Tobii AB

STO:TOBII

Earnings Call Transcript 2019-Q4

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Tobii AB Year-end Report 2019 Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday, the 6th of February 2020.I would like now to hand the conference over to your speaker today, Henrik Eskilsson. Please go ahead, sir.

[Henrik Eskilsson, Co]

Thank you, Carol, and welcome to this call, everyone. Me and Johan are happy to be here today to present Tobii's year-end results. So let's go to the next slide.We had a strong finish to the year with all-time high revenue in all of our 3 divisions. And overall, the group revenue grew by a good 19% or 12% adjusted for currency effects. Most notable was the very high 69% currency-adjusted growth in the external revenue in Tobii Tech.The EBIT for the group improved to minus SEK 21 million in Q4 compared to minus SEK 33 million in Q4 of last year. And year-over-year, the EBIT improvement was driven by strong revenue growth, maintaining high gross margins and actually reduced OpEx, which was minus 5%, FX adjusted. However, EBIT was brought down in part by fairly negative impact from currency-driven revaluations and more conservative R&D capitalization levels. If we would not have had those negative accounting impact, the EBIT would have been another SEK 30 million higher. In other words, the underlying improvement from last year is actually around SEK 40 million. We also launched several very important products in the quarter, specifically, the new I-Series and Tobii Dynavox, which is the most important product line for the entire Tobii Group, and it has been very well received in the market. Tobii Pro also launched the important Pro Fusion, which has also been well received. One of Tobii Tech's OEM customers, Pico launched the world's first mobile VR headset with built-in eye-tracking and our customer NovaSight announced CureSight, a very innovative product to treat lazy eye. Overall, we continue with a strong focus on our target of reaching profitability for the group this year.Next slide, please. As we now have 2019 in the rearview mirror, I want to take the opportunity to take a little bit step up and look at what's happening around eye-tracking from a slightly bigger perspective. And overall, we see eye-tracking definitely gaining ground broadly.In the past year, we have seen the first major product both in VR and in AR come to market with built-in eye-tracking, both our own customers, HTC and Pico, and other players like Microsoft and Magic Leap. This means that a large share of the new handsets launched in 2019 are actually equipped with built-in eye-tracking. Although these products are mainly still focused on enterprise markets and thus, with relatively low volumes.There is broad agreement in the VR and AR community on the necessity of eye-tracking for improving performance and experiences. And over the coming 2 years, we expect to see eye-tracking in a growing number of headsets and also to break into the higher volume consumer headsets. By around 2023, we expect eye-tracking to be more or less standard in both VR and AR.In PC, Dell has, in the past year, taken a major step forward in eye-tracking by expanding their integration of eye-tracking from one product to having eye-tracking across the entire line of Alienware gaming laptops. The use case for eye-tracking is evolving and growing stronger.We've also seen the first integration of our lower cost Tobii Aware solution in a Lenovo PC in 2019, and expect to see this offering deployed in several more products going forward.In the health care sector, we have seen several innovative products come to market that use eye-tracking to enable new forms of assessments, diagnostics, treatment and interaction. And this is a technology field, eye-tracking is a well-established controlled input and a growing number of people with disabilities are relying on eye-controlled computers to communicate with their families, in school and at work.In academic research, eye-tracking is growing steadily as a research tool. And only in 2019, several thousand academic research articles were published where research was conducted with eye-tracking asset key tool.In consumer research, a growing number of enterprises rely on eye-tracking to optimize their businesses. More and more companies are using eye-tracking as a tool to improve training of the workforce. Also in the automotive space, eye-tracking is a key component in advanced driver monitoring to enhance safety and convenience in vehicles and is expected to see rapid adoption over the coming years on the back of new legislation and safety standards.Large global technology companies, such as Intel, Microsoft and Qualcomm are expressing their conviction that eye-tracking will be important to their future platforms and ecosystems. So in other words, we see clear signs that eye-tracking will drive innovation and be broadly adopted across all of these areas: PC, VR, AR, automotive, health care, in smartphones in the future. And Tobii is clearly positioned as the global leader in eye-tracking, both when it comes to supplying core eye-tracking technology for integration in other companies' products as well as in our own vertical businesses in assisted-technology and research solutions. Thus, we have a strong position to benefit from this growing traction from -- for eye-tracking.Next slide, please. Let's go into some more details on our divisions, starting with Tobii Dynavox. And as you know, Tobii Dynavox is the global leader in assisted-technology for communication. And this is also Tobii's largest division. Next slide. As mentioned already in our last earnings call, we announced the new I-Series in the fourth quarter. I-Series is the most important product for Tobii Dynavox. It makes up about half of the division's total sales.The old I-Series was launched actually about 6 years ago, that has been in a very strong need of a refresh. The new I-Series have been redesigned from ground up and is, without a doubt, the most user-friendly, durable and advanced eye-tracking enabled communication device in the market. And the new product has been very well received by the market. It's getting fantastic reviews, both by professionals and by end users, and this bodes very well for the future, as we expect the I-Series to be a strong sales driver for several years to come.Next slide, please. We delivered a new all-time sales record in Tobii Dynavox in the fourth quarter of SEK 251 million. This was 16% more than Q4 of last year or up 9% adjusted for currency. The sales growth was driven by strong sales of the new I-Series in Europe and growth of sales of touch devices and education software in the U.S.In Europe, we had already pre-announced the new product to resellers, which actually led to a slower sales of I-Series in Europe in Q3 as resellers were hesitant to buy the older products. But on the other hand, it meant that our resellers were ready for the new product at launch, and we saw really strong revenue growth in Europe in the fourth quarter based on this.In the U.S., we know from experience that new products need some calendar time to have a positive impact on sales due to the lead times in the reimbursement system. The net impact in the U.S. of the new I-Series product transition was roughly neutral in the quarter, and the growth of sales in the U.S. was, in fact, driven by good growth of other product lines. We expect positive sales impact of the new I-Series also in the U.S. to materialize in the first and second quarter this year.We're also continuing with our large-scale efforts to train professionals in the use of assisted-technology for communication as we see that these educational efforts are key to long-term sales growth. In the fourth quarter alone, we trained 18,000 professionals. And overall, in 2019, we doubled training versus 2018 to 60,000 trainings of professionals worldwide.Johan, your turn and the financials.

[Johan Wilsby, Chief Financial Officer]

All right. Thank you, Henrik, and hi, everyone. First, a reminder that the acquisition of Smartbox is no longer part of the Tobii Dynavox number for the group. This change happened in Q3 '19 and all historic statements have been updated accordingly.As mentioned by Henrik, Tobii Dynavox had really good sales in Q4, in part driven by the recently launched I-Series. Revenue grew by 16% in the quarter or 9% adjusted for currencies. But we were still in a transition phase in the U.S. during the quarter, so the full effect of the product launch is still ahead of us.Revenue was negatively impacted by increased allowances for nonpayment, which is an established part of doing business with certain insurance companies in the U.S.Gross margin came in at 64%, which is 2 points down versus previous year. The decrease is, to a large part, attributed to the effect related to the increased allowances for nonpayment.Our operating expenses were flat in the quarter, which is showing our focus on cost management. The Q4 EBIT margin was up materially versus last year, up 3 points to 11%, continuing the positive trend we had seen during the year.So let's have a look at the full year performance, the next slide, please. In the full year 2019, we grew sales in Tobii Dynavox by 14% or 6% adjusted for currency. Summarizing 2019 from a sales perspective in both 2 main factors: continued good growth from our touch products and slower sales of the previous I-Series due to it being a fairly -- and fairly outdated product.Growth was below our long-term financial target of average yearly growth of 10%. But with the I-Series transition, it was not unexpected that our growth would be slower in '19. Gross margin was roughly in line with 2018, although we have the effect related to the increased allowances I just mentioned.Our EBIT margin was up 2 points versus '18. The improved operating margin was attributed to the increase in revenue and flat operating expenses during the year. And in 2020, we focus on continued revenue growth and further improving the profitability and our long-term target is an EBIT margin above 15%.So back to you, Henrik.

[Henrik Eskilsson, Co]

Thanks, Johan. Our second division Tobii Pro is the global leader in eye-tracking solutions for understanding human behavior.Let's move to next slide. In Q4, Tobii Pro launched the new Pro Fusion product. This is our latest portable, high-performance eye tracker and is designed for advanced eye-tracking studies, both inside and outside the lab. And typical research fields for this product is a great tool, include behavior research, psychology, neuroscience, medicine, et cetera.The initial reactions to the product has also been very positive, and we consider this to be a significant improvement to our portfolio research eye trackers. It replaces actually several older products that had become fairly dated. And as such, we expect it to contribute to good sales growth in Tobii Pro in 2020 and beyond. Next slide. Tobii Pro's revenue in Q4 was a new record high at SEK 131 million. However, this only corresponds to a 10% increase or 4% adjusted for currency. The full year revenue growth was 12% or 5% adjusted for currency. And this is lower compared to -- and actually materially lower compared to the very fast revenue growth we have seen in Tobii Pro in the past 3 years, and also lower than our long-term revenue growth targets. And there are a couple of factors behind this. One reason is that 2018 was a very tough comparison year with exceptionally high-growth and large quantities of customers switching from our former competitor, SMI, which was acquired by Apple.Also in 2019, we had some macro effects impact sales. For instance, Brexit has had a large negative impact on research funding, and consequently, our sales in the U.K. market. And in the U.S., there's been a fair amount of uncertainty around research funding for universities and government institutions, which has also impacted our sales in the scientific research and professional performance segments negatively.Some products in our portfolio that were older or late in the product life cycle also saw a flat or declining sales last year. We also had several positive factors in 2019. For instance, really strong sales growth in Japan and China and for some of our newer products, but not enough to lift the total sales all the way up to the desired growth level. However, as you can see in the graph to the right on this slide, the long-term sales trend is very strong for Tobii Pro. And this growth is fundamentally driven by an underlying growing demand for eye-tracking in research and growing market shares for Tobii Pro. For instance, the currency-adjusted 2-year average revenue growth is 14% and the 4-year average growth FX-adjusted is 16%.Johan, over to you.

[Johan Wilsby, Chief Financial Officer]

All right. Tobii Pro revenue growth in Q4 turned downward from the momentum we saw in Q3. In the fourth quarter, revenue grew by 10% or 4% adjusted for FX, and Henrik summarized the driving factors behind the performance.Gross margin came in at 76%, which was flat year-over-year and sequentially. As we have indicated before, operating expense growth was down considerably and showed a 2% decline adjusted for currencies in the quarter.EBIT margin was down compared to last year. However, the underlying profitability was similar to last year, but lower capitalization rate and the higher amortization in R&D as well as negative translation effects related to currency fluctuation meant a lower operating margin.Let's go to the full year. Next slide. In '19, Tobii Pro delivered FX-adjusted revenue growth of 12% or 5% adjusted for currencies. As Henrik mentioned earlier, we have experienced some headwind factors in the U.K., U.S. and from product transitions.Gross margin came in at a solid 75%, in line with previous year. Operating expense growth came down materially from previous years, and we saw an 8% OpEx growth adjusted for currencies. EBIT margin improved to 12%, up 1 point compared to the year before, and we continue to work hard to reach our long-term profitability target of 15% EBIT margin this year. Back to you.

[Henrik Eskilsson, Co]

All right. Let's move over to our third division, Tobii Tech. Tobii Tech is the world's leading supplier of eye-tracking technology for integration into consumer electronics and other volume products.Next slide. As you probably know, we focus on 3 main segments within Tobii Tech, PC, VR and niche applications. And we start by having a look at our PC segment. The overall PC market grew slightly in 2019 to a total of about 260 million sold computers. And within that, gaming is growing at a good pace. 20 million high-end gaming laptops were sold in 2019. All in all, over 1 billion people play games on PC.In 2019, Intel has been driving a major multiyear and industry-wide program to take laptops to the next level. This program is called Project Athena, and this emphasizes and promotes smart user sensors in next-generation laptops. The overall slogan of Project Athena is laptop innovation rooted in human understanding. Eye-tracking fits nicely in this theme and Tobii is working closely with Intel and several PC manufacturers to push our solutions as a key technology of Product Athena.In 2019, we took several important steps forward in the PC segment. For instance, our sales in the segment doubled. We started shipments of our new state-of-the-art IS5 eye-tracking sensor. Our largest customer in Tobii Tech is Dell and Dell introduced 3 new gaming laptops for built-in eye-tracking. And this means that Dell now has integrated Tobii eye-tracking across the entire portfolio of Alienware gaming laptops.We launched our new generation of our Tobii Aware solution and Lenovo was our first customer we integrated this into one of their all-in-one PCs. We see significant interest from 7 large PC manufacturers for our Tobii Aware concept to improve privacy, power consumption and convenience.Many millions of gamers have been exposed to Tobii eye-tracking as part of major e-sports broadcasting events and a rapidly growing community of thousands of streamers that use eye-tracking to provide their audiences with a more engaging viewing experience using eye-tracking.Next slide, please. Let's have a look at the VR segment. And the research firm IDC estimates that the total VR and AR markets will almost double to about 10 million units in 2020. And from there to 60-some million units by 2023.Eye-tracking has this year been thoroughly established as a key feature in VR and AR headsets and numerous devices with eye-tracking have come to market in the past year, both with Tobii technology as well as with others. Specifically, HTC launched the Vive Pro Eye with Tobii eye-tracking. This is the world's first major VR headsets with built-in eye-tracking.Qualcomm announced a second reference design with Tobii's eye-tracking based on the Snapdragon XR1 platform. Also Pico launched the Neo 2 Eye with Tobii eye-tracking. This is the world's first stand-alone VR headset with native eye-tracking. Pico is China's leading supplier of VR headsets. And their Neo 2 Eye product is based on Qualcomm's Snapdragon 845 platform. So this is the first product that comes to market-based on Tobii's deep partnership with Qualcomm. Both the Vive Pro Eye and the Neo 2 Eye or -- and at the enterprise market, which is a natural starting point for eye-tracking in VR. This means that volumes are still modest and revenue in this segment are still small. But we expect to see additional headsets in the market during 2020, even more in 2021 and really high volumes in 2022 and beyond.Next slide. In our niche application segments, we service OEM customers that provide highly specialized devices, mostly in the health care space. And there are a lot of exciting applications in these areas. And our customers here are often very innovative. For most of our OEM customers here, eye-tracking is that the absolute center of their product and delivers very high value. This enables us to command high prices with high gross margin for supplying high-quality eye-tracking technology.During 2019, we made good progress with numerous new design wins, both repeat wins with existing customers and numerous wins with entirely new customers. Several of our OEM customers here have also launched products in the past year, and we've also seen solid volume growth with established customers.Some noteworthy examples, for instance, include NovaSight. During Q4, announced a new product called CureSight. This product is used to treat amblyopia, commonly known as lazy eye. It basically uses eye-tracking to blur the image where the patient's dominant eye is looking and, thus, eliminating the need for an eye patch, which is otherwise how you treat amblyopia today.This means that the patient is treated simply by looking at Netflix or Disney+ movies on a special device. The product went through small-scale trials in 2019, with very promising results, and we'll go through larger trials in the U.S. during this year.RightEye is another example. They are already selling a suite of tools based on eye-tracking that enable a range of assessments, including sports vision and concussion testing.In the fourth quarter, they were designated what's called the breakthrough device award by the FDA for a new early diagnosis of Parkinson's disease using eye-tracking, and this essentially means -- this award essentially means that they are now on a fast track for FDA approval. We expect to see a continued good flow of design wins and volume growth for our customers in this segment going forward. Johan, over to you.

[Johan Wilsby, Chief Financial Officer]

All right. Tobii Tech's external revenues were up by a strong 69% in the quarter, where we saw sales in the PC segment contributed strongly. In addition, this quarter, we saw stronger internal sales growth due to the product launch in Tobii Dynavox we mentioned earlier. Overall, sales were up by 55% or 42% adjusted for currencies. Gross margin was up 5.51% primarily due to product mix, driven by increased internal sales.Operating expenses were in line with previous quarters than our earlier communication. EBIT for the quarter was a negative SEK 70 million, which was an improvement year-over-year, but it was hampered by decreased capitalization in R&D and unfavorable foreign exchange-related effects.Next slide, please. For full year '19, Tobii Tech revenue was up 48% year-over-year or 36% adjusted for FX. The external revenue growth at almost 70% was a great achievement from the Tech division. We have seen revenue from customers in the PC segment and from niche applications contributing increasingly to this growth.Gross margin was in line with last year at 48% -- 47%, sorry. The operating expenses in the division were up some 4% when you adjust for FX. And going forward, we anticipate OpEx to stay flat as we have communicated earlier. EBIT for the full year was a negative SEK 294 million, which was an improvement versus earlier year.Next slide. So let's move to the group. At the group level, revenues show continued growth in the fourth quarter and increased by 12% adjusted for currency effects, where Tobii Dynavox and Tobii Tech contributed mostly to this growth, all-time high.Gross margin for the quarter was 69%, down 1 point compared to last year, driven by the impact I mentioned in Tobii Dynavox. Tobii's EBIT for Q4 was a negative SEK 21 million, which was an improvement versus last year and the underlying positive profitability trend was driven by a materially lower growth in operating expenses.Factors contributing negatively to an improved EBIT were decreased R&D capitalization, increased amortization and also foreign exchange effects that affected the operating results negatively. In total, with almost SEK 30 million and more than last quarter. So without these impacts, EBIT would have improved by around SEK 40 million year-over-year.Next slide, please. For full year, Tobii Group revenue reached SEK 1.5 billion and grew by 9% adjusted for currency effects over '18. Again, all 3 business units contributed to the growth. Gross margin for the year was 69%, down 2 points compared to last year. Pro and Tech contributed positively to the gross margin. Tobii's EBIT was a negative SEK 138 million, which was a major improvement versus last year. And going forward, we put strong focus on our financial target to reach profitability for the group in 2020.Next slide, please. Let me end the financials by reviewing our cash flow, which was a negative SEK 40 million in the quarter. The change versus last year was driven by an improved EBIT but counteracted by increasing our working capital. However, we have a continued good trend in terms of cash flow during the year. Our cash position was SEK 208 million at the end of the quarter and excluding Smartbox SEK 185 million.Next slide, please. Tobii has an active acquisition agenda, where the company evaluates potential acquisition candidates on an ongoing basis. Due to the uncertainty around the Smartbox acquisition and the decision of divestiture by the British Competition Authority CMA, several M&A dialogues have been put on hold. A couple of acquisition targets with strong strategic Tobii Group are now identified and Tobii needs to be prepared to act on these opportunities. But for this reason, we plan to do a tap issue on our existing bond loan of around SEK 150 million.That concludes the financials. Over to you, Henrik.

[Henrik Eskilsson, Co]

All right. So we can just take a quick update on Smartbox that Johan mentioned. As most of you know, we acquired Smartbox in late 2018 that were unfortunately ordered by U.K. competition authorities to divest this company. We have appealed that decision, but have also in parallel, prepared for a sale of the company. CAT, which is the appeal instance has made a preliminary ruling that CMA was at least partially correct in their decision in their view. We're awaiting the final judgment from the CAT but are also progressing with the sale. Smartbox is an attractive company, which is obviously why we bought it in the first place. And we have early conversations with several potential buyers.Next slide, please. So to repeat the quick summary of the fourth quarter. The fourth quarter was a strong finish to the year with all-time high revenue in all divisions, including a very strong growth in Tobii Tech. We showed clearly improved EBIT and launched several important new products. We have a strong foundation to build on to work towards reaching our target of profitability for the group in 2020.So with that that ends our presentation part, and we'll hand it back to you, Carol, and specifically to questions from the teleconference.

[Operator]

[Operator Instructions] And the first question comes from the line of Sebastian Olsson from SEB.

[Sebastian Olsson, Analyst]

Sebastian, SEB Equities. So a few questions, if I may. The first one on Tobii Dynavox. So out of this 9% organic growth in the quarter, will you give us any indication of how much of this growth was actually related to the new I-Series? And then secondly, in the report, you mentioned the potential bond issue under the existing loan for M&A. What do you target here? Is it competitors or bolt-ons? And in what division you're looking for more M&A? And then finally, on the Tobii Tech, that you say that the strong growth is coming from pretty much all niches and especially high volumes in the Alien laptops -- Alienware laptops. So what is the revenue split today between the segments -- or sorry, the niche market came in computers and VR? And how do you expect this to develop forward? That's it for me.

[Henrik Eskilsson, Co]

Okay. So the first question was on the revenue growth in Tobii Dynavox and where they came from in the fourth quarter, or rather, how much of it was from the new I-Series and sort of roughly perhaps half of the growth came from the new I-Series and half of the growth came from other product lines, touch products and special education software. And as we mentioned in the presentation, the new I-Series growth was specifically in Europe, whereas the impact of the new I-Series was pretty much neutral in the quarter in the U.S. And I said, the U.S. growth was driven by the touch products and special education software. M&A? Yes. Can you repeat your second questions about that? I didn't catch that properly.

[Sebastian Olsson, Analyst]

Yes. The second question was about the potential bond issue under the existing loan. So what do you target here? Is it to target competitor? Or is it more of a bolt-on acquisition? Yes, what's your targets in terms of M&A?

[Henrik Eskilsson, Co]

Yes. It differs. And generally, we can see opportunities across all of the 3 divisions, and we can -- we also specifically seek out opportunities, both to strengthen sales channels to acquire complementary products and in some cases, also complementary technologies. And generally, we're looking for companies that can drive significant synergies with our existing businesses and create additional value, and therefore, of course, grow top line growth and improve profitability.Most cases, we're looking at EBITDA positive companies. Generally, we seldom see so much opportunities in acquiring competitors, frankly. But it's more things that complement and reinforce our business.And then I know your third question was on revenue split in Tobii Tech. And today, we don't provide detailed numbers on the revenue split within the divisions generally. But today, the PC segment is, from a revenue standpoint, clearly, the largest segment followed by niche applications and VR.And if we look at 2020, we expect PC to continue being the largest segment and niche application second and VR third. The strong revenue growth in VR will probably take a little bit longer into 2021, 2022 to kick into really significant numbers simply because that's when we expect the higher volume headsets to come to market with built-in eye-tracking. Niche applications, we expect to see steady, good, high-growth both with new design wins and existing customers and then PC, we expect to continue to be on a good growth trend in 2020 and beyond.

[Operator]

And the next question comes from the line of Thomas Graf from Handelsbanken.

[Thomas Graf, Research Analyst]

Thomas Graf here, Handelsbanken. I just wanted to -- if you could give some more flavor on the Brexit issues and the U.S. issues for Tobii Pro? How do you think it will develop for 2020? And also what more efficiencies do you think you can make in order to reach the profitability target? Is there much you can do? Or what do you think about that? Some flavor would be good.

[Henrik Eskilsson, Co]

Thank you, Thomas. So we start with Brexit. And we -- again, we saw a material impact on research funding in 2019 due to all the confusion around Brexit and elections and so forth. We hope and we expect that situation to normalize. And we, therefore, do not expect to have those kind of negative effects in 2020. If anything, it should actually relative to 2019, it should switch to a positive relative effect in 2020. When it comes to the U.S. and some uncertainties around research funding, both for universities and other types of government customers, we don't necessarily see that materially changing in 2020. I would personally think that that's likely to kind of continue on the same level. But on the other hand, that means that it should not be as it was in 2019, it was something which we felt was a -- something that pulled down the growth numbers. If we then look relative '19 to '20, I would expect it to be a neutral component. So it shouldn't sort of hamper growth in 2020, the way it did in '19.

[Johan Wilsby, Chief Financial Officer]

All right. So let me ask -- answer your question around the efficiency topic for this year and going forward, as I understood it. I mean it will -- it's not going to be a new, completely new set of initiatives. We have already started on this path, which is simply put is to make sure we have a solid revenue growth. We look for opportunities in terms of COGS down and at least maintaining our gross margin, and we will be very prudent when it comes to operating expense investments. And just to give you a sense, in the quarter, we actually declined operating expenses. And we -- for the full year '19, we were flat. So you've already seen some of the efforts actually resulting in '19. So maybe that gives you a flavor.

[Operator]

We have no further question at this time. You can continue.

[Ola Elmeland, Investor Relations Manager]

Okay. So what we have is we have questions on the web. And as usual I thought we would go through as many of them as we have time to. So the first question is on profitability from both, is the profitability goal for the whole year 2020 or just part of the year?

[Johan Wilsby, Chief Financial Officer]

It is for the full year 2020.

[Ola Elmeland, Investor Relations Manager]

Okay. And how do we define profitability, by the way?

[Johan Wilsby, Chief Financial Officer]

We measure that as our operating profit or EBIT.

[Ola Elmeland, Investor Relations Manager]

Okay. And here, I think it's a question for you, Henrik. Regarding the Qualcomm reference win, do they mean that you supply both hardware and software? Or do Qualcomm believe in hardware? In other words, the IR cameras, and you are just delivering software. Will you get revenue from only software or both software and hardware? How does this work?

[Henrik Eskilsson, Co]

Yes. And the short answer is, it depends. But generally, when we provide an eye-tracking solution for integration and VR headsets, there is sort of 3 main parts of that. One part is the algorithm software that actually runs all the machine mission algorithms to do eye-tracking. One part is the processing platform. And the third part is the actual optical system reference design. It's what is called. And the optical reference -- optical system reference design is essentially sort of the blueprints for an optimized system with cameras and elimination systems and other optical components that we provide and sometimes customized together with a customer that has a VR headset. And that reference design is licensed to the customer. And it is associated with quite a bit of IP and patents and things like that. So that's a license to a design essentially.As part of that, we also sometimes can provide optical components so it depends a little bit on the exact solution of the customer, whether we provide some of the optical components or whether they buy the optical components from a third-party that we typically then recommend. Then we have the algorithms. That's always a part of what we supply. So we always supply the algorithms with a license. And then the third part is the processing. And in the case of a Qualcomm-based handset, then typically, the processing is done on the Qualcomm Snapdragon processors. So that's typically then supplied by Qualcomm. And we have business arrangements with Qualcomm around that. And that then runs our software. If it's a solution that's not based on the Qualcomm system, then often we supply our Tobii Eye chip as a separate component. So that's how it works.

[Ola Elmeland, Investor Relations Manager]

Okay. Thank you. And then we have another question on the goal to reach profitability is before we've done that -- profitability, we've done that. But when should we expect Tobii to be cash flow positive, Johan?

[Johan Wilsby, Chief Financial Officer]

So we haven't stated a separate goal around cash flow. And I'm not going to go into details in terms of where -- the questions on when this will happen. But generally, I would say that cash flow positive will be in 2021 and probably not by -- for the full year 2020.

[Ola Elmeland, Investor Relations Manager]

Okay. And here is a general question on that. What is the conviction level in reaching profitability? Is it much -- must reach event for management? And how would this be affected by the M&A agenda?

[Henrik Eskilsson, Co]

We are very committed to this goal, and we have a very strong focus on reaching profitability in 2020. And we believe in our plans to accomplish this. We do not expect acquisitions, at least not sort of in default scenario to have significant impact on reaching the profitability target.

[Ola Elmeland, Investor Relations Manager]

Okay. I know we have -- we might have another couple of questions from the telephone line. Carol?

[Operator]

And we've got the questions from [ Tommy Helen ].

[Unknown Attendee]

My name is Tommy. I'm a private investor. I was just wondering, Tobii, has in the past, chosen not to focus on the automotive market. And it was never mentioned in annual report last year, but in this report, you mentioned eye-tracking for the automotive market is coming at cost base. And you also mentioned it in the call here. So are Tobii in a place now where you can proactively focus on the automotive markets? And are you in any serious collaborations with major players there?

[Henrik Eskilsson, Co]

So correctly, as you say, we have previously proactively, actually chosen not to focus on the automotive segment. And it's not because we do not believe in it. We have essentially always believe that there is good user benefit and a large potential opportunity for eye-tracking as part of advanced driver monitoring in the automotive market. But it's rather been a question of focus for us. And there's only -- we are doing a lot of different things in parallel in Tobii, and there's only so many things that you can do in parallel with good quality and execution focus. And in Tobii Tech specifically, we have chosen to focus on PC and VR and niche applications as our near term targets. However, long term, obviously we do see opportunities and potentially opportunities for Tobii also in the automotive sector. We are doing business development in that direction. And if the right opportunity materializes, we do have readiness to move into that market.

[Unknown Attendee]

Okay. So there are no active collaborations right now? One more question. Yes, go ahead.

[Henrik Eskilsson, Co]

No, please go ahead, Tommy.

[Unknown Attendee]

Yes. I was -- last question. A year ago, you said that the interesting question is to ask, how fast the adoption rates will be of eye-tracking in PCs. Now one year later, could you give us a clear outlook on what to expect? Or is it still a good question to ask?

[Henrik Eskilsson, Co]

I still think it's a fair question to ask, at least. And I think if we look at a -- if we look with a really long-term horizon, we've been working for a couple of years now actively pushing in the PC market. And it is taking time. And frankly, it is taking longer time to develop a PC market than we had hoped and may probably some of our shareholders as well. That said, though, we still believe very much in eye-tracking in the PC market. And specifically, in 2019, we have taken several really important steps forward. I think the fact that Dell, and Dell, who's actually now been working with eye-tracking, with Tobii and are extremely knowledgeable in the gaming space, are going from one product model to incorporating eye-tracking across their entire portfolio of gaming laptop is a very strong vote of confidence from them.We definitely are progressing in growing the value proposition around eye-tracking both in PC gaming and generally, and we see a lot of interest for our new lower-cost Tobii Aware offering was outside of the gaming market. So we are looking positively on the development of eye-tracking in the PC market over the coming years. But I still think it's reasonable to have a realistic expectation on the growth rate. It's not a sprint, it's a marathon, but it's a very large long-term opportunity for us.

[Ola Elmeland, Investor Relations Manager]

Okay. Carol, we have another couple of questions on the web, at least one, I would like to.

[Operator]

Please go ahead, sir.

[Ola Elmeland, Investor Relations Manager]

Okay. So here is a question from David. Any new updates on IS5 integration in laptops and monitors from new OEMs other than Alienware?

[Henrik Eskilsson, Co]

Nothing specifically that we can communicate today.

[Ola Elmeland, Investor Relations Manager]

Okay. Yes, I think we covered that or anything else to say about -- well, we talked about automotive. Okay. So I think that's it for today. And to [indiscernible], I can tell you that I see your question. But -- I see your comment, but I don't see a question and I don't have you on the phone line. But you please feel welcome to drop me a mail, [e-mail], and I'll do my best to answer your question. Okay. Thank you. With that...

[Henrik Eskilsson, Co]

Thanks, everyone, for attending our earnings call today and for good questions. Have a great continued day, and I'll see you on the next earnings call, hopefully. Bye for now.

[Operator]

Thank you. And that does conclude our conference for today. Thank you for participating. You may all disconnect.