Dynavox Group AB (publ) (DYVOX) Earnings Call Transcript & Summary

All right. Good morning, everyone, and a heartfelt welcome to this earnings call where we will cover the third quarter 2023, summarizing our business in July, August and September of this year. I'm Fredrik Ruben, I am the CEO of Tobii Dynavox; and with me on this call, I have our CFO.

Yes, Linda Tybring, and I will cover the financials in more detail.

Great. We're broadcasting this earnings call from our new head office here in Central Stockholm to where we moved just a few weeks ago, which brings even more excitement to an already exciting development of our business which, of course, we will cover in more detail during this call. So first, in our usual manner, we'll take you through some brief fundamentals about the company. And then we will summarize the main takeaways from the quarter. We will take a deeper dive into the financials. And thereafter, we will open up for a Q&A session. And in the audience, you can submit questions during the live session in the chat function in teams. We, of course, always welcome offline questions sent by e-mail to the above email address of Linda.

Right.

All right. So I'm starting with a short summary on what Tobii Dynavox is about. And this may be a repetition for some, but still fundamental to really understand the company. First and most important is to reiterate our mission and vision, which I know is very dear to not only our roughly 650 colleagues around the world, but also to our ecosystem of partners and investors. And our vision is a world where everyone can communicate, and we will contribute to this via focusing on our mission, which reads to empower people with disabilities to do what they once did or never thought possible. And this also summarizes 2 of our main user stories. The first one, they do what you once did. Let me refer to a person who led a normal life until a diagnosis such as ALS, which rendered her unable to control the body or communicate like before. The other part is they never thought possible, and that can refer to the child diagnosed at an early age with a conditions such as autism, cerebral palsy, where thanks to our solutions, he can do much more than the world around him ever thought possible. And Brook, the little boy in the picture to the right, from Louisiana, USA is one of our amazing young users diagnosed with nonverbal autism, and he's a great example of this. The market that we serve is hugely underserved. Some 50 million people have a condition, so grave. They simply cannot communicate unless they have a solution like ours. Every year, some 2 million people are being diagnosed and yet we estimate that only about 2% of those are actually being helped and the rest, they remain silent. The main reason for this spells a lack of awareness also among the professionals and the prescribers' task to assist these users and in combination with a poor health care reimbursement system. We operate our company on a global footprint. Today, some 3/4 of our business stands out of the U.S. and largely because a reasonably well functioning funding system established some 20, 30 years ago. Our products are sold in about 65 markets around the world, of which the U.S., Canada, U.K., Ireland, Denmark, Sweden and Norway are the markets where we sell directly, while the other markets are served by a network of some 100-plus reseller partners. Our staff is distributed in a similar way as the revenue, meaning that some 70-plus percent of our staff are based in North America with our U.S. headquarters in Pittsburgh, Pennsylvania. And our second largest office is our headquarter here in Stockholm, but we have branch offices in several European countries as well as in Suzhou, China. And as of today, we're roughly 650 employees in total. During the quarter, and I'll come back to that, we added a new division to our team via the acquisition of Rehadapt, which also means that we welcome some 50 new colleagues, mainly based in Rehadapt's office in Kassel in Central Germany. And with prior acquisitions, we have established or increased our presence, specifically in Belgium, France, Ireland and Denmark. Tobii Dynavox will provide a comprehensive portfolio of solutions ranging, if you start from the top on this slide, the content, such as the world's leading library of communication symbols, they're called PCS and the leading solutions off-the-shelf or custom-made synthetic voices of the highest quality with a large diversity in terms of languages, ages and ethnicities. If we then go down one step, we have highly sophisticated communications software tailored towards the type of user, which can, of course, vary greatly based on the need. Further down, we develop and design devices with cutting-edge technology and medically certified durability. That includes communication aid that you can control via eye tracking. And this category has been during the quarter being complemented by the leading product line of medically certified and mounting solutions, which are critical to specifically users that communicate from a bed or a wheelchair. Further down, we have a services portfolio to help our users through the complexity of obtaining the device and getting funding. And last but not least, we're here to help our users, our therapists, our caregivers through the global teams of support resources. We operate this model globally, and it's important to note that each piece of this pyramid here is critically important, also significant differentiator for us, making us absolutely unique. Our go-to-market is predominantly as prescribed aid. So some 90% of our revenue come from public or private insurance providers. And this also means that we have solid paying customers, and we've always been resilient towards changes in the overall economic climate. But now we will go back to focusing on the main topic of the day, namely our earnings report for the third quarter 2023. So looking at the highlights first. We had another very solid quarter when it comes to revenue growth. The growth compared to the same quarter last year sums up to 33%. Adjusted for currency effects, the growth was 28%. And this basically continues the trend that we've seen for the past 6 quarters, and that's pretty strong. And during the quarter, we continued to report good growth across the board, basically in all geographies, all product segments and all user groups. We benefit from a market and an up-to-date -- a market-leading and up-to-date product portfolio continuously improved with new products and features. We continue in the quarter to invest in sales and marketing, including further strengthening our U.S. funding organization. And this is key to navigate each customer through the complexities of obtaining funding for their new communication aid through the public or private insurance systems. Our work to improve awareness and competence continues, specifically among prescribers and professionals and the value of being able to meet our customers in person is of major significance, both internally, but also within our teams as well as with our customers. The North American market continues to show strong growth. It's the largest and most influential market, both for us and for the industry at large, but we have similar growth rates also in Europe and other countries. The strong momentum among younger user base continues, such as children with autism that rely on our products and our symbol communication solutions, and in particular, the software that is called TD Snap. We see a clear trend that the market where we sell directly, including the recently added Irish and Danish markets are the ones showing the strongest growth. The reason is primarily that we have a much better opportunity to effectively train and support the prescribers in those markets, while at the same time, we obviously get a deeper understanding of the local requirements, the processes, reimbursement systems and so forth. Our OpEx levels do increase, but at a lower rate compared to our sales. In addition to acquisitions, we continue to invest in our staff, mainly then within sales and marketing, but we also invest in systems and tools to manage this fast-growing business. We completed the acquisition of Rehadapt engineering in Germany early in September, and I'd like just to come back and shed some more light on that acquisition. So the acquisition of our long-term partner Rehadapt, which we completed on September 1, complements in a very natural way, our product portfolio, but it also strengthens our presence in the German market. The company is absolutely unique with the offering of high-quality, medically certified mounting systems or mounts as we typically refer to them as. A mounting solution is something that either we or our local dealers or the prescribing entity combined with a communication aid when these are fixed to, for example, a wheelchair or a bed. The acquisition means that we can create solutions that make it easier for our users to access and use their communication needs, but also improves our ability to better design and innovate further around the physical setup of each individual user. And Rehadapt will remain an independent subsidiary, under its own brand, its own organization, and they will continue to serve the entire industry and all customer segments. And as mentioned, we welcome some 50 new colleagues, mainly in the Kassel office in Germany, but also a smaller team in the U.S. In 2022, Rehadapt had worldwide revenues of about EUR 10 million and an EBIT margin of roughly 20%. And the sole seller and CEO, Uli Ehlert, will remain in position with the company. Tobii Dynavox will be paid some EUR 16.6 million upfront in cash with a potential earn-out of up to EUR 3.5 million after 12 months based on the financial development of the company and the deal was financed from our own cash and an extended credit facility with our bank. But Linda, over to you for some more financial details.

Yes, sir. Thank you, Fredrik. And I'm super happy to present our revenue for the quarter coming at SEK 424 million, a 33% year-on-year growth. And adjusted for the currency effects, the growth was 28%. M&A contributed with 3%. Hence, the organic growth was solid 25%. And this is continuing a trend for the past 5 quarters, so the sixth quarter in a row. North America continues in strong growth, but this remains the case also for Europe and rest of the world. And as Fredrik mentioned, we are seeing growth in not just regions but also products and user groups. The gross margin ended up at 68%. The main factors behind the improvement are very close of the 2 percentage points, where normalized component, shipping costs are lowering and with the sales price increase. The price adjustment that we announced earlier in 2023 impacted the income state with around 7%. We should also note that prior year's gross margin was positively impacted by foreign exchange and around 1 percentage point, what we call quantified as nonrecurring. So EBIT for the quarter was SEK 48 million, 11.4% versus 7.8% last year. Excluding nonrecurring costs of SEK 1 million related to the acquisition of Rehadapt, EBIT was SEK 49 million and the margin 11.6%. Our OpEx increased by 18% organically, excluding the nonrecurring items of SEK 1 million. The OpEx increase is mainly related to staff increases in sales and marketing organization, new agreements regarding salaries and benefits that came into force, April 1st. We've also invested in systems and tools to manage the growth of the business, and this will also contribute to the cost increase. The net R&D cost increased by SEK 7 million related to both normalized development costs but also increased depreciation. Depreciation increased mainly due to major product launches during the last 12 to 18 months. If we also look at earnings per share, this has more than doubled versus last year from SEK 0.15 per share prior year to SEK 0.33 this quarter. Cash flow after continuous investments was positive at SEK 35 million. Cash at hand ended up at SEK 140 million. Net debt was SEK 663 million. As communicated earlier, to finance acquisition of Rehadapt, we have expanded our credit facility with an additional term loan from Swedbank of SEK 100 million to a total facility of SEK 800 million. We have amortized our credit facility of SEK 13 million in the quarter, and the total used credit facility and term loan at the end of the quarter was SEK 745 million. And net debt over the last 12 months EBITDA was 2.4x, which is in the middle of the range of our financial target of the debt leverage between 2x and 3x. And this is including the financing of Rehadapt acquisition. That was a lot of numbers, Fredrik, back to you.

Great. Thank you, Linda. So before we open up for questions, I'd like to reiterate the main takeaways from the third quarter 2023. We continue to show solid growth, and this is a trend that started already in the beginning of 2022. In absolute terms, we grew revenue by 33% and adjusted for currencies, the growth was 28%. We continue to see revenue growth across all geographies and all product segments. And this is a clear trend that markets where we -- and this is also a clear then that markets where we sell directly to the end customers are the ones that actually shows the strongest growth. Our profitability continues to move upwards with price adjustments in effect, normalized cost and an organization that scales better day by day. The price adjustments communicated earlier this year impacted the income statement by roughly 7% during the quarter, and we expect to see the full effect of that at the end of this year. The previously acquired companies contributed well and are developing favorably, and given the unprecedented growth that we are accelerating our investment in systems and tools to ensure that we can cater for further growth and increase our scalability. We reiterate our long-term financial goals, which reads: To over time, maintain an annual growth adjusted for currencies in excess of 10%. And obviously, this is a target where we're currently overshoot with quite some margin. At the same time, we want to reach and maintain an EBIT margin of 15% or more. This quarter took another big step towards this. And with continued growth, strong gross margin and OpEx levels that is normalized, we remain confident that we will reach and maintain this. We want to maintain a net debt ratio over the last 12 months EBITDA of between 2x to 3x. And the outcome, as Linda mentioned, in this quarter was 2.4%. And once we have strengthened our balance sheet somewhat more, we will distribute dividend provided other more compelling alternatives such as acquisitions do not take preference. With that said, we are handing and welcoming into the studio here, [ Christian Hall ], who will take questions from the audience. Hi, [ Christian ].

Hi. Great to be here. Okay. So we have a couple of questions from Oscar Ronnkvist at ABG Sundal Collier. And the first one is regarding how should we think about selling expenses as a percentage of sales going forward? It seems to have scale fairly well this quarter. What is your hiring plans like going forward.

Linda?

Yes. I mean you should expect that this will continue to grow because we need to add more people to be able to continue our growth journey. But of course, there are some scale effects that we would most likely see coming quarters as well.

Okay. And regarding -- Fredrik, you said the company is expected to reach an EBIT margin of at least 15% by the end of 2024 in an interview a couple of weeks ago. Can we assume that it is on an annualized basis and that it should be accomplished excluding the margin-accretive Rehadapt inclusion.