Invisio AB (publ) (IVSO) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the presentation of INVISIO Q2 Report 2020 Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Friday, 14th of August 2020. I would now like to hand the conference over to your first speaker today, CEO, Lars Højgård Hansen. Thank you, and please go ahead.

Thank you very much. Good morning, everyone, and thank you for calling in to our presentation of Q2 and first half year. And as you can see from the presentation, our headline is intensified focus on the law enforcement and security market that I will come back to in just a little second. If we turn to Page 4 in the presentation, we will start with the numbers. And as you can see, our revenue in Q2 was a little lower than last year in the same quarter. However, Q2 in last year was the best quarter in the company history at that point in time. And this quarter also illustrates what we have said regarding COVID-19 impact, that we see certain delays in processes and transportation means between continents. And actually, in this quarter, we had a delivery for about SEK 12 million that was shipped to the U.S. Unfortunately, it was delayed a couple of days, and therefore, it ended up in July rather than June. So had it been there on time, the revenue would have been very similar to last year, but that's just the nature of how we can operate right now. It is very positive to see good gross margin this quarter. And as you might recall, in Q1, we had a lower gross margin due to some cables we shipped, but now we are back on a good track here. Our operating profit is also good, and it contains the increased investments in law enforcement and Intercom that we will come back to. For the first half year, we saw an increase in revenue of 18%. And similarly, a good gross margin, again affected by the Q1 gross margin, which was a little lower. So all in all, we think that this is a stable development during the quarter and the first half year. Good progress in all areas of our business. We did win several small orders for the Intercom systems during the quarter. We also saw some initial orders from new markets in Asia that we think could lead to larger orders in the future. And our order intake, especially of unannounced smaller order, was very good during the quarter. It went to SEK 107 million. Now that is less than last year. But last year was dominated by single large orders. So the so-called underlying order intake was really good in Q2. And our order book was around SEK 100 million at the end of the quarter. Turning to Page 5. Just a quick view on our development in sales and EBIT, as we always do, not so much to comment here, more a visual update of how we are developing. And similarly, on Page 6, it's our usual picture of how our order intake and sales fluctuate between quarters. As you can see, the long-term development in a positive direction continues. We saw an average growth of 20.6% for 2015 until '19. And yes, the positive development continues once you look at the 12-month rolling average. Page 7, then intensified focus on the law enforcement and security market. Now we've already, 3 years ago, when we opened our own company in the U.S., we started focusing more on law enforcement, both in the U.S., but also in Europe and in certain parts of Asia. And we have slowly but surely increased that effort over the years. In 2019, we saw a good breakthrough in Europe, in Germany. We saw a breakthrough in Japan. We also saw a large single contract with the Swedish police. And we have seen a number of smaller orders from police customers and law enforcement in the U.S. So a good platform. And as you might recall in previous quarterly report, we updated our views on the market potential for law enforcement and security, which we think is very favorable, a good opportunity for INVISIO. And therefore, we have decided to put more focus on that area, together, of course, with our other areas for Intercom and for our hearing protection systems for military. So what we have done in the first half of 2020 is strengthened primarily our sales organization in the U.S. and Europe, both to address law enforcement and security, but also for Intercom. We have also increased somewhat our resources in R&D to be able to look at more products to address law enforcement and security over time. So this is an area that, over time, we think is very important for INVISIO and where we can make a huge impact. This market is dominated by smaller local players, and we believe that INVISIO has the potential to become a global brand also within law enforcement and security. Turning to Page 8. Our new Intercom system or mobility, as we call it, is going well. We are introducing it to more and more customers globally, and we are pleased to say that we have been able to meet customers, also have physical meeting with customers both in the U.S. and Europe when it comes to the Intercom. So our marketing is going according to plan. We've also already seen some smaller orders for the Intercom during Q2, primarily from existing customers and Special Forces customers that are starting with a small number of units, and then we'll be evaluating them. And hopefully, later down the road, this will follow the normal scheme that we will see last year orders and then, over time, also be able to move into larger [ company ] customers. So we are still very confident that we have a very innovative, efficient solution for our customers and that this has good prospects of becoming a significant contributor to our growth over time, both within military but also within law enforcement. Now new markets have been a focus area of ours for several years, both in Asia, but also parts of the Middle East and South America. And we have now, in the first half year or especially in Q2, received initial orders from a couple of markets in these areas that we believe might lead to larger orders over time. This is, again, from Special Forces. And then as the development normally grows, it can be adopted by more users in a given country over time. So this is an important way for us to prepare for larger business in new markets over time. Now Page 10. We have, as communicated before, not seeing very many negative effects of the COVID-19 on our business. We are operating, I would say, close to normal in our office in Copenhagen and in our sales offices in U.S., France and Italy. We are, to some extent, at least able to meet customers. Even though most trade shows are still postponed or canceled, we are still in a, I would say, good position because we are well-established in the marketplace. Our manufacturing is still running as normal. And as you can see from our inventory levels, we are maintaining a very good level of inventory, both in Europe and in the U.S. in preparation and anticipation of more orders. You might see that we have not -- or you might have noted that we have not announced any large orders in the first half of the year. We believe this is part of the normal fluctuations of our business. There could also be a certain effect in COVID-19, just certain delays in administrative processes because administrative people are not in the same office. They have to work from home. And therefore, it sometimes takes a little longer. So that's just, yes, a little of the effect we have seen. So delays in certain processes and also that it takes a little longer to effectuate deliveries as we saw during Q2. But INVISIO has a strong financial position, and we are very comfortable with having a good inventory position in anticipation of future orders. And also, that we can use our financial position to continue investing in law enforcement and Intercom area and in our current business. So finally, on Page 11. As I said several times before, we are developing well according to our strategy, and we will continue to invest in both products and organizational development in 2020. We have continued to invest in R&D and sales. And this strong base, together with a clear strategy, gives us good conditions to continue to grow our company. So with that, operator, we are able to and willing to take questions, please.

[Operator Instructions] The first question comes from the line of Viktor Westman from Redeye.

I wanted to first ask about the status of the U.S. Marines result from the -- that it seems this tender came up again. Can you clarify what's going on?

In general, we do not normally comment on tenders or programs that are ongoing also because of confidentiality with customers. So I don't think we will comment much on that more than it is quite normal that as we saw with TCAPS also in the past, even when we work with existing customers, they will come out and ask for new quotes now and then. So that's just part of the process. But as regards to timing or other aspects of the Marine Corp., we are not able to comment more at this point.

Okay. And can you say something about how you can work to decrease the cost of manufacturing and the cost of material? Do you have any specific projects that you can say something about?

Yes. I -- that's a good question. And I think that's also a process that has been going on for several years, where in parallel to us growing and the volumes going up, then we also have, first of all, economies of scale. We are able to negotiate better pricing. And because even though we use external manufacturing, we are still ourselves responsible for negotiations of pricing for key components. So we are able to use our volume and size now to obtain better pricing. In parallel, we are also in R&D, continuously working on improving the cost aspects of all our products in terms of making them quicker to manufacture and so on. So this is an ongoing process where we -- a newly launched product will always be a little more expensive in the beginning, and then we were able to optimize manufacturing and component cost over time. So this is a very highly prioritized area for us.

Okay. Last question also, if I may. What's the situation in your -- in the 3 larger law enforcement program that you won in 2019? Are those still in evaluation phase? Or have they entered the next stage?

I mean they -- for -- if you mean Japan, we have delivered a majority of those products. In Germany, I also believe we have delivered the majority. And for the Swedish police, we have started deliveries and started training with them. So that's ongoing.

But can you say something about what will the next step be?

There, again, we cannot disclose what their next steps are. In the case of Sweden, you saw, of course, that this is a frame order agreement with a certain number of years. So there, of course, we expect that at some point in time, they will follow up with hopefully more orders during the contract. That's the nature of the contract that it runs for some years, and then you are able to buy more products. And for other customers, we are not yet able to disclose what they intend to do.

And your next question comes from the line of Zhou Yiwei from SEB.

A couple of questions from my side. Firstly, the inventory is at an all-time high level, and it increased by SEK 18 million from last quarter. Is it fair to understand that the incremental amount was mainly driven by Intercom? You have built up Intercom for the launch. Could you confirm that?

Right now, the inventory for Intercom is not very large. It is mainly cables, a lot of different cables that needs to be delivered with individual Intercom systems. But there are some millions of Intercom systems in stock, yes, but it's not the majority. You also have to remember that like revenue, inventory levels are lumpy. If the -- the shipment we talked about that got delayed to the U.S. was about SEK 11 million. If that has made it in time, it would have increased our revenue and reduced our inventory. Now unfortunately, it was 2 days late, so it was the other way around. That's just, yes, a fact of life. That happens sometimes. But again, we are very confident about the inventory level. We work closely with many customers. And the ideas we have and information we have about what their plans are over the next 6 to 9 months makes it possible for us to prepare certain parts and products for them, so we can reduce lead times. And we think that is something that the customers really appreciate.

Great. And my next question regarding your gross margin. It's also all-time high level now. Could you please break down your revenue mix to direct sales and external distributors for the quarter? And how does it compare to previous years?

Yes. I would say in this quarter, we had more direct sales than we had in the previous quarter. And in the previous quarter, again, we were also impacted negatively by some cables that we had to sell with a low margin. So in general, I think it varies a little bit between quarters. But in general, of course, the majority of our sale is now direct sale. So that's why we have seen a good development in our gross margin. On the other hand, I think we -- when we look at law enforcement, there we will see, over time, a little lower gross margin for the law enforcement market also because sometimes we use distributors in certain parts. But all in all, we should be able to balance it out at, as we said before, somewhere between 60% and 65% gross margin. But it will vary between quarters also going forward.

And just a follow-up here. Now you mentioned the -- you have also expanded your distributors quite a lot. And is it fair to assume your gross margin will be diluted in the coming quarters?

No, not on a large scale. Again, we will still, this is mainly -- distribution is mainly related to law enforcement and so on. So I think we will be able to offset that with some of our current military business and Intercom business and so on. So I don't expect that they will have a huge impact on the gross margin, no.

My last question, the -- could you elaborate a bit on the OpEx development in the quarter? It continued to increase. But as I understand, the travel expense and cost for trade shows should be very, very low in the quarter. So what has been the main driver for this?

More people. That is in R&D, hiring more people.

Okay. And could you give us an indication about your U.S. sales office, how many salespersons do we have?

Yes, we are currently -- I think we are currently 24 people. So we've been increasing. So we started out with 8, 9 people back in 2017, '18, and now we are up to 24. So now we have an organization that covers the entire U.S. together with some of the distributors we work with. We also work in groups so that we can cover both military, law enforcement and Intercom.

[Operator Instructions] Our next question comes from the line of Jesper Birch-Jensen from ABG.

First off, I was just wondering if you could say something about the dynamics of the small order intake, which was very strong in Q2 here. I mean are these new customers or old customers? Or why do you think it was so...

It's a mixture of new customers, existing customers and also more smaller customers on law enforcement. So it's a good mix of -- but there was a number of new customers, yes, also in the sort of SEK 10 million range. So there was new customers.

And also, I was wondering, you mentioned obviously the delay in transportation during Q2, causing one of your orders to be delayed to Q3. Has this been -- I mean, has this been -- situation been improving since, I mean, in July or...

Yes. I think we've seen this all along that we -- especially the number of aircraft going between Europe and the U.S. have a lot less than they were before COVID. So you have to book in good time. And we have also tried to move more inventory to our U.S. facilities, so we can deliver there. And normally, this would not be an issue. The only issue right now is because it happened just at the end of the quarter, and so it's visible in the numbers. Otherwise, we wouldn't care if it's 1 or 2 days late, and neither would the customer, basically. So it's not an issue. It's just a planning thing, so yes.

Okay. Also lastly, you mentioned that you're expecting that there was -- perhaps administrative processes are delayed with your customers. And I was just wondering, is this -- has this been confirmed by your customers? Or are they -- is it rather your estimates?

It's an estimate. And I've heard from -- I've seen from radio manufacturers also that they say that they expected that there was 1 month or 2 delays in certain processes. Just the simple fact that, yes, people have to work from home and, therefore, just getting documents signed, as an example, it takes longer when you have to send them around rather than just going from one office to another. That's just a simple example. So -- but that's at least what we hear, that it has taken a little longer in certain processes. But it is not -- we don't see that things have been canceled or changed like that. It's just that, yes, certain delays.

Your next question comes from the line of Guy Thornewill from Pie Funds.

Yes. It's Guy Thornewill from Pie Funds. Just a quick one. On I guess to do with the sort of trade issues. And obviously, your largest customer is in America. Is there a chance or is it the case that they have said to you, you're not allowed to sell to certain Asian countries? I don't know what the situation is with China, but could there also be other countries where they might say to you if you want to be a customer still you're not allowed to sell to these guys. Has -- what's the situation there, please?

It has never been the case, but we've always had an internal, let's say, way of operating. And that has more to do with the radios that we interphase to. So we more said that we -- the main radios in the markets come from Harris and from Thales and from General Dynamics and so on, so we simply follow where they operate. And so that it's quite natural with entries we operate in because we follow the radios.

Okay. Okay. I mean, are they -- do they sell into China?

Not to my knowledge. No.

Okay. So at the moment, you don't have any sales into China.

No.

So that wouldn't -- it wouldn't impact you. Yes.

No, no.

[Operator Instructions] Next question comes from the line of Viktor Westman from Redeye.

Again, I was just curious, given the coronavirus and the transportation issues you mentioned, what's the sort of deadline for you to -- before you -- that you can deliver a major order within 2020? Can you do it, say, if you get an order 1 or 2 months before year-end?

Yes, we can. We are well prepared. And as I've said, we've already -- I mean, this is, of course, somewhat of a large parcel. But we have also moved inventory already to the U.S. and so on, just so that we are closer to customers for certain anticipated deliveries. So we are well prepared. And it's not like that it's increasing with a very long time. It's just that you need to plan better for your shipments and so. And, yes.

And just the last question also on the capital allocation. If you can talk a little bit about that. You have a lot of cash. You have strong cash flows, and we know there is not so much M&A potential. So can you say something how you think about capital allocation?

Of course, this is something we discuss continuously with the Board of Directors also. But I think that at this point in time, we -- as you can see, we focus a lot of our -- on our current business in terms of maintaining a quite high inventory to be able to support customers and also investing in organic growth in the form of hiring more people for sales and for R&D. So that's where we start. And there could be, of course, M&A opportunities over time of a smaller size or maybe technology-related or so on, we will not rule that out. But for now, we are focusing our majority of resources into organic growth.

The next question comes from the line of Zhou Yiwei from SEB.

It's Yiwei. The -- one more question on the capitalized development costs. I noted that the -- it is quite much lower in Q1 and also Q2 compared to last year, but then your depreciation has remained relatively stable. Could you please elaborate a bit on this in relation to your pipeline?

I'll hand over to Thomas, our CFO.

I mean we're handling the development phase according to our very strict plans. So I mean there's -- we have -- we strictly follow these. So we are in the end of the process of developing some products. And when we're ready, we're going to start depreciate [ those ].

And then...

So as an example, from a technical point of view, I don't think we haven't started depreciating the Intercom system yet. Even though we are, at least on a grand scale, even though we have just started to sell.

Okay. And could you indicate a bit about the products, a new product apart from Intercom. Is this also something to do with the existing product portfolio or the new product portfolio?

Yes, it is. And under normal circumstances, we would probably have announced the product at this time. But due to trade shows and other things being canceled, we have decided to delay certain introductions at least officially. So we will get back to that once we have a good spot for it.

And can I follow up here. So the -- you mentioned you delayed it, would that affect your sales this year?

No. This is only for, you can say, commercial information or market information. Our key customers are well aware of what we do.

And the next question comes from the line of Anders Knudsen from SEB.

Could we zoom in on the Intercom a bit? So several small orders, which is very exciting news. But what's the value of these orders? And also you wrote, right, that it's going largely according to plan. Is there any delay here that's worth talking about?

No, there's no delay. Again, we have a plan now for visiting a lot of customers and making demos for them and leaving systems with them for testing or selling a few systems to them for testing. So there's, as usual, a long list of customers that we go and visit. And then they will tell us how they will take the next step in terms of further testing and so on. The orders we would typically receive in the beginning would be in the size of, say, between SEK 1 million and SEK 3 million and will contain somewhere between 10 and 30 systems, which is what they would normally start with in the Special Forces group to test them out in a number of vehicles in a certain period of time. And then that's also good for us because it takes some effort in the beginning to train people and also make sure all the cables are done correctly and all the -- yes, the different parts of the system is set up correctly. So it's a very good way for us to get customers and to get feedback and also to be able to use them as reference towards other similar customers.

Yes. So am I hearing you saying that you probably have orders in your hands of roughly SEK 5 million to SEK 10 million for this year? Or am I too cautious there?

Yes. That's what we -- that's I would say we can look at right now. But I'm still hopeful that, that will be more at the -- before the end of the year. But let's see.

Yes, the roof is full of birds.

I'm in their hands as well.

There are no further question at this time. Please continue.

So with that, we would like to thank you all for calling in and, hopefully, talk to you again after our Q3 in end of October. Thank you. Have a great day.

Thank you, everyone. That does conclude our conference for today. Thank you all for participating. You may all disconnect.