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Good day, ladies and gentlemen, and welcome to the Tobii AB conference call. For your information, today's conference is being recorded. [Operator Instructions] At this time, I would like to turn the call over to your host, Mr. Henrik Eskilsson. Please go ahead, sir.
Thank you. Hi, everyone, and welcome to Tobii's Q1 report. I am Henrik Eskilsson, and with me is also our CFO, Johan Wilsby.Let's move to the next slide please. We've had a good start to the year and 2018 has started out really well in all 3 business units. Tobii Pro showed amazing sales growth in the first quarter and a high EBIT margin. Tobii Dynavox is now back in growth, driven by the new touch devices and the software that we launched in 2017. And Tobii Tech continues to have great momentum in the VR segment in particular.Let's start by going through Tobii Dynavox in a bit more detail. As you know, Tobii Dynavox is the global leader in assistive technology for communication. Each quarter, we help several thousands of new users to speak, to access computers, participate in school and work; simply put, to do what they once did or never thought possible.As we've talked about many times before, there is still a huge unmet need for assistive technology for communication that is adapted to individual needs and conditions. As one of our tens of thousands of users, if you have the time, please check out Michael and his story by clicking on the link on this slide.Inclusion and improving accessibility in the broader sense is a strong fundamental trend in society, and even though there's only a limited number of companies that are serving this market with dedicated solutions, the concept of accessibility is gradually becoming embraced and incorporated into workplaces, into schools, into government policies as well as in mainstream consumer and the price, products and solutions. And all of these together contributes to driving awareness and lower scale inclusion.One positive development in this context is Tobii's relationship with Microsoft. Microsoft is highly committed to making their solutions accessible to everyone. And a recent result of this collaboration is that Microsoft is integrating Tobii Dynavox symbols in Microsoft Word Online and Outlook.com, for instance. And this makes documents and the software accessible to users who benefit from symbols to help understand the meaning of words in a document.For Tobii Dynavox, this is not in itself a major revenue stream, but it helps establish our huge symbol library as a de facto standard among users and professionals in the accessibility industry.Next slide please. Toby Dynavox has turned the corner and is now back in growth, which is great to see. In the first quarter, sales overall grew by 4% adjusted for currency effects. In particular, we continued to see very positive market response to the new touch devices and software that we launched in 2017. In particular, quantities of sold touch devices is growing rapidly and we're clearly gaining share in this segment of the market.To gain full effect from these new products across more geographical markets, we're making extensive efforts in localizations of the software and language systems. Until now the new products had only been available in English. In the first quarter, we launched Snap and Core First also in German and Spanish. And during 2018, we plan to add over a dozen additional languages.We also continue to drive innovation and invest large resources in product development in Tobii Dynavox with the aim to come out with several new and important new products in both touch and eye tracking segments during 2018.Johan, over to you and a quick look at the financials for Tobii Dynavox.
Thanks, Henrik, and hi, everyone. Before we start out with our financials, I do want to clarify that our Q1 report follows the new accounting standards, IFRS 15 and 9, and you can find more information about these in the disclosure part of the interim report. And this means that we are presenting restated financials for 2017 aligned to these new standards.As Henrik mentioned, Tobii Dynavox are now back in growth mode following the turnaround in Q4 of last year. Adjusted for currently effects, revenue in the first quarter grew by 4%. Gross margin was down 1 point year-over-year but up compared to Q4 '17, where we had some nonrecurring items.Our operating expenses were influenced by some resource investments, but cost control is present. Growth in expenses adjusted for FX was 6%. The Q1 EBIT margin was slightly down compared to previous year, partly affected by the lower gross margin, coupled with increases in R&D. Over to you, Henrik.
Okay, let's move to Tobii Pro. Tobii Pro provides comprehensive eye tracking solutions and services that enable thousands of commercial companies and academic research institutions to gain unparalleled insight into human behavior, consumer responses, experiences and performance. Tobii Pro is the undisputed market leader in this space with a global market share over 60%.Next Slide. Tobii Pro continued the very strong and rapid growth trend that we've seen in the past quarters. In Q1, we even beat the strong growth of Q3 and Q4 of last year and sales grew by a fantastic 66% over Q1 of 2017 adjusted for currency effects.As in previous quarters, there are numerous factors driving this outstanding growth. Awareness and demand for eye tracking insights is growing rapidly across the broad spectrum of segments and industries. A very strong product and services portfolio is driving both market growth and increasing market shares. And the departure from the market of a former competitor, SMI, has given us a strong additional boost in this quarter as we've been successful in capturing a large portion of their former business.Next Slide. In the first quarter, we acquired the 2 sister companies, Acuity ETS and Acuity Intelligence. Acuity ETS has been Tobii Pro's largest reseller for many years and Tobii Pro's sole channel into the strategically important U.K. market. Acuity Intelligence is a total leading eye tracking consulting services business. And by acquiring these companies, Tobii Pro is strengthening its global presence in both sales and services by adding a direct sales team and our own services branch in the U.K. market.And in addition to being a large market for Tobii Pro in itself, the U.K. is also home to many multinational global brands, which we will be able to serve more effectively going forward back thanks to this.Due to this acquisition, we also obtained an important software for doing eye tracking analytics inside VR environments developed by Acuity. Eye tracking research in VR is an area that is projected to grow significantly across a broad range of enterprise and academic research applications. We see a lot of opportunities to drive long-term growth in Tobii Pro and are investing in further scaling up both our R&D team and global sales, marketing and services organizations.Johan, over to you.
All right. So Tobii Pro continued its good strong growth trajectory from '17 with another great quarter, with revenues increasing year-over-year by more than 60%. We continued to experience stellar growth in all our segments and geographies.Gross margin came in at 74%, down 1 point from last year, but actually up 1 point sequentially. Operating expenses grew materially due to investment both in sales coverage and product development. The acquisition of Acuity was a discrete increase in resources and hence expenses.We saw a significant improvement in our EBIT margin compared to last year. 16% margin in the quarter was driven by the strong revenue performance, some scalability, but also temporary effects in our ongoing investment areas like R&D and sales. This means that some planned growth in operating expenses will occur in coming quarters instead.So back to you, Henrik.
All right. Thanks, Johan. Moving on to Tobii Tech. Tobii Tech is the world's leading supplier of core eye tracking technology. Tobii Tech sells and licenses eye tracking technology in the form of system designs, algorithms, platforms, ASIC chips, sensors and cameras application, software and IP.Next slide please. In Tobii Tech, we address several very large opportunities. Core focus in the near to medium-term is to build up a solid business in supplying eye tracking technology to consumer PC gaming, virtual reality and a range of niche customers. In the longer term we're convinced that eye tracking will be a major technology across a large portion of all PCs, tablets, smartphones and VR and AR devices.Next slide. So-called standalone or mobile VR headsets are a very exciting new part of the VR market and this is believed to become the biggest driver of growth in both the VR and AR device markets going forward. Qualcomm is the processing platform of choice for the major standalone VR headsets, including recently announced devices such as Oculus Go, HTC Vive Focus and Lenovo Mirage.In March, we announced very exciting news as Tobii and Qualcomm have collaborated extensively to integrate Tobii eye tracking into Qualcomm's reference design for stand-alone VR headsets. This integration includes hardware design on the optical system as well as adaptation and optimization of the Tobii EyeCore algorithm for the Qualcomm Snapdragon 845 platform.We believe that this is a very important development. Although it's not a design win by itself, this puts Tobii in pole position to supply eye tracking technology to future generations of Qualcomm-based headsets. The collaboration with Qualcomm also includes go-to-market engagements.Turning to next slide. GDC, which is short for Game Developers Conference, is the world's largest conference for game developers and takes place in San Francisco each year. At the show, we had an overwhelmingly positive response from customers, partners and media. Some of the media quotes on this slide illustrate this quite well I think.And it's fantastic to see that we get the same reactions every time we show and have people actually try out eye tracking technology in VR. Reactions stating that eye tracking in VR is totally natural and intuitive, and even to the point where people say it's hard to imagine going back to an experience without eye tracking once you've actually tried it. Thus we feel that the industry and media are unified in the perception that eye tracking is a must for VR to literally become a virtual reality, and that we have proven that Tobii is the leader in eye tracking.Next slide. Tobii has over the past year worked intensively to obtain this leading position in supplying eye tracking technology to the VR headset market. As we've mentioned previously, we are working in more than 5 large integration projects with major customers and partners and these engagements have continued to press well during the quarter, both technically and commercially.We expect to see the first VR products which will be eye tracking in the market late this year or in 2019 and most of the projects we're working on target products in market during 2019. In addition to the specific ongoing projects, we also have a strong pipeline of several additional potential projects across both VR and AR.As you can see from the table on this slide, and we've shown this table before, IDC projects that VR and AR devices will reach over 50 million units by 2021. At Tobii, we believe that a majority of these will be equipped with built-in eye tracking.Next slide. In the PC segment, we continue to work in close collaboration with our lead customers. In the past months, a number of very significant games have been announced that feature built-in support for Tobii eye tracking. This includes mega-titles such as Far Cry 5 by Ubisoft, Final Fantasy XV by Square Enix, Kingdom Come and Warhammer: Vermintide 2.We also show a growing interest for eye tracking use cases in eSports both in live stream competitions and in trainings. In the E-league Counterstrike Major in January, an audience of more than 1 million live viewers saw games with eye tracking overlays. For us, this was an amazing marketing outreach, driving further awareness and interest for our technology in the gaming community.In the quarter, Alienware also launched an updated version on their Alienware 17 top-of-the-line gaming laptop with built-in Tobii eye tracking.Over to you, Johan, on the Tobii Tech financials.
All right. So revenues in the quarter were up 26% year-over-year or grew by 37% adjusted for currency effects. Internal sales were up 30% and external revenues currency adjusted grew by almost 30%. The gross margin was up 1 point to 42%, primarily due to product mix driving lower cost of goods sold.As we have communicated earlier, we have grown the organization in Tobii Tech significantly over the past few quarters in order to pursue multiple sub-segments, for example, to address the strong interest within the VR market. The largest growth has been in R&D, but we have also increased our resources in sales and marketing. However, this quarter the expense growth was virtually 0 due to some material nonrecurring expenses in the comparison quarter.Next slide please. So over to the group. Our total revenues showed material growth in the first quarter, an increase by 21% adjusted for currency effect. As mentioned earlier, the material growth drivers in the quarter came from Tobii Pro and Tobii Tech.Gross margin for the quarter was 70%, down 1 point compared to last year, but up sequentially from Q4 '17. The Group's EBIT at a negative SEK 37 million, which was materially better than last year despite the material ramp-up in resources in the company.The next slide. So let's round up with a look at our cash flow, which was a negative SEK 65 million in Q1. The change versus last year was driven by the improvement in EBIT, but also due to an increase in net working capital, which was driven by increased sales and accounts receivables.We acquired Acuity during the quarter and the upfront payment impacted our cash flow after investments. We continued to have a strong cash position of almost SEK 460 million at the end of the quarter. That concludes the walk through of the numbers.So back to you, Henrik.
Thanks, Johan. Summarizing the first quarter, we delivered fantastic sales growth and strong EBIT in Tobii Pro. We're back in growth mode in Tobii Dynavox. And we saw continued strong momentum in VR in Tobii Tech. So all-in-all, this was a really good start to the year.With that, we're handing over to the operator and questions from the teleconference.
[Operator Instructions] Our first question today is coming from Mr. Robert Stone calling from Cowen and Company.
Lots of good stuff going on. I'd like to start with Dynavox. Henrik, I wonder if you could just provide a little more color on the commentary about coming new products. And also you mentioned a dozen or so new languages. Roughly, how should we think about the cadence of those things? Is there some particular industry event or something around which you may want to launch new products and languages this year?
Rob, thanks for that question. We're looking at coming out with both new devices both in the touch segment as well as in the eye tracking segment as well as we mentioned in the presentation what's quite important as well is these additional language localizations. In terms of cadence, there are no single particular events during the year that we necessarily drive towards in terms of product launches. So we expect products to be launched at different points in time throughout the year I would say.
Now that your Dynavox segment is back to growth mode sort of 4% ex-currency, how should we think about the secular market growth?
So overall, we believe that assistive technology for communication is a market that has been and will continue to show a gradual long-term growth. If you look at the market overall, it's not a market that grows at sort of fantastic high rate but has a long-term growth potential, has awareness and reimbursement, gradually improves in many countries, both in developed and emerging markets. And we do very much believe in this long-term trend of gradually improving accessibility and inclusion in society. And it goes for really all countries worldwide, we believe. As you probably know, we have expressed a long-term financial target to grow by -- on average 10% per year for our Tobii Dynavox business. And this is a target that also reflects an ambition to grow slightly faster than the overall market growth.
Turning to Tobii Pro, very impressive acceleration in the growth and you mentioned the beneficial impact of one competitor withdrawing from the market and of course the benefit of the acquisition as well. So how should we think about the impact of those 2 things? Have you seen all of the market share shift that you might get from SMI seeding share? And it's clear that you are in a better position to develop the U.K. market now. Should we think in terms of a revenue impact from that taking some time to develop? Or if you could just sort of parse those 2 impacts?
Yes. In terms of sort of taking -- over the market share from our previous competitor, we believe that, yes, we've seen the absolute majority of that effect as we've been -- it's difficult to know the exact numbers, but our perception is that we really have been successful in obtaining an absolute majority of their former business. So we're very happy about that. And obviously what this means is that this together with the other underlying growth, organic growth, that we've had in Tobii Pro has really put Tobii Pro at a new level in terms of revenue. So we've sort of really stepped up the size of the Tobii Pro business to a new level. In terms of the acquisition of Acuity, we only have 1 month of Acuity numbers in the Q1 numbers. So there is only a small effect from the Acuity acquisition in the Q1 numbers. So we expect to see a bit more of that going forward. On the other hand, it's also important to realize that Acuity has -- a large portion of Acuity's revenue has been refilling Tobii product, which means that even before the acquisition, a relatively large portion of Acuity's revenue was part of Tobii's revenues already. So it's not a one-to-one revenue addition there.
Okay. A related question on the EBIT margin for Pro. And over to you, Johan. You mentioned there were some temporary benefits from the timing of planned expense growth, and now we'll get a full quarter of Acuity expenses. So can you help us a little bit understand the size of the impact on EBIT margins in the next quarter for Pro?
Yes. I can try to help. We're not guiding, as you know. But what I -- what we stated in the report is that we have a business plan in place that we're executing on. Sometimes in some of the other areas you have slight delays, et cetera, and that means maybe that not all of these investments have been kicked off and ramped up in Q1. And we foresee execution on these projects and these resources, sort of additions, in the coming quarters instead. So you're going to have to model in some increased OpEx basically that we didn't see in Q1.
So it's not a step function. It's sort of over the course of the next several quarters. That's helpful. And along those same lines, you mentioned the expense growth for Tobii Tech. And I know you're not guiding explicitly, but if you could help us just visualize the pace of expense growth for Tech? Is that likely to be similar, maybe a little faster or slower than we've seen in the recent quarters?
I think in general we have had a significant sort of headcount ramp-up during '17, continuing into first quarter of '18. So that will probably overtime slowdown to a bit. That's our plan. But also if you look at Q1 specifically, we had some nonrecurring items in Q1 of '17 which made that set of expenses be fairly high. That one-time effect will not happen in the following quarter. So expense growth will actually go up since the comparative numbers will not have that item in them.
[Operator Instructions] We do not appear to have any audio questions at this time.
Okay. We have a -- yes, we have a couple of questions from the webcast from [ Mr. Bo Ingarnd ]. And his first question comes here. So can you say something about how the gross margin for Tobii Tech is expected to be affected next year if substantial revenues related to VR in addition to the existing revenues related to gaming computers and so on.
Thank you, Bo. The gross margin profile in Tobi Tech will depend a lot on which business models we have in particular deals that are of significance. And in VR specifically we have 2 main types of business models that we're working with. And currently we're seeing -- in the engagements that we're active in right now we're seeing sort of a 50-50 split between those 2 business models. In the one business model, we work on a pure licensing basis, where we work together with a customer to do integration of eye tracking technology and we license the system design and we license algorithms, application, software and IP. And since it's a pure license business model, in that case we have on those types of deals close to 100% gross margin. In other engagements, we also supply specific hardware components, either our Tobii eye chip, ASIC, or cameras or image sensor components, in which case we typically have lower gross margins on those type of deals. It could be, say, in the 40% to 50% range in terms of gross margins. So it's difficult to say upfront exactly where that's going to land, but again it's going to be -- the gross margin is going to be a mix in VR probably ranging from the very low-end in 30% to 40%, up to very high almost close to 100% and then it's going to be a mixed of different customer deals within that spectrum. I hope that answers the question a bit, Bo.
Okay. So next question is regarding Tobii's estimates for Tobii Tech. In previous communication, they said that the total market sales value could exceed SEK 10 billion per year sometime between 2021 and 2024. And Bo wonders if we can be a little bit more precise about the expected timing of that event.
Yes. I mean, we -- this is how we have communicated and that's of course on purpose. So I think -- I do not think we at this stage believe it's appropriate to define that more granular than that. In addition to that statement, we've also stated as a financial target for Tobii Tech on a stand-alone basis for the Tobii Tech division to be profitable and reach profitability in 2021.
Okay. We have another question from [ Nicholas Veumbloom ]. He wonders if we still expect the current funding to be sufficient to execute on the business plan.
Thanks for that question, [ Nicholas ]. The short answer is, yes, we consider ourselves to be fully funded on the current business plan, with the exception if we do acquisitions that may be a thing that requires additional funding.
Okay. Then there are no more questions from the webcast. Do we have any further questions from the telephone conference?
We do have a question coming in from [ Joachim Hedlond ].
I wonder -- we're all waiting for maybe -- you're breaking through on getting integrated in all this computers and smartphones and so on, but I think you very bad at communicating what this means for the profits in Tobii. Could you please develop a little more about how much you can make if you -- in the PC game or in your -- in VR headset or the different segments?
Thank you, [ Joachim ]. So as you obviously know already, we are profitable in Tobii Dynavox and in Tobii Pro. So that's sort of an important base. If we look at Tobii Tech, once we reach significant volumes, which we are convinced that eye tracking will do over the next several years, and reaching into the millions of units and even beyond that, into tens of millions of units, we clearly see opportunities to create a business in Tobii Tech that over time reaches several billion SEK in revenue. Tobii Tech is the type of business that has a very strong leverage in the business model, we believe, where there is a lot of upfront investments in both technology and building up the market and sales relationships. But as it scales into volumes, you have a very nice leverage, an operating leverage in that type of business, which means that we believe that once we become successful in driving a significant top line in Tobii Tech, that also is likely to drive a very good and strong profit margin in that type of business. We have expressed the financial goal as a long-term financial goal for Tobii Tech to reach profitability -- breakeven and profitability in 2021. But of course, the ambition is to move further from that to reach very healthy profit margins beyond that time point. I hope that, that helps a little bit, [ Joachim ].
I also wonder if there is room for development, like in most areas, to develop new functions with eye tracking technical point of view. Do you have the face recognition with Microsoft? Or is there other -- can you develop in gaming? Do you see new ways that you can develop eye tracking? Is it possible to develop the functions?
Absolutely. I think that eye tracking is still at the very early stage of being utilized to its full potential even in areas like PC gaming or PCs in general where we have been working intensely for some time. So we are quite excited about the possibilities and opportunities to really leverage and make use of eye tracking as a technology in a variety of different ways. One very important focus for us right now is to make sure that we realize the core values of eye tracking in virtual reality. As we are expecting the first consumer devices with Tobii eye tracking in VR to come into the market relatively soon, the core focus is to work together with both device partners but also other players in the ecosystem to realize some of these core value propositions about tracking. And that's both different value propositions where we can use eye tracking as a very powerful input to a VR device basically as a way to control your environment and your experience inside virtual reality using eye tracking but also to realize very strong and exciting benefits like foveated rendering, which is where you drive graphics quality -- high-quality graphics only to where you're looking and thus -- and dramatically improving performance of a VR headset device. So there's lots of work to do there and lots of opportunity to realize these benefits.
Sounds exciting. We're hoping for the best.
It is. Thank you, [ Joachim ].
[Operator Instructions] As we have no further audio questions at this time, I turn the call back over to you, organizers, for any additional or closing remarks. Thank you.
All right. Thank you. And thanks, everyone, for attending Tobii's Q1 Earnings Call today. I hope that we will see you all again at our next earnings call. Have a great afternoon, everyone. Thank you. Bye-bye.
Ladies and gentlemen, that will conclude today's conference. We thank you much for your participation. You may now disconnect. Thank you.