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

Good day, and thank you for standing by. Welcome to the presentation of INVISIO Q2 Report 2021 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your first speaker today, Mr. Lars Højgård Hansen, CEO. Please go ahead.

Thank you very much. Hello, everyone, and welcome to our Q2 update for INVISIO, and we have two main highlight events from the quarter that is sort of describing what we have seen in the last 3 months. First of all, we have launched a new technology platform of control units that I'll get back to in just a minute, but a very significant technological product-related event for us. Secondly, we are seeing that our markets are gradually becoming more active. As vaccines are rolled out globally, we can see that activity levels are rising. People are returning to work. We are able to go back and visit customers, especially in the U.S., but also in Europe we see now the same positive trend for our markets. Turning to the numbers on Page 3. Our revenues increased by 25% year-on-year and went up to SEK 154 million compared to SEK 134 million (sic) [ SEK 124 million ] in same quarter last year. And in comparable currency our revenues actually increased by 35%. Our newly added product line from Racal Acoustics contributed with about SEK 30 million of that number. And for the 6 months period, we saw revenues increasing from SEK 240 million last year to almost SEK 300 million this year, meaning an increase of about 24%. And order intake was quite good during the quarter, SEK 167 million. And what is worth noting here is that we had one larger order of SEK 40 million. But apart from that, this is a good stream of smaller orders from all geographies, all product areas. So I think this is actually a very good sign for us that we can see stability on the inflow of smaller orders and also an increase in the number of smaller orders as markets are now opening up. So this is very good for sort of the future that we see, better stability when it comes to the order inflow of smaller orders. So we left with a strong order book of SEK 192 million at the end of the period that for majority will be delivered before the end of the year. But when it comes to products from the Racal product line, as we've said, sometimes their deliveries are a bit further out because they are related to programs with a long lead time. So sometimes their deliveries are up to 12 months out. Good. On the negative side, if that is negative, our gross margin was a little lower than last year, which was a strong quarter last year, 58% against 64.6%. Main reason is product mix. We see that continuously it has to do with the type of products in this quarter. There was some sales of third-party products. There was also a higher sales of cables towards headsets and control units and -- so this is, I think, the part of the normal fluctuations that we see. And the same for the first 6 months, there is an impact because of mainly product mix. We still have the ambition, as we have said many times that our gross margin should be somewhere between 60% and 65%, and we will also get back to that point. I'm quite sure. And that, of course, then impacts also the EBIT margin that was at 16.6% towards 21.7% last year. And for the full year -- sorry, the first 6 months, 16.5% versus 18.1% in EBIT margin. So the thing that is new for INVISIO in 2021 is, of course, that we have acquired Racal Acoustics. And as such, we have depreciations. And in addition to that, we also have launched several new products and product platforms that we are now starting to amortize. And that is, of course, impacting our profit and loss result, but these are some of the investments that we have been indicating for a long time. If we turn to the next Page 4, there is just an overview of how these amortizations and depreciations are distributed. And again, I think this is part of the long-term investments that we said we would do, especially in new products. We are now looking into a very, very strong product portfolio and lineup. We have just announced a new product platform for control units. We have our new T7 headset that just recently came to the market. We also have the RA4000 headset that is very new. And we have the Intercom platform that has only been in the market for short term. And these are, of course, the products or the development projects we now have to start amortizing on, but these are also the products that will make sure we can continue to gain market share and continue to grow our business in the coming quarters. And yes, so I think we have an outstanding product portfolio now, the best that the company has ever had. We just need now the markets to continue to open, so we can get out there and show and start testing these fantastic products with our customers. So turning to Page 5. I will not dwell on that very long. It's just the usual update on our sales per quarter and rolling 12 months on the left-hand side and the EBIT per quarter and also the rolling EBIT margin. And again, the decrease in the EBIT margin is related to the investments that we have done internally and that we continue to do in new products in the organization. The slight increase in our operating expenses in the quarter and for the first 6 months are also related to predominantly a few more people in R&D and a few more people in sales, especially in the European sales organization. We have a very strong setup in the U.S. where we cover most of the countries -- almost all of the countries now. In Europe, we are still growing the organization and we have added some key people to the organization in Europe that we believe will help us, yes, go back to good growth numbers in Europe as soon as we can start visiting many of the customers that we know are there and able and willing to test our products. So on Page 6, we spent a bit of time this quarter to inform about the new technology platform, which is really a paradigm shift for us and for the industry where we go from hardware to software and where we also introduce a very advanced artificial intelligence technology. So this is really one of the most significant events in the history of INVISIO, where we really lift ourselves to a new level. And also, in our view, have a competitive advantage now that is higher than what we have ever had towards our competitors. This technology platform is built entirely from scratch. So even though from the outside, it looks similar to the generation one platform, everything inside is entirely new and built internally at INVISIO from scratch. So we really believe, together with our headsets that this platform sets a standard for audio performance, for hearing protection, for communication for years to come. And one of the main strengths of the platform is that it gives a very high degree of flexibility when we can offer, I would say, customized solutions to customers and updating the system based on the standard platform. And we have taken many steps to make this as seamless as possible. We have a lot of new advanced algorithms, which will help the user hear even better, be better hearing protected. And in addition to that, we, as I said, have added artificial intelligence, which really will help the user to hear and filter out unwanted noise and sounds and making sure that they can be as efficient and as well protected as possible. And by this, we clearly show that we are driving the industry with new innovations. And this is one of the reasons we have invested heavily in the organization and in R&D over the past years to really make sure we are at the forefront of the industry and are at the forefront of the technologies that can be offered in our space. So we believe this is a platform that will help INVISIO grow over the coming years. So on Page 7, there is a couple of highlights from the new platform. Mission adaptive is related to, as I just said, how we are able to adapt automatically to surrounding audio and noise so the user does not have to do anything. The system will adapt it to the environment where the user is operating. We have market-leading hearing protection. We also have a patented solution where we can actually have double hearing protection with both over-the-ear and an in-ear headset at the same time, which gives the users really unprecedented levels of hearing protection. The system is flexible and intuitive. It doesn't require any setup. It doesn't require any calibration. It's just plug and play out of the box. And then the last but not least, INVISIO Audio, which is what we are very, very proud of, the way we are able to offer audio performance that filters out all unwanted noise and let the user hear what he needs to hear and nothing else. And turning to Page 8, by now with a new platform, with a new system we have developed here. This platform will be available in a number of variants of control units. Our V10, our V20, our V50, V60 all will be available on the new platform. And we then are able to, as I said, be very adaptable to many different missions that our users have, anything from being a diver, a parachuter, a sniper, Special Forces, many different types of missions and functions. We are able to customize and adapt the system and the platform to different user types. We also are basing the Gen 2 on our IntelliCable principle, where all our cables are smart cables and that automatically adapt to all the different types of equipment that our users have. Everything from computers, tablets, smartphones, mine sweepers, radios, intercom system, anything that the users might want to use, we have intelligent cables for that will easily adapt to the system. They just need to block the cables into the control units and into the unit they would like to connect to, computer, smartphone, radio, and then it automatically works. And last but not least, our new Intercom system is built on the same principles. It also uses the INVISIO IntelliCable. So everything is integrated, it's modular, it's versatile, compatible. And the Intercom system is compatible with all the different types of vehicle platforms that our users have, ground vehicles, helicopters, boats and so forth. And by having this entire system of personal system, IntelliCable and the Intercom system, INVISIO has a totally unique customer proposition that no one in the industry can match. So we are alone about offering this type of system that I'm sure will serve us well over the coming years. So Page 9, yes, just a short update. We did actually also receive one larger order from an existing customer in the U.S. Department of Defense of SEK 40 million. That is part of the SEK 167 million order intake that we saw during the quarter. But again, we are very satisfied that our investments in the sales organization, the investments in the distribution network is now paying off so that the order intake of smaller orders is going very well and increasing. And we believe that was the right investments to make and that we will see continued good results from that. Page 10, another important development in the quarter was that the Swedish Police Authority extended the framework agreements we had with them with another year. We originally signed agreements with them back in 2019 for 2 years, and now the customer has extended these agreements with another year. We have a very good relationship with the Swedish Police, and we are very pleased that we are able to help them with their communication and hearing protection needs. And this, of course, is also an important reference customer for us in many of the other activities, especially in Europe for police and law enforcement. So more to come from that angle. So in conclusion, we are a little bit business as usual. We are continuing to execute our strategy. We continue with the integration of the Racal Acoustics product line. We continue to intensify our market penetration in North America, in Europe, in parts of Asia, and we do that through continued work with our sales organization and with our distribution partners. And of course, by introducing all the many new products that we now have available and can bring to the market over the coming months. We will also continue to have full focus on law enforcement and security with our own organization and also with our distribution partners. We still have very firm belief that this is an area that will bring growth to INVISIO over the coming years. And last but not least, our geographical focus, as I said, continues. We have done a lot of work in parts of Asia and Middle East that, to some extent, has been halted by the pandemic, but we are absolutely certain that we will be back on track shortly when the markets are open again for visits and for product testing and so forth. So in summary, I think, this was a fair quarter and a first 6 months that we are under the current conditions are satisfied with. We have been preparing ourselves for the markets opening up. We have been adding to the organization in sales and in R&D. And we now have, as I said, an outstanding product portfolio that we are very much looking forward to bringing to the market and start reaping the benefits from the new control unit platform, the new Intercom and for the new headsets that we have launched recently. So that was the short summary of second quarter '21 and the first half year. And operator, we are now open for questions, please.

[Operator Instructions] And your first question comes from the line of Yiwei Zhou from SEB.

I have 3 questions here. And firstly, could you give us an update on the Intercom launch? And secondly, you actually mentioned in the report, there were some delayed orders by COVID in the quarter. But I also realize that the inventory level is lower than last quarter at the end of Q2. So is it fair to assume that you don't expect any -- those delayed orders will come in the coming quarter? You see the risk of further delay of those orders? And lastly, a question on the Racal. You previously mentioned there will be margin -- development margin improvement for Racal business. And could you also give us an update on the current margin level?

Yes. Thank you, Yiwei. And if we start with the Intercom, that is going well, especially in certain parts of Europe and in the U.S., where we have been able to continue to travel. I think it is going along the same line as in Q1. The number of activities are increasing. We have a number of systems out to test. We have customers actually using it now in real life activities in parts of the world. And the feedback we have been getting has been very, very positive. So this is just a matter of continuing the rollout. We have continued to see orders also, smaller orders during the quarter for Intercom. So there's been nothing significant in the quarter related to Intercom. It has just been a continuation of the activities. And we do believe that the orders will continue to increase. And also at some point in time, as usual, difficult to say, but we will see larger orders coming from these Intercom activities. So I think -- and our sales teams are quite good at updating also our social media with some of the activities that they do. So you can get a little bit of an insight into some of the activities that are ongoing there. When it comes to orders, I think what we have indicated during the pandemic was, of course, that it was very difficult to visit certain customers. And therefore, they have delayed their general level of activities and projects because many of our products are normally procured -- most of our products are procured as part of a long-term modernization strategy, and it's never urgent to the sense. So the pandemic has just delayed certain activities and programs and projects. And we can see now slowly but surely that people are returning and they're looking at these projects again. They will be starting testing and so forth. So I think that we'll be back to a good activity level in the second half of the year. We are preparing ourselves, as usual. We are helped by having a certain amount of inventory, so we can react fast. I think this will also be a competitive advantage in the next 6 to 9 months that we actually are able to deliver many of our products with a fairly short notice. So we are well prepared for the markets opening up. And your last question around Racal. I think we have already done a lot of work with Racal. As we said when we acquired them, their business model is a little bit different because the majority of their business are through large system integrators, through large vehicle programs and so forth. But I think the Racal gross margin levels are now close to what we see for INVISIO here. So slowly but surely, I think we are improving. So the margin -- the lower margin we see right now in these quarters are more related to normal product mix variations and not specifically to Racal.

Great. And maybe just one last question here. You mentioned the third-party product was also sold in the quarter. Could you confirm it was T5?

No. It's a mix of things. And it is not -- some of the margin -- lower margins in the quarter was also related to cable. Sometimes there are cables that are -- where we have to accept a little bit of a lower margin because they are part of an established pricing model where we are just helping the customer delivering something that they've used before, but now they get it INVISIO version. Sometimes there are certain connectors that we just have to use that are very expensive, but there is a limit to how expensive a cable can be. So there are a number of different things that can impact the prices of specific cables. So I think it is -- yes, it is the product mix. We have also, in this quarter -- I think we sold a few less headsets compared to cables and control units. So it's just a mix.

[Operator Instructions] And there are no further questions at this time. Therefore, I would like to hand back to the speakers.

Thank you. Then we thank everyone for calling in, and wish you all a continued great summer. And hopefully, talk to you again when we have our Q3 financial update. Thank you, everyone.

This concludes today's conference call. Thank you for participating. You may now disconnect.