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

Welcome to INVISIO Q2 Report 2025. Today, I am pleased to present CEO, Lars Højgård Hansen; and CFO, Thomas Larsson. [Operator Instructions]. Now I will hand the conference over to CEO, Lars Højgård Hansen. Please go ahead.

Thank you, and good morning, everybody. Welcome to our conference call. For the Q2 report, we have chosen the headline high levels of market activity continues. That is definitely what we see and which is also, to some extent, reflected in our reporting. Our financial highlights for the quarter is revenues around SEK 430 million, order intake around SEK 400 million; operating margin, 14% and the order book at the end of the quarter, SEK 705 million. A couple of things have impacted us during this quarter. We had a little delivery of remaining third-party radio sales from last year with a lower gross margin. we have also been impacted by the strong Swedish krona towards both dollar and British pound. We have also had a little impact by the U.S. tariffs. We'll get back to all of those in due order. The operational highlights during the quarter is, first of all, a significant order from a new large customer entailing our world-leading new X7 in-ear communication solutions. We have also this morning updated our financial target regarding the EBIT margin. As we have said several times, we see strong opportunities for INVISIO due to the increases in defense investments that are ongoing and will be accelerating in Europe and within NATO over the coming years. If we start with the revenues, our revenues close to SEK 430 million in the quarter, and of that, there was a small portion, close to SEK 30 million remaining of the radio order we got last year. If we exclude that, the revenues was around SEK 400 million, a little higher than last year, but then we have the currency effect, mainly due to dollar and pound, as I said, and in comparable currencies, our revenue would be SEK 450 million, as compared to SEK 390 million last year, including the radio order. We are quite content with that. On the order intake side, we saw an uplift from SEK 245 million last year to SEK 401 million in Q2 this year, and that takes the rolling 12 order intake to about SEK 1.7 billion. This is led still by a good continued inflow of small and mid-sized orders and then one large order on top. Yes, I think this again, illustrates the seasonality we have between quarters in our industry, but all-in-all, we are quite satisfied with the SEK 400 million in the second quarter. The order book, turning to that. Most of the order book, as usual, will be delivered within 6 months, and this means that the current order book of about SEK 705 million is due to be delivered in the second half of 2025. We have a little bit remaining of the third-party radio order. That's about SEK 38 million still remaining where deliveries still are not confirmed. By that, we have about SEK 670 million to be delivered in the second half of the existing order book. Gross margin is also impacted by a few things. again, the third-party radio deliveries were with low gross margin just over 10%. So that impacted our gross margin somewhat. If we exclude that, the gross margin was close to 60% as compared to 63%. Then we have the currency effect, and then we also have about SEK 4 million in tariffs that is pulling the gross margin downwards in this quarter. Yes, and then there's the usual product mix sometimes. But in general, we are very pleased with this. We can see a good stable gross margin on our key products and also expect that to continue. We have a product portfolio that is almost now exclusively consisting of newly developed products, and that will continue to support a strong gross margin going forward, but as usual, fluctuations will occur between quarters. On the operating expenses, we are following our trend. Here again, there is a few smaller fluctuations between quarters related to hirings mainly we have grown our headcount about 15% in the last 4 quarters. Some of that related to the acquisition of UltraLYNX in the first quarter, but others also related to our expansions according to plan in primarily R&D and in sales. We have a very impressive list of new products that have been introduced to the market within the last 12 months, like our V60 Generation II audio data and power control unit, our new world-leading X7 in-ear headset, INVISIO Link Control Intercom system app, our Intercom Switch, Intercom loud speaker, acquisition of UltraLYNX and so forth. And then many, many smaller product variations and customer-specific cables, et cetera, that are not included on this list. The development is -- level is really, really high, and we, of course, expect to get good payback from this over the coming years. Operating margins, a bit lower than last year, mainly explained by the lower gross margin and a little higher operating expenses. If we look at the rolling 12, we are at 19.9% at the end of the quarter, just shy of our new target of 20% EBIT margin over time. So just turning to that. We have had our existing financial targets for 10 years, and we have been reviewing them continuously, of course, with our Board of Directors and now the financial target for the operating margin has been updated so that it is to achieve an average annual operating margin of at least 20% over time. The other financial targets remain unchanged. This change on the EBIT margin reflects how we have been performing over the last years, but also our expectations to an increasingly active market environment where we think the future sales will grow at a faster rate than the total cost base, so this is an evolution for the company. As always, our industry, our company performance should be evaluated over an extended time frame as we see significant volatility between quarters. I guess you are all very familiar with that by now. Inventories, inventory value, a little higher than last year and now around SEK 300 million. This is a result of, first of all, expected deliveries with short time frames in the second half of the year. We also did move a little bit of inventory to our facility in the U.S. prior to tariffs being put in place, but this is mainly for deliveries in, yes, the second half of the year. And inventory, again, is also almost predominantly standard products, plus some key components, and we think this gives us a significant competitive advantage in the market environment that we have where speedy deliveries is very appreciated. Cash flow, not too much to say around that. There's a couple of things impacting us more from an IFRS perspective. We have a new office in -- new office lease in, which I'll come back to. You can find the details in the cash flow statement. Operation-wise, during the quarter, we had a significant order from a new European customer that includes control units, cables and our new INVISIO X7 in-ear headset solution, which is a new standard for comfort, weight and situational awareness and of course, hearing protection level where no other headset in the market can match the hearing protection levels that we provide with the X7. This new European customer is of significant size, and we would expect further orders also to come from this customer over time. The deliveries of this first order will happen during 2025, and it's, of course, very important for us now to have statements with our new in-ear solution. As always, new products takes a bit of time to get established in the market, but we've seen really good traction with the X7 headset so far, and we expect this to be one of our front runners in the years to come. We are -- have also expanded the capability of our Intercom system with the new wireless Link, INVISIO Link that we talked about also in the Q1 update. Our next upcoming trade show of a major size is in London in September, the DSEI, where the INVISIO Intercom with a Link and the rest of our product portfolio will be displayed in an updated marketing setup and an updated booth, and we will are very excited to be present there and talk to many of our European customers. We have also added an Intercom switch and a loud speaker to the Intercom family of products to give even more capability and functionality within vehicles. As you are all aware, there are very strong increases in defense investments in Europe happening over the coming years. NATO have now agreed to the 5% GDP target, of which 3.5% will be invested into equipment and capabilities. As I said several times before, we, of course, expect this to be a driver and a business opportunity for INVISIO for many years to come, along with the European Defense Readiness 2030 initiative, which will also mean high focus on defense investments in the European Union. All of these are underlying strong drivers for our market, and as we haven't yet seen the impact of this, we, as said, also many times before, we expect this to happen from the later part of '25 and onwards. Now the tariff discussion and negotiations are ongoing. We do not have any more information than anyone else about where that will land. We have had a negative impact of about SEK 4 million in the first 6 months of the year. Historically, defense equipment has either been tariffs exempt or having very low taxes. We don't know where this will end yet as negotiations are ongoing with -- between the EU and the U.S., we are preparing ourselves for different scenarios. We have done that for quite a while, and that includes also manufacturing in the U.S. as well as other initiatives depending on where these negotiations will land. We acquired Racal Acoustics 4 years ago, and we have now fully integrated the operations of Racal into INVISIO, so we are one company with 2 brands. We are a modern high-tech company in the defense industry, and in line with that, we are now upgrading our facilities and also preparing for growth in the U.K. We will be relocating our U.K. office to a new, more modern facility in Croxley, just outside London, and this will happen in the second half of September. In summary, we are pleased with Q2. It is in line with our own plans and expectations. We think, we have reported good revenues and order intake. We saw a new large order from a new customer with future potential, but it is the long-term perspective that we always take. We continue to invest into the product portfolio and into the organization, as we have done in recent years, and by that, preparing ourselves for the strong market activity leading into large upcoming defense spendings and giving us a solid platform for continued growth. We look forward to the second half of 2025, where we will continue to strengthen INVISIO and hopefully see a very strong set of results when we talk later in the year. That will end my presentation, and we are now open for questions, please.

The next question comes from Jakob Marken from Danske Bank.

Just a couple of questions from my side. Firstly, maybe on order intake. You ended last year with underlying order intake that was very strong in both Q3 and Q4. Then you could say that it's been a little weaker here in Q1 and Q2 this year. I'm just wondering if you can give us any more color on that, if there's anything particular you've seen or if it was anything particularly strong in H2 or how we should think about that going forward?

I think the activity level is really, really high. There are good reasons to believe that the second half will be strong. Will that happen? Well, as always, we are depending on decisions in government organizations and so forth. Sometimes it drags out a little bit in time, but I definitely think that the underlying interest and demand for our solutions is strong. I think there are good reasons to think that we will have a good year as we also had last year.

Because that was my follow-up on that one. You sound very confident on H2. I mean, you had a super strong H2 last year. I mean, is it reasonable to believe that you can match the numbers from last year? Or how do you view that?

I think as I -- my standard answer to that is always that most of the time, is it possible? Absolutely. Will it happen? Well, that will depend on timings, but the underlying interest and the pipeline is definitely there to make it possible. We could run into delays of certain projects where it just takes it past Q4. In some instances, it's also related to other equipment that the customer is buying. Sometimes they are buying a radio separately, but they want to have our deliveries same time as the radio, and then if the radio has a later delivery time, then we will be pushed out as well. It's a little bit out of our control, but it's definitely not impossible.

Then just a follow-up on the -- you talked a little bit about the Intercom Link, and I'm just wondering if you -- how has the interest been this far? Also, if you can give a short comment on the UltraLYNX acquisition, how the integration is going? Do you think that can contribute already in '25? Or how do you view that?

Yes. The Intercom and the Link, the interest is really, really high, and we have -- we're just now ready to ship the first ready units to customers for testing and verification and hopefully soon getting into order phase. I do expect that to be a very significant contributor to the Intercom business over time. You can say that the Intercom product portfolio that we have has developed from when we started, it was a rather simple system with one box. Now it is a much more complete system, where you have an app for controlling the Intercom. You have loud speakers, you have switches, you have volume controls. It's a much more flexible system for the user and now also with the wireless part, which really has created an enormous amount of interest. As I said, the Intercom and the Link will be a key feature at our upcoming trade show in London in September, and I'm sure there will be a huge interest. Also, the UltraLYNX is progressing. We will be renaming it to INVISIO Products, and that will also be one of the key product lines at our trade show in September. We have now done most of the internal preparations, setting it up in INVISIO manufacturing and preparing the training our salespeople and all the necessary things that needs to be in place. We are ready, and we have also the first quotes out even for a little bit more significant than just a few units. We do expect to see the first good orders before the end of '25.

Then just the last question on the tariffs that you mentioned. Is there -- is it -- could you say if it's related to military side or police or both, just to know.

It's predominantly related to the police side at this point in time. So -- and things where we have shipped from Copenhagen to our facility in Atlanta and then shipped to police customers. It's predominantly police customers, law enforcement customers.

The next question comes from Hjalmar Ahlberg from Redeye.

Maybe first question on this new customer order. I think you said that you see potential for more orders there, but can you say anything on the potential size of the customer? Is this like an order for part of the potential unit or so to say? Or is it the full potential in this order?

No, it's not the full potential. I don't think I can quantify the size, but as usual, when we have a new customer of this size, there is a huge potential for upselling and adding the rest of our system, Racal products, Intercom, but also more headsets and control units over time. I'm not able to quantify it, but I think there are -- and normally, when we have a new customer like this, it's a long-term relationship where we can see that the follow-up orders from the same customer, just replacements and so forth is at least 20% per year of the original order. I think it could be more -- there is a high interest from many customers now to expand into buying more complete systems, meaning they start with soldier systems and then they add the vehicle part and the Intercom part and so on. In this very, very busy time, many customers would like to make it simple and buy a larger system from one supplier where we then take responsibility so that everything works.

Then a general question, follow-up on that is, I mean, if you look at your sales pipeline or the market activity, is this related to old customers buying more? Or is it also new customers? If you can give any sense of the mix there?

It's definitely a good mix. I wouldn't be able to put a number on it, but it's definitely a broader mix. It's also, again, a much broader mix where sometimes a customer will -- a new customer could come into our pipeline because of the UltraLYNX hub. Then when they see what else we have in the portfolio, then suddenly it becomes much broader than the first customer contact. I think the fact that we have a very broad portfolio is making us relevant for many more different types of customers than previously. This will only continue to grow with our growing portfolio.

You said that you're kind of preparing for a potential more impact on tariffs. Do you think that you -- that we should expect that the gross margin could be a bit more soft in the short term because of this effect? Or do you think you still have the 60%, 65% gross margin? Is that still relevant in the short term?

Yes. I think short term, nobody knows what is going to be the new numbers. We are just staying close to the different agencies here and in the U.S. that are trying to find out what the new normal will be, but until we know that, there might be a short-term impact. As I said, we have plans for in different directions. We don't want to put them into place until we know for sure what the new normal will be.

Also, a question related to gross margin. I mean you said third-party reg can still delivered, but you don't know when, but could it still come more in 2025? Or is it more in 2026?

Yes. I think it is originally scheduled for 2026, but we -- it could, of course, be pulled in if for some reason, the customer changes his mind. It is in the plan, it's scheduled for '26.

The final question, just on the U.K. office. I mean, does that have any noticeable impact on OpEx in Q3 or Q4?

No, only in the terms of IFRS to call it paper money, but it's lease agreements.

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

My first one is just can you recall us how much third-party deliveries you expect to have in Q3 here from the radio order last year? I apologize if it was already taken, I missed part of the presentation here.

No problem. We don't expect anything in Q3. The remaining part of the radio order is -- by plan, it is scheduled for 2026. Unless the customer changes his mind, it will be in '26.

Then the second one on the underlying gross margin just below 60% here. Is this a mix driven? Any limitations getting prices through to customers? Or are you seeing an increased competition for your products from the larger general suppliers to the industry?

No, it is 3 things. It is currency and it's a little bit of product mix, and then it's the tariffs that has brought down gross margin a little bit as well.

Then the second one, first half year costs figures are up around 25% versus last year. Is that roughly the pace we should expect for the second half of the year as well to be up around 25% versus second half of '24?

It was a little higher in Q1 this year because of the acquisition of UltraLYNX, where we brought on 8, 9 new employees, and now we have the full effect of that. We don't expect to have that increase in the second half of the year according to plan. It's probably a little higher now in the first half.

The next question comes from Mads Quistgaard from DNB Carnegie.

I will take them one-by-one. First, coming back to your comments on the second half of this year being busy. My question is, will this mainly be in Europe, given what we're seeing in the U.S. with budget costs. One could assume that the tender processes have been delayed over there? That would be my first question.

No. We have a very high activity level in the U.S. and it is also my understanding that the new so-called Big Bill that was now approved in the U.S. actually contains quite significant increases in investments in military and law enforcement. Our U.S. team is very positive also for the second half of the year and onwards. We have the same high activity level in the U.S., s it is broader.

What we also see in the U.S. is obviously major investments into military projects, which includes AI and so on. I also saw, I think it was 2 months ago that Meta took over the program Eagle Eye from Microsoft. Just to understand, do you see that as a threat to your underlying industry? Or how do you view such programs in the U.S.?

No, not really. I would more see it as a complement. There has been different technological attempts related to heads-up displays and [visas] and other things. They still need to interface to the type of products that we have, and we have a good relationship with some of those programs and activities that are ongoing. I think they've so far had a little hard time making it into real products more than for training purposes, but let's see. I think it's more an addition and a complement to what we do.

Then my final question is more of a bookkeeping question and it's on net financials. I can see that you write in the report that it's due to strengthened SEK against GBP and USD. Is there anything else in the net financials given that it's minus SEK 30 million? Also, what should we expect for the second half? Because given my FX forecast model, I see the same strengthening of the SEK against USD and GBP.

Yes. The SEK 13 million that you are referring to, they are intercompany transactions. Again, back to IFRS rules and how you report that. If I should try to give one example, for instance, when we transfer products, we transferred products to Atlanta prior to the tariffs to try to avoid some of the tariffs. Then also, when the dollar has a lower value before we sell the products, then we have to take that difference as a negative, so the SEK 13 million are purely intercompany transactions.

The next question comes from Adrian Elmlund from Nordea.

Adrian Elmlund here from Nordea. A couple of questions from me. Also, I missed parts of the call. Sorry, there's a lot of calls going on. Maybe you can just -- I can have a follow-up here on the gross margin. Should we expect further pressure on the gross margin in H2? Because [FX] and the tariffs.

Again, it is really hard for me to say that at least for the tariff part, it's really hard to know what the outcome. I think there is a plan for the EU to have something in place with the U.S. before end of August. Before we know what that means, then it's really hard for me to estimate, but I would say from a business point of view, we don't see any impact on the gross margin. Of course, we won't know what the future of the currencies hold, whether that is a further decline or strengthening of the dollar. I think from a business point of view and from a sales price point of view, I don't see any pressure on gross margin.

Could you, in any way, quantify how much of the decline in the gross margin is due to product mix, contra FX and tariffs?

Of course, there was quite an impact due to the radio sales with 10% gross margin. That gave a couple of percent, if I remember the number correct. The product mix, again, we have a product mix depending on shipments to law enforcement with a lower gross margin or if we sell through a reseller or a system integrator or if we sell direct, and it is just the mix between those deliveries in a quarter that makes up. In general, our gross margins and especially with the newer developed products that we have launched have very strong gross margins.

Secondly, what are the main reasons behind the increase in OpEx? Is this R&D or other types of investments?

It's R&D and sales, and then the acquisition of UltraLYNX.

For the second half of the year, what should we expect here in terms of OpEx increase sequentially?

We continue to add people, both in R&D and sales where we see the necessity. Right now, there's maybe more focus on the sales side because the activity level is really, really high. It's always a matter of -- we constantly have a dialogue with relevant persons that could join our team. Then when the opportunity is there, we will hire them when it makes sense. There is going to be a little bit of fluctuation, but it still follows our plan. I think the first half was a little heavier due to the fact that we acquired UltraLYNX, and we brought 8 people on board in one role.

The next question comes from Yiwei Zhou from SEB.

I have 2 left here. Firstly, Lars, recently, I heard the military vehicle manufacturer talk about massive order from European countries. Based on your dialogue with the customers and your partners, when do you expect to see this will start to benefit you? Is it part of your second half strong expectation? Or is it more like '26, '27?

That's definitely further down the line. Many of these -- I mean, it's, of course, a massive opportunity over time with all these vehicles being built. Many of them will not decide for the communications equipment until they get much closer to delivery. I think many of these vehicles -- yes, I don't have the details, but I think the delivery times are probably from 24 months and upwards. That's going to be a very strong driver for us over years to come, but it's not for '25.

Then I'm also curious on the updated EBIT margin target. It's more on the timing. I remember 6 months ago, you just updated the market size estimates. What's triggered that you're also doing the update on the EBIT margin? I know it is widely expected that the EBIT margin should be above 20%, but still the timing is a bit.

There's nothing specific about the timing. It is more -- we have an annual process with the Board of Directors where we look through the targets. Of course, we updated the addressable markets, and we also now -- I mean, it was -- we had a couple of years during the pandemic where it was very unstable and volatile. Now we are back to a more stable track. We can see historically for the past couple of years that we are higher than our recent target of 15%. I think we are a company with a strong winning culture. We have to have targets that we have to work very hard to achieve, and at least this is an update of where we are right now. I think it's also natural based on the fact that when we can continue to grow our revenues with 20%, we will see a positive impact on EBIT margin over time as well. I think it's a natural.

I guess the 20% that doesn't put a limit on the quarterly EBIT margin.

No.

It's only on the full year.

Yes.

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

Thank you all for calling in today. I know you have very busy times with many, many companies reporting. Our next call will be with the third quarter update on October [3]. I will talk to you all again shortly. October 23, that is. Thank you, and have a great summer all.