Tobii AB (publ) (TOBII) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Tobii Conference Call on the COVID-19 pandemic. [Operator Instructions] I must advise you the conference is being recorded today. I'd now hand the conference over to your first speaker today, Henrik Eskilsson. Please go ahead, sir.

Thank you so much for that, and hi, everyone. I hope that you're all doing well in these strange times. Welcome to this update call regarding the impact of the COVID-19 pandemic on Tobii. And I'm sure that you have -- all of you who are on the call today, you've read the press release that we published this morning. But I would like to spend just a couple of minutes first to give you some more background before we go into a question-and-answer session at the end. So since we have an office and some 60 employees in Suzhou in China, which is only around 300 kilometers from Wuhan, which was, of course, the epicenter for the outbreak -- initial outbreak, we have been working actively with the coronavirus situation since quite early on. We thoroughly activated global and local response teams that have been monitoring the situation and taking proactive decisions as the situation has evolved gradually. And obviously, our priorities have been twofold: one, to safeguard the health and safety of our employees; and two, to ensure that our ability to service customers, supply products and maintain our business, is overall sustained. And thanks to this, Tobii is today more or less fully operational, although many of our employees are today working from home. We have not suffered any significant supply disturbances and our sales in the first quarter this year have held up well. In North America and Europe, the Q1 sales were good. But in China, we saw that we lost a large part of our sales during the time period of strict quarantines. Also in Japan, we saw negative impact on sales in the first quarter, although not nearly as severe as in China. Both Japan and China are important markets, in particular, for our Tobii Pro division. All in all, our revenue for the first quarter is around [ SEK 390 million ], which is actually some 5% above the revenue in the first quarter last year, but of course, lower than we were planning for 3 months ago. We will not go into the details of the first quarter financials today, but we'll instead get back to that on April 29, when we issue our report for the first quarter. The main reason we chose to inform the market today is the short-term outlook and the consequences thereof. The uncertainty is, of course, very high. But in the second quarter, we do anticipate that we will see a clear negative impact on our business. And we expect to see this in almost all markets, probably except China, though. We also expect some of this to continue in the third quarter, not because of underlying lower demand, but rather due to the fact that it is and we expect that it will, for some time, continue to be difficult for us to reach and to service our customers effectively. Some schools and care facilities and businesses are closed, so difficult to reach due to quarantine or semi-quarantine restrictions in society. Once our communities open up again, I expect the majority of our business to rebound fairly rapidly up to its normal level, and this is what we're already starting to see in China, actually. Even though the world at large may face a lower economic development for quite some time, I think most of our business will come back strongly, once the quarantine like restrictions are lifted. In Tobii Dynavox, for instance, we serve a very fundamental need of communication. That underlying need does not change. And in our experience, Tobii Dynavox business is, therefore, very resilient to the state of the economy at large. Similarly, the Scientific Research segment, which makes up about half of our Tobii Pro business, has historically been very resilient to downturns in the economy. Tobii Tech is, to a large extent, mainly driven by adoption rates and product innovation of our customers rather than by macroeconomic factors. So in summary, we anticipate negative impact on sales in the short term, but probably a faster recovery than many other companies. One consequence of this is that it will most likely not be possible to reach Tobii's financial targets, specifically in 2020. That includes a target to reach profitability this year for the group. I realize that there is a lot of questions about revised targets, but we will not be able to present revised targets today. We will review the financial targets when the situation has stabilized. To adapt our costs to the new revenue level in the short term, we have initiated a program. This, for instance, includes decreased discretionary expenses, fewer consultants, a global temporary work reduction program and a temporary salary reduction for the executive management team. An additional part of the program is to accelerate Tobii Tech's path to profitability. For the last several years, Tobii as a group has made substantial investments into Tobii Tech. There is still a large opportunity to bring our technology to several new major markets, and we will continue to invest in Tobii Tech. However, given the anticipated impact of the pandemic, we plan to somewhat reduce the level of investment. As part of this, we have decided to give notice of termination to up to 50 permanent employees in Tobii Tech. To put this in perspective, Tobii Tech has around 240 full-time employees. This is, of course, very sad. But the situation the world is in now, as we all know, requires extreme measures under extreme circumstances. It is the way it work right now. All in all, we expect this program to reduce our operating expenses in the second quarter with roughly 20% compared to last year. It is, of course, difficult to tell how long the current market situation will last and how it will evolve. But through these measures that we are announcing today, we expect that we will have a sufficiently strong financial position, both short and long term. We will also be ready to accelerate the business when the situation improves and are prepared to take further measures if we need to do so. So that was all I wanted to say initially, and I suggest we move over and take any potential questions from you calling in today.

[Operator Instructions] The first question is from the line of Daniel Thorsson.

I'll start with the question regarding the different regions. Do you expect to see a similar effect on the business in Europe and U.S. in Q2, that we have seen in Asia in Q1, to the knowledge you have as of today?

Thank you for that question, Daniel. I think it's difficult to estimate still what that impact will be. I do believe that the -- to some extent, society and -- is still somewhat more digital in Europe and the U.S. than in parts of Asia and can, therefore, be more resilient to situations where a lot of people are working from home, et cetera, than maybe what we saw in the also rather extreme quarantined place in China. But all in all, I think it's still too early to tell what the impact will be in the second quarter. We expect a clear negative impact. How large, we do not know.

Okay. Fair enough. And then a financial question on Q1. I know that you said that you don't want to elaborate too much on it, but should we expect any effect on gross margins in Q1 due to differences in the supply chain or transportation or anything that you have seen, that may also affect in Q2, that drives up the costs basically?

Yes. We're -- Daniel, we're still in the process of closing our quarter. So we're not going to comment on the P&Ls, et cetera, today. We will get back with a full report, as we said, on April 29.

Okay, okay. Fair enough. And regarding the U.S. -- the last question, regarding the U.S. for Dynavox business, what is the level of shutdown in the U.S. causing for the Dynavox business? Where are the main bottlenecks? Is it around procurement, physical sales for your deliveries? And what's the lead time? When could that hit your business most?

So again, I think the main impact or, really, the overwhelming majority of impact that we expect to see is not because of any lower underlying demand, but really just the fact that it's difficult to physically gain access to customers and end users in Tobii Dynavox, for instance, to physically be able to participate in assessments with potential clients that need these communication solutions and so forth. And of course, that depends, as you say, on the level of sort of shutdown in society. Are we able to get physical access to patients who may be in hospitals, in some cases, in care facilities or to school systems, et cetera. And the actual insurance funding part of the process and the work seems to be working reasonably well so far. And it seems like insurance companies in the U.S. and organizations like Medicare, Medicaid, et cetera, are sufficiently digitized today and are able to also conduct work effectively from home, et cetera. So it's more an issue of sort of being able to fill up the long-term pipeline with new assessments and new cases like that, and that's why we also expect to see that there is a slight delay and some of the impact on sales due to that. But it's not a -- obviously, in the U.S., the level of shutdown in society varies a lot from state-to-state, and the extent to which we're able to reach the customers also varies quite a bit. Okay. I have received a couple of questions that we can go into. One is the status of the Smartbox divestiture. Obviously, it is, of course, quite challenging to pursue a divestiture process in this current business climate. But we were already underway where -- with the divestiture when the quarantine restrictions started to apply. So we still had progress. But I would say the time line is more unclear, given the current situation. Okay. The other question that I received from a couple of people is on the 20% savings that we expect to achieve, around 20% in Q2. How do we calculate that? What are you seeing [ the most ], Johan?

All right. So what we have as the basis for the statement in the press release is operating expenses, i.e., COGS, i.e., cost of goods sold, are not included. We look at gross R&D spend, sales and marketing spend and G&A spend, and look at how we can bring these cost items down. And then, obviously, when we compare to 2019 in quarter 2, we have excluded Smartbox out of that base. Hope that clarifies.

Okay. I think that's it now. And any more questions, Sarah?

[Operator Instructions] Now we have a question from Daniel Thorsson.

Just a follow-up, Johan, on the 20% savings in OpEx in Q2. And what is the exact level you compare to? I'm not really up to speed here if we have the excluding Smartbox numbers or not from Q2. But I see around SEK 310 million in OpEx in Q2 '19 last year. Is that the correct figure to compare it to?

Yes. It is. Well done.

Excellent. And then a final question also on Tech. We haven't talked much about it. But what is the lead time effect on demand in the year that you see? And also, do you have any market insights from Q1? We saw, for example, HTC coming out with good comments on their VR sales in March just yesterday or this morning, I think. Is that what you see as well, that, that is maybe coming much later on, for example?

I think that so far, we see relatively modest effects on the Tobii Tech business as such from the pandemic. So we take it further back in value chain, which means that we would anticipate to see an effect later. I think that the -- we believe that the effect will, in some cases, be frankly quite small. In some cases, might even be positive and in some cases, negative, depending on which market segment or which customer we're talking about. So it's fairly difficult to gauge at this time what that will amount to overall. One thing, we do see a little bit, is a slight delay in some conversations with customers and partners that are working on upcoming future products. Again, largely due to the fact that with quarantine restrictions in place, it's difficult to have the right kind of meetings and some customers and partners have, in their turn, some challenges in their timelines and supply chains, et cetera. So we will have to see into that later with what the effects will actually turn out to be.

A question on that, Henrik, is that -- do you think you may see a delay in upcoming products because of -- you can't have the physical meetings within the industry or because your potential clients would like to postpone their upcoming launches because they estimate a weaker economy, for example, globally? What do you think is the main reason here?

We actually think it's the first, more so than the latter, based on the indications we have so far.

Your next question is from the line of Johannes Ries from Apus Capital.

So now only one follow-on question on Tobii. Probably you mentioned Tobii, as half of Tobii Pro business has shown very resilient in the latest downturns. What part of this business is resilient? What is more at risk?

So we have approximately -- thank you, Johannes, for the question, by the way. In Tobii Pro, roughly half of the business is to Scientific Research. So academe, universities, now the research institutions. And the other half is to commercial customers, mainly in market research and what we call professional, performance or training applications, et cetera. What we have seen historically, for instance, in the 2008 downturn of the economy, we saw that the Scientific Research business stayed strong throughout all of that because the research grants and funding stayed intact. And governments, if anything, were actually trying to really uphold that to stimulate the economy. Whereas the commercial side of Tobii Pro's business can be more sensitive to general economic downturns or macroeconomic climate at large. That's our anticipation and experience from history.

Okay. But therefore, the people has to come back to the institutions and not stay at home throughout the year.

You're absolutely correct. There's a difference here between the long-term effect and the short-term effect. So in the short term, it's actually almost the opposite, which is when schools and universities are closed, pretty much worldwide right now, it is, in some cases, significantly more difficult to reach customers. It's difficult to do a -- come on-site and do a physical demo of the fantastic eye-tracking machine. On the other hand, in some cases, professors have time to look at grant application and purchase of some eye-tracking equipment that they have been considering for some time. So it's not all black. There is a bit of a mixed bag and mixed situation in that. But generally, of course, it is more difficult to reach the customers. But that's a very different situation in the short-term from what we then expect may occur, if there is a recession happening on the back end of the coronavirus pandemic. And it's in that kind of long-term perspective that we truly believe that the scientific research part of the business as well as the cost of the Dynavox, will be highly resilient.

Great. And Tobii Tech, to come back to the question before. You see the projects -- the R&D project mostly of our customers running on because I have, on a lot of tech companies, everything may be so that -- maybe that's a question may be reduced in some regard, but R&D has mostly hold up well.

Yes. Yes. We also generally see R&D activities being held up quite well. And of course, even now, China's starting to kick in to gear again. We see more progress and traction with our current partners in China just over the past few weeks.

The next question is from the line of Sebastian Olsson from SEB.

Yes. Henrik and Johan, so one question from me, if I may. If you can please just go through the geographical sales exposure in Dynavox specifically, and how it looks today?

So Tobii Dynavox has roughly 2/3 of its sales in the U.S. and a majority of the remaining 1/3 in Europe and a little bit in other parts of the world.

Okay. And maybe also one more on the cost reductions. You were clear that the main part is in Tobii Tech. Maybe just elaborate a bit on Dynavox and Pro, and how the cost reduction program will affect those segments as well?

Yes. So generally, the program is actually applied group-wide. So we are reducing discretionary spend, reducing things like consultants, and we are implementing a temporary work reduction program across the entire group for all divisions globally. But then as you mentioned, we, also specifically in Tobii Tech, also do additional measures that have a bit more of a long-term effect to accelerate Tobii Tech's path to profitability on a stand-alone basis. But the first part of the program applies roughly equally actually to all parts of the group.

The next question is from the line of Seamus Astron (sic) [ Simon Kjellström ].

Yes. Can you hear me?

Yes.

We can.

Okay. Yes. I think you got the name wrong. It's Simon Kjellström from Carnegie. I only have one question. You say in the press release that you expect to have some sufficiently strong financial position. Could you elaborate on what scenario underlines this assessment?

Simon, I don't think we are going to go into all our scenarios in today's call. But obviously, we are stress testing our financial position in all possible scenarios as we see them. And that's how -- on that basis, that's how we have made the statement.

All right. So you can't say if this assumes that, for example, that demand returns by Q3 or Q4?

No. I'm not going to go into details on the call today on that.

We have one more question, and this is from the line of Daniel Kröger.

Henrik and Johan, it's Daniel here. So I have one short question on the finance side as well. So when you shift your breakeven point to, I think, '21, do you see any risk on the fund side that you need the capital increase or something like that?

No. Not right now. As I alluded to in the recent question here with the scenarios that we see in front of us, we believe that our financial position is sufficiently strong now for -- obviously, the short term, but also longer term. So no.

Okay. And then a second question on Tobii Tech. Do you see any discussion of -- on the product side that someone will shift some products to -- I don't know, next year, like on the game content or something like that?

No. We have not seen any such outcomes from the pandemic as such, other than some smaller calendar shift in products that might have shifted a couple of months due to the pandemic, but nothing major. Okay, I think that's it, Sarah?

Thank you. Yes, and no further questions. I'll hand back to the speakers for closing.

Good. So thank you so much for joining today, and thank you all for good questions. And I hope that we will see you in our earnings call on April 29.

Stay safe and healthy.

Safe and healthy. Thanks, everyone. Bye-bye.

Thank you. That does conclude the conference for today. Thank you for participating. You may now disconnect.