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

Welcome to INVISIO's Presentation of Year-End Bulletin 2023. [Operator Instructions] Now I will hand the conference over to the CEO, Lars Hojgard. Please go ahead.

Thank you very much, and welcome, everyone, to our Presentation of Q4 and Full Year 2023. And the headline, we have chosen for this Bulletin is that we saw a strong end to 2023 and a promising start to 2024. 2023 was a record year for INVISIO in many aspects. We have seen a very positive trend for our business throughout the year, and that continued in the last quarter. Our revenues in Q4 reached a record SEK 346 million, and for the full year we exceeded SEK 1 billion for the first time. Actually we stayed at SEK 1.2 billion, which is a revenue growth rolling 12, of about 60%. And the order intake was also good in the last quarter of the year. As usual, order intakes and revenues will fluctuate a little bit pending customer expectations and requirements, but the order book at the end of the year was more than SEK 600 million. Now we continue to see an overall high level of activity in our markets, and of course especially in Europe due to the situation we see. But most of the business that we have been receiving in 2023 is actually related to prior decisions. Some pent-up demand from the COVID, but also very much related to the fact that INVISIO is today, a much larger and broader company from a product portfolio and market segment point of view. We, as many others in our industry, believe that the impact of increasing defense budgets that we see in Europe is not expected to be felt until later part of 2024 and onwards. The planning of how to spend bonded budgets and where to do that is something that takes time and therefore we don't think that the increasing budgets will come to our benefit before end of Q -- 2024 and onwards. In the early part of 2024, we have seen a very important product launch for us, our INVISIO X7, the next generation in-ear headset with AI enhancement. And this is a product, a headset with hearing protection that is definitely best-in-class, and that we expect a lot from in '24 and onwards. So as I said, it was a strong quarter for order intake. We did not announce any major orders, which means that this is a mix of smaller and medium-sized orders that made up to about SEK 300 million in the quarter. And as I said, we have seen good order intake throughout the year. Order intake totaled nearly SEK 1.3 billion for the full year. And we've also seen that the volatility is decreasing somewhat in the order intake, even though there still will be an element of that, going forward. INVISIO is today, a much broader company. We are addressing ground soldiers. We are addressing the vehicle market, both with our Racal Acoustics portfolio but also with our Intercom. We are addressing the law enforcement market, and therefore, that gives us better stability in the order inflow and actually also in revenues. So the order book today stands at SEK 603 million adjusted for currency, and we have continued to keep a high inventory level. And that reflects an increase in upcoming deliveries, but it also reflects our willingness to be able to deliver at very short notice. We think that is a strong competitive advantage. We think also this is what our customers would like to see that we are able to react fast when money is made available, and when decisions are taken around the type of products that we can deliver. And as I said before, what we keep in stock are standard products. We don't see any risk or scrapping with that. We merely see business advantages and competitive advantages of a good customer service through short lead times on all our types of products. Q4 was the fifth consecutive quarter of strong growth. It was at almost SEK 350 million, up 20% from the previous Q4 or 13% in comparable currencies. And as I said, revenue exceeded SEK 1.2 billion for the full year, which is a 60% growth compared to previous year. So despite the 2 tough years of COVID, we can now see that the annual sales growth in the 5-year period amounted to 19%, very close to our target of 20%. Our gross margin exceeded 60% in the full year of 2023, and we can see that the higher component costs that we saw during the COVID pandemic, where we had to buy components at the spot market at considerably higher costs are now behind us. The market is back to normal. And indeed, we are seeing certain components that are decreasing in cost, and availability is good. In Q4, we had a couple of deliveries that we executed through a system or sold through system integrators. And as happened before, when we do that, we do have a lower gross margin. And in certain quarters, we are impacted by some of these deliveries, even though they are a good business for us as well. So in general, our normal business, so to speak, exceeds 60%. Gross margin, and then sometimes we have deliveries where we accept the lower gross margin [ through larger ] system integrators. Our operating expenses follows a stable trend of what we have seen also in recent years. We -- most of our operating expenses is people, and we have been recruiting more people, especially in R&D and in the Sales team throughout 2023, and that will continue to some extent in 2024 in line with the growth expectations, we see -- of course, the very active market that we experienced and that we think will continue for many years, are also opening up for new opportunities for us, where we have the financial ability to look at some of those opportunities and start maybe looking at products and developments that are a little more longer term and that would benefit INVISIO's growth over time. We spent about 15% of our revenues in R&D, so that's a lot of money. That's a lot of, let's say, innovation power that goes into our R&D department. And we work very closely with customers around new, both technologies and projects. And sometimes, we come to a point where we decide together with customers that this was not entirely the right direction and that we need to change the scope a little bit of certain things. We did that on a particular project in Q4, and that has caused us a financial impairment loss of about SEK 7 million, because we decided to write down certain parts of a project and change direction. Now the experience and knowledge that we obtained during this project is not lost, it's just carried over to some other activities that are continuing. So margins, from our point of view is at satisfactory levels. The EBIT margin for the full year '23, almost 20%, doubled compared to last year and 18% for Q4. Now the margin in the quarter was affected by this impairment loss. So if we take that away, we were close to 20% EBIT margin. And if we look at the last 20 quarters, including the COVID period, the average EBIT margin is about 15.4%, which is above our financial target of 15% as a minimum. So when we look then a little bit more at the market, we -- as we have been communicating throughout the year, there's a very high level of activity in all our markets and all our product areas; and especially, in the vehicle market, there has been a very good development during 2023. Strong sales development for the Racal Acoustics branded products, and there's a high demand for the new Magna 4000 digital headset. As we've communicated, there's a competitor in the U.S. that has -- or is leading the market, which is also adding to our opportunities. And we believe that the vehicle market, in general, also caused by the geopolitical situation is going to be highly attractive for years to come. So, we expect continued good growth for our vehicle business. And that also includes the Intercom system. We think that even though this has taken a little longer than we expected in the beginning, we are now starting to see good interest for the Intercom system -- or good sales for the Intercom system. We did receive a number of orders for the system during 2023. Sales exceeded SEK 100 million. And we will expect larger orders to arrive in 2024 for the Intercom space. And there's no doubt in our mind that the Intercom system and products related to that will account for a significant portion of our Group revenue in the longer term. It is an attractive category that fits well into the system, thinking of what we offer. In Law Enforcement and Security, we've also seen a good development throughout the year, a number of midsized larger orders as well and a lot of tests ongoing continuously. So we now have a strong platform with a number of reference customers, both in Europe and in the U.S. And I expect this will continue, as we have said before, the law enforcement market, security market is mainly handled with partners, with distribution partners. So this means we can address a lot of potential customers where we don't need an entire sales force, our own, but then we also have a little lower gross margin because we work with external partners. As part of this market area, Law Enforcement and Security, we are also adding Firefighting. And here we are primarily looking in the beginning at selective parts of the market related to military and certain higher end aspects of the firefighting market. So we will follow up on that throughout the year, but we believe there are good opportunities for our type of solutions also in the firefighting market. And we've been requested to do tests with a number of firefighting units, both in Europe and in the U.S. Now, as I said, product development, R&D is a very high focus. We have spent almost 15% of our revenues on that, and we will see several new product launches in 2024. One was already in January at a trade show in the U.S., and this is the INVISIO X7, our next-generation in-ear headset. And we were sort of the first to establish the in-ear headset category with our X5 system, now almost quite a number of years ago, and this has been a market-leading product for many years. Now it's time for the next generation, where we have worked extensively with existing users to get feedback on the first generation X5, looked at the latest technologies, and then added that to the new X7. So there's a number of new functions, a new ergonomic design, and the headset is in every aspect, a second generation or a next generation compared to the X5. It adds several different wearing styles, foam plug, silicon tips and also a custom-molded version. It adds a very high level of hearing protection. It adds artificial intelligent enhancements for better speech intelligibility. And all in all, it is a fantastic addition to our total portfolio. And the product is ready to ship, and therefore, we expect good sales of the INVISIO T7 product already in 2024. Then coming to our financial status here, the Board of Directors are proposing a dividend increase from SEK 0.70 per share last year to SEK 1.30 per share this year, and this follows our objective that over time the dividend should be between 25% and 50% of profit after tax. In the last 5 years, including the COVID period, we have distributed SEK 160 million to shareholders, which is equal to a ratio of 60%, including the proposed dividend for 2023, we are now at 49% to just below the brackets. So looking into 2024, we will continue our journey of spreading our wings and strengthening our position on the global market. We will continue to broaden our product portfolio, and thereby, increase our competitive advantage. We will continue to add, select or selective recruitment of talents within both sales and R&D, but maybe at a lower pace than what we have seen in 2023, pending customer opportunities and what activities we see in the market. We are very fortunate to see that we don't have issues finding good talent. INVISIO is very well respected in our industry and in the Copenhagen area and in Harrow as well, where we have our development sites, and therefore, we are an attractive employer and it is not a challenge for us to find highly-talented people, being it within R&D or in sales. We will also continue to broaden our customer base and that will be from a geographical point of view, but of course also now with the military firefighting market, so we look forward to a very busy 2024. As we all know, the geopolitical situation is uncertain in several parts of the world and that will keep defense and security issues high on the agenda for many years to come. And if we add that to the fundamental need for modern communications equipment and hearing protection in many countries, we are certain that INVISIO has a bright future and that we will see continued high level of demand in 2024 and for years to come. So that concludes our presentation for Q4 and the full year, and we are now open for questions, please.

[Operator Instructions] The next question comes from Mads Quistgaard from Carnegie.

I will take them one by one. So starting with the order book, will the SEK 600 million be delivered this year? That would be my first question.

The majority, yes, there is part -- a little part of it, which is Racal Acoustics branded products that might be late-'24 or even into '25. But I would say the majority, yes.

Okay. Perfect. And then, on the firefighting market, could you talk a bit about the market potential here? So what is the addressable market? Also, should we expect a ramp-up in your OpEx in this quarter for marketing spend? And when do you sort of expect the sales kick in from this customer group?

Right. So I think at this point in time, you should not expect any OpEx increases for this. This will be part of what we do already and be part of some of the trade shows that we go to already. So we are taking a little bit step by step, also not to defocus from the many other activities that we have. So it is incremental business for now, where we will get our feet wet, so to speak, with certain customers that are very insisting on trying out our products and then take it from there. And that's also why we have decided not to publish any or give any indication on addressable market for now. So we are not putting a lot of efforts into this right now, because there is a lot we have to do on our core market, so to speak, within the military and police and security. This is, yes, getting our feet wet. And then we will come back to this a little bit later when we can see the first tangible results.

Very clear. Makes sense. And then maybe can you comment on the situation in the U.S. and also in the current budget proposals? Have you seen sort of drag from this in the quarter?

Yes, a little bit. And I think this is what has happened several times, if not many times, over the last 10 years, that the budget ends up in a situation where it is delayed and moved into January, February, and then certain decisions are dragged out a little bit. So we have seen some effect of that, yes, but it's hard to quantify. We're not being informed that certain things will be delayed because of the budget drag or similar, but there's probably no doubt that there are certain delays and that will start seeing the light of day now that the budget has been approved and the money will be released.

Perfect. And then, my final question is on the continued expansion into new geographies. Could you be more specific to what target margins you're focusing on today? Is it the Middle East? Or is it still a major countries where they are starting to use military radios? Or what is it specifically?

Yes. I think that, where we have made the most progress in parts of Southeast Asia, that's where we have been for a long time, and also where Racal products have been sold for a long time, so that's probably where we are spending most of our resources and where we also, I would say, saw a very good traction just prior to the pandemic. And then everything was shut down for a while, and now we are getting back and starting to see orders from certain countries in that region. So, that's probably the place where we have come the furthest.

The next question comes from Daniel Thorsson from ABG Sundal Collier.

Yes. I have a question on your guidance on military budget here to favor you earliest in the latter part of 2024. Does that statement mean that we should expect somewhat of a slowdown in activity in the first half of '24, due to the fact that you are facing tougher comps and will not gain from this effect immediately? Or will a strong market activity underlying make you deliver a solid H1, in your view?

Thanks, Daniel. It's a great question, and I don't really have a good answer because we -- fluctuations as usual, and there might be opportunities popping up. I'm just trying to -- in line with what I think other defense companies are doing. So, because there was a little bit of a belief that all the things we read in the papers about increasing budgets in most major countries will immediately lead to higher spending. And so, we are just trying to say that, that is not necessarily going to happen. It does take time, because it requires planning in every single country. It requires tender processes and so forth. And that's why, it will take time before most countries are ready to start utilizing the money and spending it in the right way. So -- but we still believe that we will have good growth stemming from our current product portfolio and our current opportunities. So -- and again, it is very volatile in our market. It's very hard to -- some of the things we're working on is very hard to know whether they will hit us in Q1, Q2 or Q3. So I wouldn't give any indication to that, it should be a slower start.

Yes. Okay. So that's more the overall picture than any quarterly comments into '24.

Yes.

Okay. And then, a follow-up linked to that one. Do you have any insights from your customers into potential inventory buildup that may have driven the strong development in 2022-'23. You have been very clear, it's more of a pent-up demand post the pandemic, but that could cause a potential backdrop in order intake during 2024? If you have heard such a behavior at all? Or I mean, it's probably difficult to have an insight into it.

Yes, not for our type of products. No, definitely not. It is not my understanding that anybody has been building inventory. So the pent-up demand has more been in terms of some projects for new purchases that have been delayed because they couldn't make decisions during COVID, they couldn't have physical meetings and so forth. So decisions that should have been taken a long time ago have just been implemented in '22, '23. But it's not a matter of building inventory. We keep inventory, and of course, our customers also have a certain amount of inventory, but not to a level that would impact buying more stuff from us.

I see. I see. Do you think there is a risk that some customers or countries may have ordered products ahead of their potential budget increases that's going to happen in end of '24, that we have already kind of seen that effect in some regions or so? Or do you think that is still into the future, as you comment in the report?

It's still into the future. Yes. But it's -- yes, it could happen earlier. We don't have the detailed insight into that, but it's just -- I think -- yes, I think this is in line with, as I said, what other larger companies as us in defense industries are also saying. So I think that is the right way to look at it. But there will be differences. And certain countries will start earlier. So we could see -- or we will see good development also in the first quarters, I'm sure.

Yes. Okay. That's very clear. And then a question on gross margin here, please. That was low. You explained system integrator's role here in deliveries. Is that something related to Racal products? Or anything that we should keep in mind, modeling 2024 here. That could happen in '24 as well? Or is it more of an outlier, a one-off effect, or how should we see it?

I mean, I think it is something that we will see now and then going forward, because as we are also becoming a much larger company, we are being part of activities, projects, programs that we were not part of when we were a smaller company. And then, we are sometimes a part of a huge package that needs to be integrated and delivered. And of course, we have seen that with Racal previously, that they have traditionally and still do work a lot with vehicle manufacturers and system integrators, and therefore, they can get good numbers on something with a little lower gross margins because they don't have the selling costs themselves. And we sometimes have seen that for INVISIO as well. Most INVISIO products are sold directly, but there are also sometimes INVISIO products that are sold as part of a package, including radios and other things that gives us a little less gross margin.

Yes, I see. Okay. That's clear. A final question, and should we expect any announced orders at all ahead? Or is it unlikely to see orders larger than -- 10% larger than sales? That was more the question, because the definition you have? Or will it change that level or?

No. I think in tradition, I mean, of course, any listed company has to release or announce orders that influences the stock price and so on. And of course, now that we have grown to a revenue level around 1.2 (sic) [ SEK 1.2 billion ], the threshold for large orders is increasing. And in the early days, a SEK 20 million order was worthy of press release. Now it's something that happens every second day, and therefore, it's a little more tricky. And I think also from a customer point of view, there has been a tendency to not order 1 big order, but maybe chop it up into 2 or 3 orders that are not so big. So it's a little change of behavior as well. So -- but I'm sure there will be announcement during the year also from maybe a strategic point of view. So I think there are opportunities that will be worthy of press releases as well.

Excellent.

The next question comes from Jakob Marken from Danske Bank.

So first of all, I was wondering, you gave some intel on how the Intercom system has been developed and how the order intake has been in 2023. I was just wondering, if you could give some more light on the rest of the order intake. So how much has been rest INVISIO and how much has been on the Racal brand, if that's possible?

Yes. I think in Q4, it has been a good mix of Racal products and INVISIO products and maybe not so much Intercom, as I recall, and because Intercom is also project-driven, so -- but I think, again, a good mix of the different types of products and also a good mix across geographies.

Okay. Perfect. That's very helpful. And the second one was on -- so you say the X7 is expected to have strong sales already in 2024. How should we think about the gross margin level in this one? Is that going to be accreted from the start? Or should we expect some lower gross margin to start?

I mean, no. I mean, X7 as our other headsets like the T7 and X5 and all this is a high-margin products that are fully developed internally. They are sold for the majority through our own sales force and is part of a system. So they are definitely high-margin products.

The next question comes from Hjalmar Ahlberg from Redeye.

A follow-up on the Intercom discussion there. I mean, you did say that you have several clients evaluating your products and expect major orders. Can you say something on how many clients are evaluating it? And if it's new clients that you've [ mapped ] in 2023 or if it's the kind of same that they've been evaluating earlier?

Yes, it's a mix. I think, there are customers that have been evaluating or not evaluating, but has been interested for a long time and definitely also will buy at some point in time. But as usual, it is sometimes related to when budgets are available and also a priority of the money they have available. I think, I've explained at some point in time before that sometimes you end up on a wish-list for a certain customer where they have a top 3 or top 5 and you are on that list for quite a number of time, until they have financing. And then they will pick from that list. And at some point in time, you end up #1 and then they buy your products, but it's very hard to know exactly when that will happen. And -- but there are also other customers that are buying directly because it's part of what they need. And I think especially, customers that are used to both INVISIO and Racal branded products can see the benefit on how our system fits together that if you have the dismounted soldier systems, you have the vehicle headsets from Racal; and then the Intercom, then everything works as a system. So I think, we also slowly but surely seeing a trend, especially also with the geopolitical stuff and many of the new investments that many customers will favor products that are already in the field that has been proven, [ so to ] space and that they can see from other countries that really works well and has been evaluated for a long time. So I think we will benefit from that in '24 and going forward. So we are well proven now in the market.

I see. And the question on X7. Do you think that this will be -- a lot of X5 customers will buy this as a replacement? Or will this kind of add new customer groups? And looks like cannibalization X5 or that it would be increased sales from this product?

Yes. I think, of course, we will try to make sure that this is a good alternative for those that are buying for the first time. And for those that are already X5 customers, many will continue with X5 for quite a while. And then at some point in time, they might want to go to the next generation as with any other type of product. But I think in majority, the X7 will probably take more from over-ear headsets that they will take from X5. I think some of the experiences we've had from the X5 is now, as I said, being turned into a much smarter, smaller, easy to fit, comfortable to wear and some of the things that we have seen over the years that customers have given us feedback on has been changed and modified in the X7. So I think we have a really, really strong offering here now. And we also have, as the only company in the industry, we have the opportunity to combine an in-ear headset with an over-ear headset, so you actually get double hearing protection. And that is starting to become popular in certain countries and in certain markets where you have very, very high noise levels and where actually the double hearing protection is going to give you longer time in the operating environment. So, you can spend longer time in the noisy vehicle or a longer time with very noisy weapon systems, if you have a double hearing protection.

Okay. Got it. And maybe a final question on OpEx outlook or potential for increased margin. It kind of sounded like you do not expect the same pace of growth in terms of recruitment, or is it kind of business as usual? Or could you give any flavor on the potential margin expansion from here?

I think as in general, I think that over time, our revenues will grow more than our OpEx. I think, that should be the nature of how we operate. But of course, in a shorter time perspective, sometimes when we see an opportunity and where we can see that here is a possibility for us to develop something innovative and unique, if we do start now and we spend the money now, then we have a financial situation, so we can do that. But I do expect us to grow our revenues more than we grow our OpEx over time.

[Operator Instructions] The next question comes from Yiwei Zhou from SEB.

I have 2 left here. And firstly, Lars just noticed that your U.S. deals almost doubled in 2023. I was wondering how much of that improvement was driven by Racal? I'm asking, as I also recall that before you bought Racal, they had a little presence in the U.S. market. I just want to get a feeling how much market share they have gained?

I don't have a percentage number, but I will absolutely say that a big part of the positive U.S. sales development is Racal Acoustics products. So in a short period of time, we have managed to get Racal Acoustics back on the map, so to speak, in the U.S. So it's a very well respected brand from the past. And now the new products are coming back in force. And as I said, with the changing competition in the U.S. market, with a competitor leaving, we expect very good development for Racal branded products in the U.S., going forward.

Have you seen the full effect from the key competitors [ stating ] the U.S. market?

No. No, no. Not, yet. Not yet. That will only happen during -- my estimate, will happen during 2024.

Okay. And then, another question I have is on the order backlog. Could you help me to understand why there is a big deviation to what I have calculated from the order backlog at the end of Q3? It was nearly SEK 720 million. When I calculated from the revenue delivered in Q4 and order intake in Q4, I get to a number close to around SEK 670 million, rather than the SEK 600 million. Is there any sort of a currency effect? What -- could you explain it [ better ]?

Yes. My best answer to that is the currency effect. Every quarter, we have to look at the current currencies and then calculate for the full period, the full year and that goes for the revenues that goes for the OpEx, and of course, also for the backlog. So this is related to backlog -- sorry, currencies as we report in Swedish krona.

And you can confirm there was no any single cancellation?

Not to my knowledge. No.

There are no more questions at this time. So I hand the conference back to the CEO, Lars Hojgard for any closing comments.

Okay. Thank you all very much for listening in and look forward to speaking to you again in the -- after the Q1 report, shortly. Thank you very much.