 continues to build a strong foundation for long-term success, specifically in areas like VR and with automotive driver monitoring. And again, with the results we've seen in Q3, we are now taking actions to reduce our OpEx to ensure that we can meet our previously communicated goals of being profitable for EBIT in 2023. Specifically, what we are guiding now is that we will be EBIT profitable in Q4 of 2023.

With that, I'd like to open it up for questions. Henrik?

[Henrik Mawby, executive]

Thank you, Anand. And analysts, please indicate if you wish to ask a question, and we will let you into the call. For everyone else listening in on the podcast, there is a Q&A function available in the Team's window. So please use that and post your question. Let me remind you that there is a bit of a time lag on these questions. So please post them sooner rather than later. Let me see here if we have any analysts wanting to ask questions.

So Erik Larsson, let's start with you, from SEB.

[Erik Larsson, analyst]

I have 2 questions. So first off, on the cost reduction, is there anything you can quantify in terms of size or anything really what you're looking into as of now?

[Henrik Mawby, executive]

Magdalena?

[Magdalena Andersson, executive]

We're not guiding specifically on size, but what we would like to sort of try to -- what we are trying to express is that, during this year, you've also seen that our cost base has been growing, and we were planning to continue to grow it also going into Q4. So for us, that's why we also expressed it as taking down the run rate. We are now sort of looking into not growing as fast in Q4 as we first had intended, but rather to take it down going into the next year so that we have a more -- not as such a high growth rate, but rather a slight decline.

[Erik Larsson, analyst]

Okay. Great. And then just another question on the peripheral. So my understanding is that Q3 usually is not a big quarter for this -- for the eye tracker peripheral. So I'm just curious what's driving the performance? I guess it's a bit FX in there, but it sounds like volumes are there as well.

[Anand Srivatsa, executive]

Yes, absolutely, volumes are there. Actually, volume is the underlying driver for the performance. Of course, there is some FX benefits as well. But from an organic perspective, we saw a very strong quarter. What we've seen actually on the eye tracker side -- on the eye tracker peripheral side over the course of the last year is that we're seeing very strong customer feedback on the value of our solutions into simulation games. One of our big marquee games, of course, that we supported about 2 years ago now, December of 2021 was -- 2020 was Star Citizen. That has been a community of gamers that have really enjoyed this peripheral and they have been, with word of mouth, encouraging their fellow Star Citizen players to go and pick up this device.

What we saw at the back half of next year -- of last year, of course, was that the Microsoft Flight Simulator game also supported the Tobii eye tracker. And we're seeing that community also pick up use of this peripheral to go and enjoy their game further. So what we see is as these games sort of come in and the communities see the value we're building, we're starting to see good growth driven from that type of behavior.

[Erik Larsson, analyst]

Okay. So it's not a specific game release or so, it's more the word of mouth and network effects are gradually kicking in more and more basically?

[Anand Srivatsa, executive]

Absolutely, absolutely, yes.

[Henrik Mawby, executive]

Thank you, Erik. And then let's move on with Daniel Thorsson from ABG, please.

[Daniel Thorsson, analyst]

So first question on Products & Solutions. Do you get the feeling that large enterprises reduce short-term investments or are also taking a more permanent decision of cutting back those type of activities also in the midterm?

[Anand Srivatsa, executive]

Yes. We certainly don't think it's a permanent situation here. Again, I think you see this kind of behavior in general. Again, in my previous stints in larger companies as you go through macroeconomic changes, there's, of course, the first ask to look at what is discretionary, what are things that we can afford to delay. So what we're starting to see, first of all, is delays and customers choosing to push out when they invest in some of these areas, specifically to understand their customer behavior. These are things that they typically will end up delaying for some period of time.

I think the timing is a question mark. We do believe that these macroeconomic challenges are going to be with us through Q4 certainly and into 2023 as well. But if you think about sort of a pandemic-related corollary, after that sort of ended, we did see some strong bounce back in the business. And so we are expecting, of course, that as these companies ride their ship and deal with the current issues, there's a potential that maybe they have tightened too much. And then as they see the economic situation start to improve that they will once again invest in these areas, which we think are quite critical for them to go and improve their products and offerings to satisfy their customers.

[Daniel Thorsson, analyst]

Yes, I see. Okay. And then a follow-up on that one, which you touched upon a little bit here as well. But how do you think about Products & Solutions sales development in '23 when you model your new Q4 EBIT positive guidance for Q4 2023 then? How do you think about sales development there?

[Anand Srivatsa, executive]

So I think that we are thinking about growth in that overall reporting segment characterized by 2 sets of things. One is, of course, if you think of Products & Solutions, there are 3 components that are built in. One is the enterprise set of customers; the other ones are university customers that are doing more scientific research; and then the third is sort of our gaming peripheral business. So each of these has a slightly different dynamic. On the gaming side, I think so far, we haven't seen sort of weakness in that so far. We're, of course, starting from a smaller base in that portion of the business.

On the university research side, we think that government grants, by and large, are still staying stable. And you could imagine that, that may be a business that's less impacted by macroeconomic issues. We have still seen in some portions of those markets impacts from the pandemic. For example, in China, we saw that in Q1 and parts of Q2. So as the COVID pandemic fully sort of resolves itself, we think that, that business actually could be stable and be back to the kinds of growth we've had historically. But of course, the wild card here is very much on the enterprise side and how deep does the macroeconomic situation continue to manifest itself. But we are thinking about growth for next year on this reporting segment also.

[Daniel Thorsson, analyst]

Okay. That's very clear. And then the last question. On the VR segment here, regarding the latest non-Tobii checking headsets that you mentioned or enterprise headsets, what is really the key reason for OEMs launching an enterprise headset with online eye tracking technology, but not in the consumer segment?

[Anand Srivatsa, executive]

Yes. I mean, if I sort of try to parse that question a little bit, let's maybe -- let me answer it in a more holistic way. So first, as you noted, last quarter, we actually had 2 headsets launched, that were enterprise headsets that don't have Tobii eye tracking, the Pico headset as well as the Meta Quest Pro.

Now typically, for most technologies, when there's a new technology coming in, it's quite normal for these technologies to come in at the most premium spot of your portfolio, something that is at the highest price points because that's where you can go in and do a little bit more experimentation from a product position perspective. That's quite normal for the technology industry in general.

What we see is that the fact that these customers are building internal eye-tracking capabilities is actually a testament to how important they think eye tracking is. And I think that's quite good for us because it's an indication of their belief that eye tracking is something that's going to be important for their portfolio.

Now at the same time, we believe that our offerings are quite strong. If you look at the features we developed or the population coverage that we can address, and of course, population coverage is critically important when you get into a high-volume headset, like consumer VR HMD. If you think about the features of the headsets that just got launched versus what we offer for the Sony PS VR2,or for the HP Reverb Omnicept Edition. You can see that the features are quite different. And of course, we are addressing a much larger population when you think about the PlayStation VR2.

Looking forward, we are working with all of these players in the VR headset market, and we actually think that as they expand their eye tracking capabilities in their portfolio, we think we have a really good chance to compete for the business going forward.

[Henrik Mawby, executive]

Thank you Daniel. And let's move on to Mikael Laséen with Carnegie, please.

[Mikael Laséen, analyst]

I hope you can hear me. Yes, I have a follow-up on the Products & Solutions segment, and specifically enterprise side. Can you tell us something about, first of all, how large part of the business that is, Enterprise customers? And also what type of customers you're exposed to, I mean, to understand the cyclicality and maybe also comment on the use cases there?

[Anand Srivatsa, executive]

Yes. So let me speak to that. I don't think we're going to guide to specific numbers of what the enterprise is or break down the Products & Solutions side into that level of detail. But let me talk a little bit about what enterprise means, so I can give you some context of who these kinds of customers are. So primarily our types of devices are used for 2 types of major use cases by companies. One of them is actually for what we would call market research or user experience. So people who are trying to understand the user better, to either get feedback on a product they're designing or to go and improve the product itself.

And the 2 major types of companies or 3 major types of companies that sort of use that kind of technique are either marketing agencies that support companies that are doing packaging design; or, for example, companies that have an end-user product, an FMCG kind of company or even in many cases, a company building an application or an app for your phone, software application on a PC or an app for your phone. Those are sort of the categories that we would cover under market research and user experience.

Then we have another set of use cases that are around training and assessment. And here, we see a pretty broad set of customers as well. It ranges from folks in the automotive industry that are using our technologies for workers in their factories to upskill and reskill them. It also goes into industries like aerospace and defense, et cetera. And so we have a pretty broad range in some of these areas that we cover under this bucket. Again, I think the dynamics in general are that we are seeing that as they look at the macroeconomic situation they're facing, many of them are making the decision to delay some of these projects or to cancel them temporarily.

[Mikael Laséen, analyst]

Okay. It sounds like it could maybe be the market research side, that is maybe a bit early or cyclical that you have primarily these delays or cancellations. Is that...

[Anand Srivatsa, executive]

Absolutely. I think that's certainly one of them. But I would also say, if you think about our automotive customer base, which is a large one where they're using these solutions to understand driver behavior or as I mentioned in factories to go and optimize worker reskilling, you have to think about sort of the situation they've been facing since sort of the pandemic, right? They walked into a pandemic, then there were supply chain issues, that if they had automotive customers, and now you could argue they're potentially walking into a situation with consumer confidence that's lowered when rates of borrowing are quite high. And so that's an industry that you're right, that it's not the same as the marketing research agencies, but that particular vertical has been through a fair amount of turbulence over the last year, and that also drives belt tightening kind of behaviors.

[Mikael Laséen, analyst]

Okay, got it. And I was thinking about the seasonality for Products & Solutions and integrations in Q4. Is it anything you can say for this year that is important to take away?

[Anand Srivatsa, executive]

Yes. What I think I would say is, again, we do expect the seasonality on Products & Solutions to continue to play out. Typically, the budget cycles that exist are still there, even if people are tightening belts there or is it the end of your budget kind of behavior, both from a university research perspective, but also from an enterprise customer base. So I think both of those things play out. Of course, Q4 is also the holiday season if you think about our gaming peripheral. So all of those things seasonally should have a strong quarter if you sort of take out the specific variations on the macro side, we continue to expect that the seasonality will play out that way.

On the integration side, it's a little bit different. Again, there, we think that the seasonality patterns aren't as clearly defined. They're very much dependent on customer to customer characteristics. And so I think that there is much less defined seasonality from a Q4 perspective for the Integration business.

[Mikael Laséen, analyst]

Okay. And I was also thinking about the working capital, why that was negative in Q3? What are the reasons for this? And if you can also comment on the tax payments and repayments that you made and have received?

[Magdalena Andersson, executive]

Yes. We repaid SEK 37 million this month to the tax authorities for COVID-related tax relief that we had applied for earlier and now it was due. But then we also got, after the quarter, SEK 166 million of renewed relief going forward. So the SEK 37 million was, of course, part of the negative working capital in this quarter. But also since we are -- working capital are moving from quarter-to-quarter depending on when people pay the bills and we pay our bills, so they will fluctuate from quarter-to-quarter, slightly up, slightly down. So it was nothing specific this quarter except for the SEK 37 million.

[Mikael Laséen, analyst]

Okay. Got it. And just to follow-up on that. Did you get deployment from Sony this quarter? I guess that you -- it was delayed from Q2 to Q3.

[Magdalena Andersson, executive]

Yes. As all our customers, we take on revenue and then we get paid. And Sony is one of our customers, and they also pay their bills, so yes.

[Henrik Mawby, executive]

Thank you, Mikael. Let's move on with some questions from Daniel Djurberg with Handelsbanken. On DMS, you're still expecting -- are you still expecting a design win in Q4 or has this changed due to the delays highlighted?

[Anand Srivatsa, executive]

Yes. I mean again, I think what we had talked about earlier in the year was that, "Hey, we feel like we need to build a position where we're going to get into a design win this year." I would say the progress we've made over the last 9 months is actually very positive. In many cases, stronger than my initial expectations. But I also want to caution that specific design win timing is very much dependent on RFQ timing.

And so what we are actively doing now, of course, is to go and showcase our solutions to as many customers as we can to make sure that we are participating in RFQs, which we are doing right now. And the award of those RFQs as well as our ability to talk about them very much depends on the timing that is set by our customers.

But what I would say at this point in time is, I believe that the progress we're making and have made in automotive is actually more than we expected going into the year. I think we are much better from a technology capability perspective. I think the feedback we're getting from customers is quite strong. And again, I think that this actually is a positive testament to where we're going to be from a long-term perspective. Of course, we are chasing our first design win. That is going to be very important for us to go and build credibility in this market.

[Henrik Mawby, executive]

And then, Daniel, on your second question, I'll cut away some of it because I think it's already been answered earlier in the call. But on enterprise customers delaying or canceling orders, is this hampering mostly the near-term 12 months outlook? Or do you think it's hurting also the outlook for 2024?

[Anand Srivatsa, executive]

Yes. Again, I think we are taking the impact, as I mentioned in the earlier question. We are expecting this impact to be there for the rest of the year, certainly and into 2023. At this point in time, it's hard to call specifically what's going to happen from a 2024 perspective. But I think that this macroeconomic environment is something that is a watch item. So at least for what we have in '23, we've taken it into account, and then we'll have to see what plays out from a 2024 and beyond perspective.

[Henrik Mawby, executive]

And finally, when talking about breakeven EBIT in Q4 2023, does this mean we should assume breakeven EBIT for the full year '24 as well?

[Anand Srivatsa, executive]

So right now, we're not setting any additional goals beyond what we have right now. What we have previously communicated is that we intended to get into EBIT breakeven during 2023. And again, our expectation of being EBIT profitable in Q4 '23, in my view, is in line with that statement.

The second goal that we have communicated is that we intend to reach SEK 1.5 billion of revenue in 2025. And again, we continue to stay committed to that goal and the long-term foundation that we're building in areas like VR, et cetera, are sort of the way that we believe that we are going to end up getting there. At this point, we're not going to make any additional goals on what we expect for 2024.

[Henrik Mawby, executive]

Thank you. We have received quite a few questions around the Pico and Meta launch of headsets with their own eye tracking. And I think the answer to Daniel's question covered most of the questions there. Otherwise, if you feel like we haven't answered your question, please send an e-mail to us, and we will answer them after the call.

So moving on, in your opinion, is your DMS solution considerably better than competition? And why do you think so?

[Anand Srivatsa, executive]

Yes, if I answer this question, the way that we talk about it to our customers and sort of what the market is facing, one of the biggest things I think that people need to recognize is that with the legislative mandate coming into the EU and in other markets, the DMS offerings actually have to hit a fundamentally different price point than what they have been hitting so far.

Up until now, the DMS products have been in premium car models, and they need to go into every single car model based on what the EU legislation is mandating. That means that there is an opportunity and a disruption that is needed for these systems to get much cheaper from a total cost of ownership perspective.

And of course, when we think about how you make DMS cheaper, it comes down to 2 sets of things. One is, what is the cost of the solution that an OEM has to go and buy in order to go and deliver DMS. And that is the hardware that's needed, the camera, the compute, the cost of the algorithms. There, we think that our approach allows an offering that is much more forgiving of lower-quality camera, it can also scale to lower cost compute. And again, I think we have the benefit of not having as much legacy to go in and deliver a solution that's more cost competitive from that aspect.

The second aspect, of course, is the investment that OEMs and Tier 1s have to make to integrate a solution into a particular DMS design choices. So for example, the cameras that make these DMS systems could be in various parts of cars, depending on the car's design. It may have to be on the A pillar, which is the sort of part of the car that's to the left of a driver. It could be in the center console. It could be in the rearview mirror. And typically, these integrations have been quite expensive as well because each of these algorithms are pretty tightly tuned to the kind of image that they get on user space.

We believe that our approach is also much more forgiving from the position of where the camera is, which means that the integration programs can be less expensive. We think the combination of these 2 things, lower system cost overall and a lower cost integration, I think, makes us pretty compelling.

[Henrik Mawby, executive]

Thank you. How should investors like me think about the absence of design wins in gaming laptop hardware integrations?

[Anand Srivatsa, executive]

Yes. I think what we see happening on the gaming side, I think we've been pretty open about this, that this is a journey we've been on for the last 7 years. And the first thing that we had to demonstrate was that we had product market fit. I think the success that we have with the Eye Tracker 5 peripheral clearly demonstrates that gamers are willing to buy our solutions for the experiences that they deliver and the specific games that we create value, in games like Microsoft Flight Simulator, Star Citizen, DCS, you know we have over 150 games that we support.

When we think about how that translates from a PC OEM integration, what we see is in the PC market it's much easier and much more affordable to go towards software-only solutions. It's easier to design from a time to market perspective. It tends to also be cheaper. And so we've seen our mix move from hardware to software, and we think that, that's a trend that will be sustained for us.

[Henrik Mawby, executive]

And lastly, as Tobii shareholders, we've seen a lot of headwinds in the past few years with first, the COVID pandemic and now macroeconomic setback. Please give us your view of why we should be excited for Tobii in 2023?

[Anand Srivatsa, executive]

I think that what I would summarize this is the following. I think if you go back 4 or 5 years ago, we've talked about the potential for Tobii to really be a mass market volume type of company that the technology that we were creating, while it creates tremendous value in pockets of the market, that it will also be applicable on a broad base with very large volumes in consumer electronics.

And I think over the last several years, we've been saying that, "Hey, we need to wait and see, we're sort of around the corner from when this is actually happening." And I would say that where we are in 2023, we are actually at the time where that proof is materializing. And it really starts with something like the Sony PS VR2.

This is a headset that's going to ship in millions of units next year, which means that this technology will actually be experienced by people that have never even considered that this capability exists in the marketplace. I think that's a pretty big change for us.

So both what's happening in VR and what's happening in automotive, I think they are very positive indications that we are actually delivering on those promises, and it's not something that is in a sort of future state that is unknown in terms of when the timing is going to materialize. I think these are much more deliberate in when these major steps are going to be taken. I think that's why investors should be super excited about where we are.

[Henrik Mawby, executive]

And with that, we round off the Q&A from our side. Is there anything -- any last comments or...

[Anand Srivatsa, executive]

Well, thank you, folks, for your time once again. Again, I think that we continue to build a great position for our company on the long term. And I hope as you see that despite the macroeconomic challenges that we've seen in Q3, we're taking tangible steps to ensure that we meet our commitments that we've communicated to you previously. Once again, I think that we're quite excited about what the future holds, and I can't wait to see what '24 and '25 are going to be for Tobii going forward. Thank you very much.

[Henrik Mawby, executive]

Thank you.

[Magdalena Andersson, executive]

Thank you.