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

Ladies and gentlemen, thank you for standing by. And welcome to the presentation of INVISIO Q3 Report 2020. [Operator Instructions] I also must advise that the call is being recorded today, Friday, the 30th of October 2020. And without any further delay, I would now like to hand over the call to your speaker today, Mr. Lars Højgård Hansen. Thank you. Please go ahead.

Thank you very much, and welcome to our call. The main message for our Q3 report is a strong order intake and continued investments in both sales and R&D. We saw strong order intake and stable sales growth during the quarter. We also saw some delays or postponements in larger programs as a consequence of the ongoing pandemic, but we are convinced that at some point in time, the world will get back to normal. And therefore, we continue to invest in important areas of our business because we believe that the long-term need for good hearing protection and communication in noisy environments is not going to either decrease or go away. So let's look at the numbers on Page 4. Our revenue during the quarter was 9% up. And if we account for currency, it was 14% up compared to last year, standing at SEK 119 million. And for the first 9 months of the year, we have an increase of 15% compared to last year. What was a little lower this month was our gross margin at 50% compared to 57% last year, and we now are at about at 57%, 58% for the first 9 months. And I would like just to put a few comments onto that. As we have said, I think very precise and consequently over the previous quarters and years, we believe that our own portfolio of headsets, control units, cables, Intercom will be able to sustain a gross margin of somewhere between 60% and 65%, and we have been also at that level for the full year 2019. So our own developed products is the core of our business, and we have a healthy gross margin for those. What is happening is that INVISIO is also more and more seen as a system integrator, a one-stop shop, if you like. Many of our customers sees us as the hearing-protection expert, the headset expert. And whatever need they have, whatever legacy product that might have, they come to us and say, "Can you also help us integrate this? Could you help us with a few units of that and so forth?" And when we do that, we are a little bit acting as a reseller. We resell other people solutions. We sometimes also have to make cables with very expensive connectors or legacy cables that are difficult to get hold of. And where we -- for these types of, what we call, third-party products, we are seeing a gross margin of somewhere between 30% and 35%. These are products we don't spend any development time on. We resell them and we integrate them to our system. And in certain quarters, which also happened in 2019, we do sell considerable amounts of these types of products with a lower margin. So it doesn't mean that suddenly, our gross margin is going in the wrong direction, it's just a matter of the combination of our own products and certain third-party products. And for us, the margin money is important. On the gross margin, we -- as long as we have full control of our own products, it is fine that we also sell third-party products with a lower margin. So that's the explanation for this. In combination, of course, also, we are a little affected also by the currency decline in the quarter that affected our revenue and also, of course, our gross margin. And when we then look at the operating margin, it is subsequently also lower because the gross margin is lower for the quarter. The operating margin is, of course, also influenced by our OpEx level, which is stable. We have 2, you can say, direction for the OpEx. Our number of hirings have still increased. We have more people, which has increased the OpEx. On the other hand, due to the pandemic, we are not able to travel. We are not able to go to trade shows and so on. So we are saving money on that account. So these are the highlights regarding the numbers. As I said, the order intake was very strong, SEK 212 million, and this is actually the second strongest quarter in the history of the company in terms of order intake. Turning to Page 5. Yes, we will just pass that quickly. That's just the usual update on our development in sales on the left-hand side compared to previous years and also in the EBIT compared to previous years. So not so much to comment there. On Page 6, we also have our usual slide of following the order intake and sales and showing the fluctuations between the quarters. And on the sales side, on the left-hand side, you can see our actual sales per quarter, but also the rolling 12-month average, which is having a good positive trend. And on the right-hand side, you can see the development in order intake and the good result we had in Q3 on order intake. The order intake, as we tried to explain in the financial report, is of course, a consequence of the growing market position that we have in all parts of the world. A few years back, INVISIO was relying on a smaller number of customers. We were also relying on larger programs. In 2020, we only announced 1 large program in Q3, which was a large order, which was SEK 44 million from a customer in the U.S. Apart from that, the rest of the order intake are a combination of new orders from new customers, follow-up orders from existing customers. They are spread across geographies, and they're also spread across military customers, law enforcement customers and some orders for our new Intercom systems. So it's a much healthier mix of customers, if you like. And again, we think this is a natural evolution due to the fact that we are a larger company, and we are much more present in many parts of the world and with many more customers. So it's all good. Okay. Page 7. As I said, we did get 1 large order from an existing customer in the U.S. This was placed through our U.S. contract, so-called GSA contract. And again, this is from an existing customer. So it's a follow-up. They're going to expand to more users, and we expect the deliveries to take place in 2020, so in the fourth quarter. On Page 8. Even though we are restricted from travel and going to trade shows, we continue to see a very high interest in our new Intercom system. We have been able to go and visit certain customers and show them our Intercom, and it is very clear that the concept of the Intercom is immediately understood. It is something that, I would say, almost everybody we meet, see the need for. And we have also already seen, I would say, good interest and also a number of smaller orders. And in the third quarter, we had another 3, 4 small orders from Special Forces in U.S. and in Europe. And one of these were the U.S. Army's second Security Force Assistance Brigades, SFAB, that has been a customer of ours for a long time. And they are now embracing this new technology with the Intercom system. And it's a good reference for us, both in the U.S. and in Europe. So I would say that despite the current pandemic, we are doing well on the Intercom. As we've said also previously, we expect to see smaller orders during 2020 and hopefully, some increasing orders during '21 and onwards. There's no doubt that this little smart portable system is very well understood, and it will be a very important part of the INVISIO solution going forward. On Page 9. We -- as we've also said many times, we invest a lot in R&D and in our sales and marketing. And during the quarter, we introduced our new over-the-ear headset called in INVISIO T7. Traditionally, INVISIO has been the market leader in in-ear solutions and control units and cables. But we can, of course, see that there is a very interesting market for over-ear headsets as well. Actually, many of our customers are telling us that they would actually like to have more than 1 headset, depending on what type of activity they have to do and which part of the world they're going to and so on. So this is, to some extent, going to be additional sales to many of our existing customer. And as always, when we launch new products, we will have competitive advantages, and we will have technological advances. And on the T7, there's a number of new innovations. This is the first submersible over-the-ear headset, and you can actually jump from an aircraft at 10 kilometers height and go directly into water and down to 10 meters underwater. It can be used underwater down to 10 meters, and it is very unique in that capacity. It is also unique in a number of other ways. It has 3 different wearing styles that you can exchange between without used tools. It has also a very high level of comfort with some patent-pending 3D cautions that we have developed internally. And also, it has a fantastic audio, what we call, INVISIO Audio because it is connected and part of our control units and part of our personnels. So everything around, some quality situational awareness is top notch in this one. So again, this is a headset that has been -- during the development process, we've had customers involved. So we expect this to be a winner in the market for INVISIO and will help us advance our market position. During the quarter, we have already received the first orders in the 100s for the INVISIO T7 headsets. So this is going to be an important part of our portfolio going forward. On Page 10. As I said, we also work with other companies when there is a market need and a requirement for something that we do not necessarily have in our portfolio at this time. And an example of that is a Danish audio company called N-ear, that has developed a very -- as you can see on the picture, a very discrete audio tube that is intended for listening. So when users are in a situation where they need to be very discrete and they need to listen only and be, yes, on an important activity, then this is a very good solution. So this will broaden our offer to either be an independent product or integrate with our system for especially law enforcement and security users, but also in certain military applications. So we have signed a global sales and distribution agreement with the company N-ear, and we really look forward to advancing this relationship and see the outcome of our efforts over the coming years. So Page 11. On a final note, business as usual. We are developing according to our strategy, and we will continue to invest in our product and organizational development. We do what we think is right long term for the company in terms of our organization, in terms of our investments. And again, even though there is a global pandemic right now, we, as all others, I guess, very sure that this will disappear and the need for advanced hearing protection and communication is there and will not go away. And we have a very bright future ahead of us with what we have in our portfolio. So with that, that concludes the presentation, and we are now ready for questions, please.

[Operator Instructions] So our first question is from the line of Yiwei Zhou from SEB.

Lars, congrats to the strong order book. And a couple of questions from my side. Firstly, so actually on this over-the-ear headset T7, is it possible for you to give us an indication of the area selling price and also gross margin?

I will not give you -- for competitive reasons, I will not give you the selling price, but I will say that the gross margin is within the INVISIO predictions of 60% to 65%. So this is a product that is developed for being competitive in the market, but also something that we, of course, can make money from, and that can help us continue to develop more world-leading products. So we have a healthy gross margin on that.

Just a follow-up on this. Then is it fair to assume you were priced very competitive compared to, for example, the product from 3M, the Comtac version?

I think that, again, this headset will exist in different variants as well, and this is -- headset is unique in the way that it connects to our system. So of course, we will sell it individually, but most of the time, our customers will interface it to the existing INVISIO system they already have. So therefore, we will not in many -- most cases, we will not be in direct competition with someone because it is part of our system. And also, what I did not mention is that it has an absolute leading level of hearing protection. So for those that require the absolute highest level of hearing protection without going to an in-ear solution, we are the one. We do have the highest level of hearing protection.

All right. Fair enough. And is it possible to give an estimate of the market potential?

It's big. I would say that it is big because both the in-ear and the over-the-ear markets are very substantial. And as I said, sometimes it's a matter of choosing between the 2, but in many cases, it is a possibility for users to have both. So it is -- and especially also when we go into law enforcement, there has been a tradition of choosing over-ear headsets instead of in-ear, even though in-ear has advantages in terms of size and weight and so on. But again -- and so now, at least the customer has a choice or he or she can choose both. But it's definitely going to be an important area of revenue for us.

Okay. And my next question is regarding the small unannounced orders. It has kept increasing quarter-over-quarter. Is it fair to assume this would be the run rate going forward?

I don't want to give you any indications on that because, again, we can only influence the order intake so much and especially now it's difficult to get out and so on. It's difficult to predict. So I think that what we can say based on the fact that we have many more customers and more geographies and more products and so on, it is fair to say that the number of small orders is in an increasing trend, but quarter -- from quarter-to-quarter, there will still be fluctuations. That will not change. But in general, over a longer scale, I would say, yes, there are more smaller orders because we have many more customers. We have law enforcement. We have Intercom. We have the different geographies. So yes, in general, there will be more small orders.

Great. And do you have a knowledge on how much of those sales, the small orders have been the replacement of sales?

No, unfortunately, that's the tough part because the customers will never tell us exactly how much is replacement and how much is for new users. But again, our best guess based on a few customers that we have relationship to with that maybe 15% to 20% is replacement.

Okay. And last question. The financial items is quite high in the quarter. And you mentioned this is the -- is it a hedging loss?

No, that is related to stock and currency fluctuations because of the fact that we have quite a lot of products. We moved quite a lot of products to the U.S. to our warehouse to be able to avoid the pandemic and be able to shift the customers quickly. And when the dollar has been going not so favorable against the Swedish krona, then we have a technical decrease in the value of the stock. So it's -- yes, it's paper money, but that's where it comes from.

The next question is from the line of Viktor Westman from Redeye.

And congrats on a solid report. And I was wondering, since you're going to sell a lot of third-party things also in the future, have you considered reporting in-house sales versus third-party sales?

No, because it's still part of a system. And also, it is not -- how should I say, it is not a significant amount that -- it is still something that -- all in all, we would like to sell our own products first, but we are also happy helping a customer if the customer has a certain preference or has a legacy product, but we are not going to make it such a strong part of our strategy so that it needs special reporting. It is a part of the total portfolio. And it's never sold individually. It's always sold as part of our system.

Okay. And you -- 1 question also about the pricing when you launch new products, is -- how does the bargaining power look like when you have some pretty large customers there? Are you able to raise price points when you come with new innovation?

It depends a little bit on what type of product it is and what type of market it is. But I think all products that we put into the market are evaluated. We look at competitive products. We look at price points in general, but we also look, of course, at obtaining a decent gross margin. But more importantly, we need to make sure that the customer is willing to pay what we put into the market. But I think we are -- after 15 years now, we do have a lot of experience, and we do know what the right price points are. And as I said, we also think that INVISIO should be able to operate somewhere between 60% and 65% in average. But it will vary a lot depending on third-party products, but also depending on the sales model. As we have discussed before, our direct sales is the dominating part of our business today. In the past, we used to sell through resellers, but now we sell mostly direct. But when we go into law enforcement and security, there are a higher amount of resellers that we need to sell-through to get the outreach, and that will also impact the gross margin a little bit. But still, I think, all in all -- then we have the Intercom, which can increase our gross margin somewhat. So all in all, [Foreign Language], we should be able to get to 60%, 65%.

Right. And on the T7, can you discuss if this adoption will be faster than, for instance, the Intercom?

Yes, it will. Yes. Right away, many customers. And again, due to the pandemic, you can say that the -- we have not had a possibility to introduce the T7 at an official trade show. So we decided to do it now. But the product has been known to many of our customers for quite a period. So that's also why we already, in the quarter, received the first orders because they have seen it for a while, and some customers have been testing it for a while.

And maybe I can end with the corona question then. Is it possible to estimate how many tenders would have been finalized should there had not been any coronavirus?

No. That is not possible. Even -- I wouldn't even try to do that. That is very difficult to say.

Okay. Right. Right. I was just thinking if the initial time tables have not been moved and et cetera, but I understand.

No, I think it's more like in certain countries where we think they could be getting towards doing a tender, then those activities have simply been put on hold because of the pandemic. So it's not happening right now, so that's what we see.

It looks like there are no further questions. Please continue.

Thank you then, everyone, for calling in, and talk to you next time after the all year report in February. Have a great day.

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