Airthings ASA

OSE:AIRX

Earnings Call Transcript

[Emma Tryti, executive]

Good morning, and welcome. Happy to see you here in the room and also, welcome to those following us online this morning. As we are wrapping up 2024, I'm happy to present our Q4 results together with our new CFO, Helge Øien.

[Helge Øien, executive]

Thank you, Emma.

[Emma Tryti, executive]

Much welcome to you, Helge. In 2024, strong demand amongst our consumers at times exceeded our ability to deliver. I've said it before, but consumers' perceptions around our products are changing from nice to have to must have. So we knew it would come, but it came a bit earlier than anticipated.

So we have had periods of being out of stock. I would say we have managed to capture a large share of the volume, but not the full share of the value. And we are entering 2025 with a lower cost base and a leaner organization in accordance with our updated strategy to capitalize on the changing market dynamics and these consumer perceptions.

And geopolitics and rivalry between the U.S., China and Europe, create uncertainty for all of us. And companies exporting to the U.S., us included, are awaiting the toll barriers from Trump. And even though Trump, this weekend, announced toll barriers to Mexico, Canada and China, it's still too early to know how his politics may affect us.

But what we do know with certainty is that the awareness around indoor air quality increased at a rapid pace throughout 2024. It's driven by personal health focus and safety concerns related to radon levels and wildfires and the wildfires in California will continue to drive that demand.

And as I said, we have managed to capture a fairly large share of the volume. We shipped 320,000 devices last year corresponding to 40% increase compared to the year before. In Q4 alone, we actually shipped 60% more compared to the equivalent quarter last year. This has also resulted in record high revenues for the Consumer segment of USD 7.9 million. That's up 12% on a reported basis and 25% if we adjust for a onetime item, which is related to the buyback on inventory that we flagged in the Q3 report.

And I present in my first quarter for Airthings at Q1 last year, and then I introduced a new goal, which was to reduce our days of inventory from 384 to below 250. And I'm pleased to share that we manage that. And despite the positive trends with demand and awareness increase. Margins came under significant pressure.

And the drop in margin in the Q4 is unsatisfactory. So going forward, we will move fast to adjust to the new normal with indoor air quality as a must-have. So all in all, revenues were stable year-over-year despite the one-off in the Consumer segment of USD 0.9 million and a 31% decline in the Business segment. But listen to this, in the Business segment, if we adjust for a large deal of $1.4 million in the equivalent quarter last year, we actually grew by 11%.

And the underlying pipeline is pretty healthy, again, driven by repeat sales from large Fortune 100 companies. And this graph, it illustrates what I referred to as unsatisfactory margin development in the quarter. This is a drop of 18 percentage points.

So let me explain the factors. So firstly, it's driven by one-offs, which is the buyback of inventory and impairments. And secondly, it's by the simple fact that a significantly larger share of our revenues came from the Consumer segment compared to the Business segment when we compare it to the last -- to the quarter last year.

And thirdly, we have sold high volumes at preplanned high-velocity events at terms negotiated at a time, when demand was lower. This is a significant area for improvement. I'll come back to it later. ARR came in at $4.4 million, up 6% year-over-year. And the increased demand, it's driven by something as simple as increased awareness of 2 things. The first is the radon risk and the other is increasing instances of wildfires.

And the graph here illustrates a spike. It's a Google search for radon detectors is at an all-time high. And what happened actually here at the 2024 and, especially the last quarter. It should be seen in context of a release of research from the government in Canada, showing that as many as 1 out of 5 Canadian households may be exposed to dangerous levels of radon. And when people start to learn about this and to learn that radon is actually the leading cause of lung cancer among nonsmokers and responsible for more than 21,000 death in U.S. alone on a yearly basis.

Then something happens in the minds of people. They start thinking maybe this is something it might be present in my own home. And when you have asked yourself that question, what happens then, you just need -- you get this urge of testing it. And a pretty common behavior amongst American consumers is that you go where you usually go, which is to Amazon or your local retailer.

And when you search for radon detector with Amazon, Airthings come up as the highest-ranked product, 5.6 out of 5 stars over 10,000 ratings. So that's the way it goes. And it's also shown by 25% increase, not only on a quarterly basis, but also on the last 12-month basis. And as more and more people now considering indoor air quality solutions as a must-have, more people will also test. 7 out of 10 Americans have still not tested.

And as this increases demand will follow, which will be good news for Airthings. Devices registered. That's an important metric for us because it measures when our products get into the hands of our customers. It grew by 12% amongst consumers, 22% amongst businesses year-over-year. And then you may ask yourself the question, why did it only grew by 12% amongst consumers when shipped devices grew by 60% in revenues by '25.

The explanation from that is, it's mainly 2 factors. So for -- the first one, there is not a one-to-one correlation between sell-in and sell-through. There is a lag there. But more importantly, this time, a pretty large share of our shipped products in Q4 are related to our best-selling products, ease-of-use, radon detector, which is not connected.

And in the Business segment, the positive underlying momentum that we talked about in Q3 continues, also helped by a shootout from Amazon as our B2B customer sharing the rollout of 30,000 sensors globally. And as the interest of indoor air quality solutions is on the rise, we will meet that demand by introducing our next-generation radon detector.

It is an improvement when it comes to the sensor technology and the screen. But in addition, this easily connects to our app, where our consumers can follow their radon experience and also get advices on how to mitigate the risk. So this was launched at CES in January this year and will be available for consumers before summer.

I'm also happy to share that we have just signed an important contract with one of the largest U.S. retailers, Target, which will increase our sales outlets for our products from 1,800 to 2,300. So the agreement covers around 500 stores, plus their digital sales channels. And sales will start from the second quarter this year.

So our position is stronger. Our brand is better known. The awareness is on the increase, and we will monetize on this by a disciplined execution. So we will channel the rising awareness into airthings.com by focusing on top funnel activities. And we will enhance campaign steering and unit economics to respond to the increased demand. And we may make sure that we do have sufficient levels of inventory avoiding periods of being out of stock.

And we do see that we are pleased to see that the strategic change we did in the Business segment is paying off, and we will continue to hunt the big deals in the Business segment. So we are adapting to the new normal and margins will be normalized and we are confident in our approach.

So with that, I hand over to you, Helge, and happy to hear you digging a bit deeper into the numbers.

[Helge Øien, executive]

Thank you, Emma. Very excited to be here for my first quarterly presentation. So I will guide you through the numbers, give some more color and then, of course, take you through cash flow and balance sheet as well. But let me start with the Consumer segment. So Airthings, we had revenues of roughly $38.5 million last year. Almost 80% of our revenues are coming from Consumer segment. So it's very important to follow the trends in Consumer.

Like Emma said, we see strong underlying momentum with 25% growth. That's impressive. We're not able to kind of convert the growth in units to revenues, but 25% is still an impressive number. Like we flagged in the Q3 report, we have a negative revenue effect from a buyback of inventory related to a default [ battery ] on one single product. We said it could impact revenues up to $1.2 million. What we book now is $0.9 million.

Like Emma said, in the Consumer segment, you see a great demand to share the Canada story, which is a big driver also here in the numbers, together with the American market. So 12% reported growth, 25% underlying growth. Okay. Let's look at the margins, what's happening there. As you can see, margins are declining from hovering around in the high 50s, down to 37% this quarter.

We talked about 2 onetime items, one on revenues, and we also have $200,000 on the COGS. When I adjust for that, we are at around 45% underlying margin in the Consumer segment this quarter. Why? Primarily driven, like Emma said, of sales mix and high campaign activity in fourth quarter.

Over to business. Business is roughly 20% of our revenues, is characterized by higher margins. We have a quarter where we're comparing to Q4 '23 with one significant large order of $1.4 million. So we're down 31% from that level. But throughout the year, we've seen a gradual buildup coming from a solid pipeline with repeat purchases from Fortune 100 companies, and like Emma said, we're also chasing those new major orders as well.

Small onetime item also in the B2B segment of $100,000 related to inventory impairment. Adjusting for that, the gross margin is relatively stable at 73%. Recurring revenues. Emma mentioned 6% growth. Recurring revenues for us are coming from our Pro segment and the Business segment. Stable development, both segments contributing to the growth of 6%.

We are chasing additional businesses here. And of course, we will continue to drive for new business here. Large rollouts, like the one you mentioned with Amazon, will, of course, support, but it's been a relatively stable growth trajectory the last 5 quarters.

Before I go into the full P&L of Airthings, I just want to summarize a few onetime items that affect our quarter and the yearly numbers. I mentioned already the top line effect of $900,000 that we also flagged in the Q3 report. In addition, we do annual impairment testing. On the inventory, we have impaired $300,000 in total, $200,000 coming from Consumer, $100,000 in Business that affects our cost of goods sold.

Further down in the P&L, you will see there is a goodwill impairment coming from the Business segment of $2.6 million, and we also have reevaluated our deferred tax asset aligned with our updated business plan and the growth trajectory, and we have decided to take an additional tax expense of around $6.6 million.

All of this is kind of linked to end of year and annual impairment testing. So we report stable revenues, $10.3 million for the quarter, $38.5 million for the year, flat on a reported basis, underlying trends, I would say, are solid, especially in the Consumer segment. Cost of goods sold, impacted by some of these onetime items. The margin, of course, impacted by this. Adjusting for the onetime items, we see a margin at a significantly higher level. I'll come back to that on the next slide.

Employee expenses are down. We did a reorganization in Q3, and we see that that's helping driving down the OpEx costs. Other OpEx, I will come back to. We see an increase linked to the top line. And then you will see the effects that I mentioned earlier on impairment and on the tax side as well.

Okay. We mentioned a few times the margin development. Pro is characterized by very high and stable margins. Expect that to continue. Then we have the Airthings margin of 45%. If I adjust for the onetime items, we are at 52%. We'll come back to more about the outlook on the margins later when Emma is back on the stage.

OpEx. We report an increase in OpEx this quarter. What's driving that? We see an increase of around $300,000 coming from R&D. That is because last year, we had a grant -- a public grant that helps us on the cost side, and we are also capitalizing less this quarter due to the phasing of the different projects we have at the moment.

General and administrative costs, stable. We have done the reorganization. We are strict on cost control on daily spend and so on, and we expect to continue to see kind of stable costs there. Then Emma mentioned that we see high growth in the volumes. So we ship volumes around the world, especially to Canada and U.S. And unfortunately, that also drives additional freight costs. So taking us back around $300,000 on the cost side, but it's linked to the top line.

Last category is sales and marketing costs. And the main driver here is also top line because these are mainly linked to commissions and the fact that we have high growth, especially in the Canadian market.

Inventory. We mentioned that we met the target of reducing the days of inventory to down below 250 days. We met that target even when we adjust for the small impairment of the inventory. The value of the inventory is down to around $10.3 million. If you're going to go a bit deeper and see what are those $10 million made up of, we see that components is roughly 1/3, and Business and Pro inventory is close to half.

While consumer finished goods is less than 20%. And this is linked to what Emma mentioned in the intro, that for some products, we were actually sold out for parts of the quarter. So this is a focus area for us to have a healthy inventory, working with kind of having a good product pipeline on the high-volume units, but we still need to work on managing, especially the B2B inventory side.

On the balance sheet, just a few things to mention. Main changes compared to Q3 are related to what I mentioned being the goodwill and tax reevaluations. Other than that, we ended 2024 with close to $9 million in cash. And we actually have positive cash flow from operations in Q4.

Investment activities was close to 0. In total, when we report $9 million or $8.8 million at the end of the year, remember that we also have a credit facility with Danske Bank, which is now extended throughout 2025 of $5 million, giving us roughly $14 million in liquidity at the moment.

So Emma, if you join me back for a few concluding remarks, and then we'll go through the outlook together.

[Emma Tryti, executive]

Yes. Thank you. So you might ask the question whether we will be able to capitalize on this increasing demand continue delivering the same kind of revenue growth while we are recovering the margins. And the answer to that is, yes, we do really believe in our approach to do so.

So we will capitalize on it by a very disciplined execution. And we have also started to plan for it with the way we have innovated our products and the way we will continue to position ourselves in the market.

So with that, we wrap it all up with the outlook, which remains positive. So we are expanding the market for air quality monitoring, not only our own position, but the category in total. And revenues in both Consumer and the Business expected to grow in the first quarter of 2025. And as we have mentioned a couple of times today, the underlying growth in the Business segment has never been healthier, and we are continuing to hunting the big deals. And the particular high demand for indoor air quality solutions is related to the radon products in the Consumer segment. And it's also supported by high sell-through numbers in January in all -- across all our channels.

[Helge Øien, executive]

All right.

[Emma Tryti, executive]

Can you just share a bit on monitoring the tariffs?

[Helge Øien, executive]

Yes. You mentioned already. But of course, the world is a bit nervous at the moment, especially the European Union and also Norwegian businesses. So Airthings, we have around 80% of our revenues exposed to Canada and U.S. Most of it is related to U.S. So we are exposed to potential tariff changes. As you all know, we don't know how it's implemented.

But of course, this is a risk factor for us and something that we're monitoring and see how we actively can mitigate over time. So important to be aware of. Then strong growth on Consumer for Airthings, but margin weakness. We -- for the Q1, we say that we expect the margin to -- gross margin to normalize. What does that mean? Well, Emma and I've tried to mention a few onetime items and also some seasonality and campaign activity that impacted Q4.

We do not expect that to be the same in Q1. Yes, we have very high sell-through numbers in January, but costs related to that have already been taken in the fourth quarter. In Q2 2024, Airthings announced a new strategy when you joined Emma guiding for positive EBITDA in the second half of '25 and for the full year 2026.

Our plans still support that outlook. So that's why we're repeating it here. Then guiding on revenues for Q1. We are expecting revenues in the range of $9 million to $11 million. Rewind 1 year, same period, we had $9.5 million. So we expect growth, and we expect it, like you said, in Consumer and in the Business segment. So with that, we've given you some kind of insight into our expectations for both Q1 and also, on the profitability side for 2025. All right.

[Emma Tryti, executive]

Helge, would you just like to mention we're not guiding here on ARR?

[Helge Øien, executive]

Yes. Previously, we have had ARR as a guiding parameter. Like I mentioned earlier, the growth has been relatively consistent. We expect ARR revenues to be relatively stable. It can be impacted positively if we land large new deals, but we have decided to guide only on revenues going forward. Yes.

[Emma Tryti, executive]

Thank you all for joining and listening.

[Helge Øien, executive]

Any questions from online?

[Unknown Executive]

We have no questions from the online audience today.

[Helge Øien, executive]

All right. Should we then wrap up?

[Emma Tryti, executive]

Crystal clear messaging, yes. Yes.

[Helge Øien, executive]

Thank you, everyone.

[Emma Tryti, executive]

Thank you.