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

All right. Hi, everybody, and welcome to Tobii's earnings call for the third quarter. I hope that you're all having a great day and happy Halloween to all of you. I'm Henrik Eskilsson. And together with Linda Tybring, we will go through our results for Q3. Linda's regular day job is as CFO for Tobii Dynavox, but she's currently also interim CFO for the Tobii Group until our new group CFO, Magdalena, comes on board in January. Today is the first time that we present our quarterly earnings in a webcast format. So hopefully, the technology will bear with us today. Only pre-invited guests will be able to ask questions verbally in this webcast. Everyone else who's joining will be able to ask questions as well, but only via the chat window. Feel free to post questions you may have, and we will try to address as many as possible after the presentation. Let's start with a 1-page summary of the quarter. In the third quarter, we saw good progress in our business despite challenging conditions. We experienced continued pressure from -- on revenue from COVID-19 in all 3 of our business units. However, we do feel that the underlying customer demand remains strong as the investments we've made in strengthening our product portfolio and drive awareness fuel an underlying business momentum. Our assessment is that, without the negative effects of the pandemic, we would have shown strong growth across the board. Our revenue overall only decreased by 4% organically. From Q2 to Q3, we saw sequential organic growth, and we feel that we have now clearly passed the trough. We saw a high activity level in the business during the quarter, and we did announce important strategic collaborations, product launches and customer wins. Our cost-reduction program has continued to deliver good results with a 16% organic OpEx reduction. This led to an improved EBIT. And if you adjust also for R&D amortization effects and currency effects, the profitability improvement from last year was significant. Tobii stands strong with a solid financial position with SEK 300 million of cash. And after the quarter, we have now also concluded the mandated divestiture of Smartbox in a good way, which strengthens our financial position further. As you know, Tobii Dynavox is our largest division and stands for more than half of our revenue. Tobii Dynavox is the global leader in assistive technology for communication. Tobii Dynavox business improved in the third quarter, and it's great to see that we are now back in organic growth. Revenue rose by 2% organically. We continue to experience significant challenges due to COVID-19, in particular, in the U.S., where the impact of the pandemic on society makes it more difficult for us to reach and interact with end users and prescribers of assistive technology for communication. However, in most countries outside the U.S., revenue grew at a good pace compared to last year. We have a very strong product portfolio, in particular, with the new I-Series, which helped us drive underlying demand. Our team is doing heroic efforts and are working very hard and with lots of creativity to overcome the practical challenges of the pandemic. We continue to see that the investments that we've made in recent years in digitalization are really paying off in times like this. We've been able to switch to digital ways of working for sales, reimbursement support, trainings, customer support, product development, all of this quickly and effectively. One evidence of the great work that our teams are doing is that our customer satisfaction rates are at all-time high levels. Our compound Net Promoter Score is now at 47, which is very high, and our NPS scores for our post-sale customer support is even higher at 57. And for customer -- our funding services were even as high as 80. In the quarter, we launched the new PCEye product, which is our first stand-alone eye tracker with outdoor tracking capabilities. Our biggest flash, however, was the strategic collaboration that Tobii Dynavox and Google announced now in October. As one part of this collaboration, we work together to deeply integrate Google Assistant into Tobii Dynavox's communication solutions. Instead of having to create voice commands to control Google Assistant, which is, of course, difficult for our users, most of our users have severe disabilities, they are themselves not able to communicate. They often also have physical disabilities. So it's literally impossible for them by themselves to talk to Google Assistant to make Google Assistant do different things. But what we've done together with Google is to work closely together to enable our communication solutions to communicate directly with the Google Assistant from the software in a native way. And this makes it much more effective, much easier for our users to access all of the fantastic capabilities of a service like Google Assistant. And we actually brought you a quick little demo. So we'll give it a shot and see if we can show you an example of how this works. So this is on of our new I-Series devices. So it's a computer with built-in eye control. And what you see on the screen here is our software Snap+Core First, which enables our users to do all sorts of things: communicate, generate speech, but now we also integrate with Google Assistant. So for instance, if I want to turn off the lights, and again, I have a disability, and I am unable to physically go up and turn off the lights. I'm also unable to verbalize this command to Google Assistant. But what I can do is I can simply -- and now we're having the little demo playing with us. Why are -- yes, yes. Give us a second, and we will see if we get this going. There we go. So now if I want to turn off the lights, all I need to do is I look and turn off the lights.

All right. Turning the lamp off.

And then Google Assistant turns off the lamp for us. And of course, if I want to turn the lamp back on again, I simply look at that button.

Got it. Turning on the lamp.

If I want to check the weather, for instance, I can navigate around here. I can go to time and weather. I look at an icon. And...

Today in Solna, there will be showers with a forecast high of 10 and a low of 3. Right now, it's 8 degrees and sunny.

For most of us, this type of ability to control the Google Assistant is mainstream today. Many of us use it in our own homes. But for our users in Tobii Dynavox, this capability is exceptionally important and exceptionally powerful. There are literally thousands of devices and use cases which are now available quickly and easily for our users to control through Google Assistant. And together, this provides our users with whole new level of freedom and independence. We have also worked together with Google to incorporate what's called Tobii's picture communication symbols, or PCS, in Google Android's Action Blocks. Action Blocks is a functionality available in Android devices, which make it possible to create macros or predefined commands on your phone or tablet. An Action Block could, for instance, be to send a text message to mom and tell her to pick me up. And using our PCS symbols, users can include easy-to-understand symbols for such commands and have them, for instance, on your mobile phone. This collaboration with Google is important in several ways. First and most important, it provides great improvements and new capabilities to our users. Improved ability to control smart home devices has been the #1 request from a large part of our user base since the launch of our new I-Series. Second, working with strong ecosystem players like Google really helped drive awareness around assistive technology for communication. And third, advances like this help solidify our leadership position in assistive technology for communication. So Linda, over to you and financials for Tobii Dynavox.

Yes. Thanks, Henrik. Really good to be here. Let's start with Tobii Dynavox. In the quarter, the revenue grew with 2% organically. And as Henrik said, we continue to have positive trends despite the COVID situation. We could almost see all markets outside U.S. actually grow, which is in the grid. But as Henrik mentioned, in the U.S., we are still a bit challenged with the restriction in society. So we continue to struggle to reach our -- and service our customers and end users. However, set the COVID aside again, we also saw a very strong performance of our new I-Series, which is great. Gross margin came in at 67%. We controlled our operating expenses well, which decreased by 2%, but that also relates to none of us being able to travel and meet customers in a normal way. We made a minor positive effect of the government grants related to pandemic. So despite the external circumstances, we managed to deliver an EBIT margin of solid 13%. That is 1% decline versus last year, but that difference is fully explained by negative effects of currency. If we summarize the first 9 months of 2020, Tobii Dynavox revenue declined -- increased, sorry, 2% organically. The operating margin was 14%, up 3%, with good improvement. The improved margin, we can really explain as I mentioned earlier, I-Series is really strong. We've managed to really meet the challenges with COVID-19, which is really great. And we've got some government grants, which has been helpful. This profitability level is really close to the long-term financial target that we have strived for in many years. Back to you, Henrik.

Great. Thank you, Linda. So let's move over to our second division, Tobii Pro. As you all know, Tobii Pro is a global leader in eye-tracking solutions for understanding human behavior, also with a very strong market position. Tobii Pro saw a partial recovery from the pandemic in the third quarter. In Q3, revenue decreased by 14% organically compared to last year, but grew significantly over the second quarter. Some universities opened up in the third quarter, while others remained partially or entirely closed. Enterprise customers are gradually starting to be able to conduct research and studies again, and we saw them gradually starting to make investments in eye-tracking equipment and research projects. It has continued to be difficult, but not quite as difficult as in the second quarter for us to reach and interact with our customers and do sales and trainings. The new Pro Glasses 3 product was launched in June and has been very well received by the market. Customer reviews are great. And this flagship product opens up for additional sales opportunities, both to existing customers and new customers and both in established as well as in new application areas. And these initial sales of the new Glasses 3 also helped push revenue up in the quarter. The pandemic is also forcing us and our customers to rethink and invent new ways of conducting studies to understand human behavior. One example of this is that we have seen an increased interest in conducting in-home research using the glasses. We have several major customers that want to understand behavior in people's own homes. For instance, we have recently conducted a large study together with a very big streaming company. We wanted to optimize the user interface of their service on TVs and other devices. We did this by sending glasses home to people and ask them to wear these while watching TV. Another example, we're doing a large study right now with one of the biggest consumer goods brands who want to understand how people go about selecting what to have for dinner. So we equip a number of families with glasses and instruct them to wear the glasses when going about dinner preparations, so our customer can then see how their customers roam around in their cabinets, roam around in the freezer, cook the meal and then gather the family to eat together. And they want to use this knowledge to innovate and craft more enjoyable experiences. A third example is a pharma company who wants to understand how people in the home use medications. Right. Woah, what happened?

Life at Tobii. Never a boring time.

I guess you never know what happens in a Tobii earnings call, right? So just making sure everybody is paying attention. Let's see if we can get back on track there, Linda.

Yes. Sorry. I'm totally out of focus then.

Okay. So Tobii Pro. Overall, for Tobii Pro, we expect to see a continued gradual recovery to the business going forward. Right, Linda, financials on that.

So let's summarize. I mean Tobii Pro's performance in the third quarter continues to be impacted by the COVID-19 pandemic. Revenue declined by 14% organically, and Henrik summarized some of the challenges we saw, but also some of the improvements. We could see that Q3 was a partial recovery and significantly higher sales in Q2, which I think is great. Gross margin came in at a solid 75%. Operating expenses came down as a result of the communicated cost-reduction program earlier this year, where we managed an 11% organic decline. The cost reduction that has been done in Tobii Pro is partially structural in nature. And we will, therefore, continue to see some of this effect in the coming quarters as well. We are really happy to report that Tobii Pro is back in profit, even though with a small 2% EBITDA margin. The strong increase in revenue over Q2, together with a tight cost control, helped us come back to profit. If we summarize the first 9 months of this year, Tobii Pro's revenue decreased by 22% organically. Gross operating margin was a negative 9%, which was mainly due to the extreme impact of COVID-19 in the second quarter. Let's spend some time on Tech, Henrik.

Thanks, Linda. Tobii Tech, as you all know, is the world's leading supplier of eye-tracking technology for integration in consumer electronics and other volume products. Whereas last quarter showed strong growth for Tobii Tech, in this quarter, we saw actually a slight decline in revenue compared to Q3 of last year. Revenue from development projects with customers tends to be lumpy. In the second quarter, such project revenue was unusually high, whereas now in the third quarter it was lower than normal. So that made a clear difference in terms of revenue. Also, the pandemic has slowed us down in business development. It is more difficult to win complex technology deals when we cannot fly over to meet customers and key decision-makers face to face. Several of our customers have also, in turn, had development projects postponed due to COVID-19 and some of our established integration customers have seen lower sales volumes, which in turn affect Tobii Tech's revenue negatively. These negative effects of COVID-19 on revenue have been more delayed for Tobii Tech than what we've seen in the other 2 divisions that had more impact experienced already in the second quarter. However, despite these short-term headwinds, we continue to make progress with important deals and have a high activity level in numerous customer engagements. HP announced its latest VR headset, the HP Reverb G2 Omnicept Edition with Tobii's Eye Tracking integrated. The HP headset is powered by our EyeChip ASIC and includes a license to our system design and eye-tracking algorithms. This headset targets enterprise customers in application areas such as training, collaboration, creation and analytics. And eye tracking provides strong values in the headset, for instance, by enabling more powerful graphics and powerful analytics capabilities. Let's show one of HP's teaser videos on this new device. [Presentation]

So this is how HP talks about new capabilities that, to a large extent, stem from eye tracking. And actually, all of the leading -- the 3 leading enterprise-focused VR headset manufacturers have now launched devices with Tobii eye tracking integrated. So both HTC, Pico and now also HP. And this is a great testament both to the fact that eye tracking is well underway to become ubiquitous for VR and to the fact that Tobii is a clear market leader in supplying technology for this. Tobii's revenue opportunity from enterprise headsets in itself is modest due to the fact that these types of headsets sell in limited volume. Our large revenue opportunity in VR comes from eye tracking moves into high-volume consumer headsets, which we expect will start to happen in the coming 2 years. In the quarter, we also landed design wins with OEM customers for glasses-free 3D screens, touchless information kiosks and also an innovative device enabled by eye tracking to perform eye examinations with really young children. Back to you, Linda.

Thanks, Henrik. Tobii Tech's external revenue declined in the quarter with 7% organically, as Henrik mentioned, mainly explained by timing of the milestones in different projects, which were materially higher in Q2 but lower than usual in Q3. The decline is also a result of COVID-19 causing a difficult environment for deals, project delays with new customers, but also lower sales from established partners. However, we saw the internal revenue grew 20% organically. Overall, revenue were down 1% organically. If we look at the gross margin, came in at 46%, which is in line with last year. Tobii Tech's cost-reduction program, which was -- included a reduction of about 60 consultants and employees, has been well implemented, together with temporary lower cost as a result of COVID-19, for example, that we're not able to travel or meet our customers, a reduction of more than 30% in operating cost was achieved compared with the same quarter last year. Tobii Tech's -- the operating loss came down versus last year, despite that we are capitalizing R&D costs -- lower R&D costs and higher amortization and had negative currency effect of [ 1 10 ] in nature. If we conclude the first 9 months of 2020, revenue increased 15% organically. Tobii Tech's operating result is minus SEK 167 million, which means a strong SEK 57 million in improvement. Let's summarize the group. So Tobii Group revenue in Q3 held up well despite the negative effect of the pandemic on the majority of our business. However, this was, to a large extent, countered by good growth with several parts of Tobii products. Revenue declined with 4% organically. Gross margin came in flat versus last year at 69%. We continue to execute well on our announced cost-reduction program. In summary, we lowered our operating expenses with 16% organically versus last year. Tobii's EBIT was a negative SEK 27 million, which was an improvement versus last year and well achieved according to the circumstances. We have during the period had lower R&D capitalization. We have increased amortization and depreciation versus same time last year. In addition, we have a large negative currency effects, and we also received government grants. If we were to adjust for these factors, we came closer to cash earnings. We improved by SEK 29 million year-over-year, which gives an alternative view of how the underlying profitability trend is. So if we summarize the 9 months of 2020, revenue decreased with 3% organically. Our operating loss was SEK 95 million, which was an improvement versus 2019. And same as I mentioned earlier, we had increased amortization, lower R&D capitalization and a large negative currency impact. And if we do the same earnings -- cash earnings adjustments, we will say it's improved by SEK 81 million versus last year. Next page, please. So let's conclude the Q3 financial by reviewing our cash flow, which was a positive contribution of SEK 11 million and improved materially versus last year. The large improvement in cash flow is mainly explained by the significantly better result from operation, but also improved working capital. But the working capital improvement is, to a large extent, due to the postponed taxes that we got from the tax authorities -- or the tax authorities' responses to COVID-19. Cash at hand, SEK 298 million, and this is excluding Smartbox. If we look at the net debt, this was SEK 167 million, exclude the SEK 102 million that relates to a leasing arrangement according to IFRS 16. And we have to remember that the divestment of Smartbox that was completed shortly after the period will lower our net debt with another SEK 114 million. Back to you, Henrik.

Great. Thanks, Linda. So in conclusion, we are overall content with the quarter and have made good progress with important strategic collaborations, product launches and customer wins despite difficult circumstances. COVID-19 headwinds were countered by good underlying momentum. And consequently, revenue held up well. Our cost-reduction measures have had the intended effect, and we improved EBIT. Financially, we are solid, in particular, after the divestiture of Smartbox. Looking ahead, we are cautiously optimistic. Q2 was clearly the trough, and Q3 showed clear signs of improvement. As the world slowly normalizes, we expect the positive trend will continue. However, it's still very difficult to project exactly how the situation will unfold and develop. We will keep a firm grip on spending until we see solid revenue growth return. In the medium and long term, we are bullish about the opportunities for growth and improving profitability in all 3 businesses. So with that, we are ready for questions.

[Operator Instructions] I have a few questions already. One is, when do you publish design wins?

Yes. So that depends is the not so simple answer. Obviously, we try to announce and communicate material design wins when we can. We often experience that design wins is not something that occurs at a binary point in time. It often tends to be something that evolves gradually as part of collaboration with the customer. And often -- in particular in -- for instance, the PC industry, the formal agreements that actually constitute the design win occur very close to or simultaneous, in some cases, even after products have actually been announced and launched. We also experience with many of our customers that integration of eye-tracking technology into their product is a very strategic nature and extremely sensitive to them and their business interests. And therefore, also for those reasons, it is sometimes difficult or impossible for us to maintain good customer relationships and actually announce sort of their future coming products or key features in future coming products ahead of time. And that also means that, in many cases, design wins are not announced until the time of product launch or product announcement. So in practice, it is fairly often that design wins are not announced until the product is actually launched. And in those cases, we may very well have been working closely with those customers for 1 or even 2 or, in some cases, even 3 years before that announcement. In other situations and cases, we are able to announce design wins much earlier. And obviously, we do so, if we can.

Great. And the next question comes from Ramil Koria with SE Banken.

Can you hear me?

Yes, we can.

Great. Thank you guys for the presentation. Least to say, it was entertaining. Just a few questions from my side. First off, a clarification. I mean you've touched upon it several times. But just to clarify, the sort of the postponements in Tech and the impact on external revenues, you said that Q2 was extraordinarily strong and Q3 was sort of the complete opposite. Should we expect a normalized levels of in between, all else equal? Or how should we reason around that, also bearing in mind the sort of the impact from the pandemic in the coming few quarters here?

Yes. No, it's a good question. I mean we see 2 effects in Tobii Tech. One of the effects is the impact of these revenues from customer projects. And they do have a tendency to be lumpy because we send invoices and recognize revenue when we reach certain milestones in those development projects. And we so happen to reach important milestones simultaneously for a couple of these big projects in the second quarter, and that meant that we had this unusually high amount of project revenues in that quarter. Whereas then in the third quarter, it was sort of the opposite. Projects are still running well. It just so happens that the timing of these milestones did not occur in the third quarter specifically. And then we had unusually low project revenue. So if you look at the sort of difference between the second and the third quarter, more than half of that is explained by the timing of these project revenues. And I do think that going forward, you should sort of -- it's difficult to say anything forward-looking on a quarter-to-quarter basis, but sort of, on average, you should probably assume something in between. But then we also have the second effect, which is more of almost like delayed COVID-19 effect that we start seeing the impact of some business development efforts that have been more difficult and also that our integration customers have seen delays and lower sales revenues in some of their markets. And because we sell integration components, that effect doesn't occur instantaneously for Tobii Tech. For Tobii Pro and for Tobii Dynavox, the sort of effect of COVID-19 is almost immediate. But for Tobii Tech, it sort of has the 1-quarter delay, which we experienced to some extent. And therefore, I think it's reasonable to assume that we are likely to see those type of effects also in the coming 1 to 2 quarters.

That's crystal clear. And then a pretty high-level question on Tobii Tech, given the head count reductions you've made. I believe it was 60 FTEs, whether that be employees or consultants. But can you just take us through sort of which functions that have been affected the most in -- within Tobii Tech on the back of the head count reductions?

So the biggest part of this is that we've reduced the number of consultants, but it has also affected some employees. And we have reduced resources somewhat both in research and development as well as in certain types of marketing functions, for instance. It is mainly in 2 areas. One is in truly long-term initiatives. So both some research projects that are very long term, so 5-year-type horizon, as well as some very long-term market activities that we have postponed essentially by reducing resources focused on that. And also, we have more of these reductions specifically in work around the PC segment. One example is we have, over the past couple of years, we've made very large investments in developing our new IS5 eye-tracking platform, which serves customers both in the PC segment as well as in niche applications and also Tobii Pro and Tobii Dynavox use this eye-tracking platform. That's been a very expensive development activity, which has consumed a lot of resources for us. But it's now done and is working really, really well. It's a great eye-tracking platform. It's very successful for us, and we're integrating that in a lot of our own products and customer products. But we don't feel any immediate need to develop a new IS6 platform. We are served well with the IS5. So there, we can actually in the short term reduce the amount of R&D resources in that area in the near term, and that specifically impacts the PC segments and reduces the cost base in that segment when launched.

That leads me pretty nicely into my sort of next question about IS6 or the potential launch of IS6 postponed and the impact from that in terms of -- put it this way, how important this sort of next-generation IS platform to reach mass-market solutions? Or I guess, I already know the answer, but do you reckon that IS5 will be enough to be able to integrate in sort of mass-market solutions?

IS5 is -- accomplishes what we wanted IS5 to accomplish, which is a great eye-tracking platform. It has shrunk the size and the cost further. It enables us to integrate eye tracking into a lot of different devices and use cases. But it's also -- and this is something we have, of course, known and communicated from early on is that the IS 5platform is not in itself sufficient to take sort of high-fidelity eye tracking all the way to super mass market in PC. It is still a fairly expensive eye-tracking platform, if you look at it from a sort of super high-volume consumer electronics standpoint. That means that we can do integrations into premium gaming laptops. We can do really good integration into niche application market customers. We saw, for instance, new design win this quarter with 3D -- glasses-free 3D screens, information kiosks, again, Tobii Dynavox, Tobii Pro, et cetera. But to reach the true mass-market volume, we do need eye-tracking platform that is at lower cost. What we're doing in the near term and what we think is actually the most effective way to make headway into the mass-market section on the PC area is the offering that we call Tobii Aware, which is essentially a more narrow set of features around eye tracking that we can realize based on already existing hardware that's available in many mainstream PCs already. And this enables us to much faster reach into the millions of volumes in the PC market and drive penetration from that direction. And we actually think that this is the best and most effective strategy to reach the high-volume penetration in this market space. And that it's actually the right strategic timing to follow a little bit later with a low-cost IS6 platform down the road.

That's clear. Let's see what more I had. Just on the Google solution -- I'm being slow here, but could you just elaborate a bit on sort of -- I mean, I for one wouldn't expect sort of the addressable market or the target audience here to be very tech-savvy, i.e., smart home penetration in newer customer groups, I would expect hasn't come too far. Could you just take us through sort of why I'm potentially wrong here? And if you perhaps have any numbers to share in terms of what this more concretely could sort of provide you with in the coming year or 2, that would be very helpful.

Sure. So first of all, this is not -- it's not that smart home integration in itself opens up a new market. It's more that it provides a fundamentally very, very important feature for our existing markets and our existing users. For many of our users, being able to control your home and the environment around you is one of the most desired capabilities. Again, if you have a severe disability, you -- many of our users are unable to physically control things in their environment. But of course, the ability to yourself say I want to turn on or off the lights, I want to change the temperature -- thermostat, I want to open my door, want to lock my door, I'm going to put on the TV, I want to change channels, I mean, all of those things that we just take for granted and we do a gazillion things like this every day, many of our users are not able to do this by themselves and having smart home features that help them do that, it becomes super important. So whereas things like Google Assistant, frankly, is maybe a nifty little thing for the average consumer, for one of our users, it is a tremendous benefit that really, really means a lot for quality of life and independence. So this is definitely something that -- and smart home features are not new in this space of assistive technology for communication. This exists already before, but what's so exciting about integrating this with something like Google Assistant is that it's moving from being very niche, peculiar, rather expensive technology to actually be gaining access to this huge ecosystem of thousands of different devices and applications and use cases in a much easier to use format. So it really opens up to a much wider world of smart home capabilities. If we look at the -- so again, it doesn't create a new market. However, the market that we are addressing in Tobii Dynavox, assistive technology for communication, that is a large and very underpenetrated market. So we often talk about the fact that approximately 50 million people worldwide need assistive technology to be able to communicate effectively. And we estimate that the current global penetration, so people who have any meaningful assistive technology to help with their communication, out of these 50 million, is less than 2%. So more than 98% of people who need this don't have access to it. So of course, improving the solutions, driving awareness, coming up with better and better products, training, et cetera, that's what's helping drive this market, which we think is a much larger opportunity long term than what we see here right now.

Great. Two final questions from me. First off, on the sort of -- on the very short term here, cost seasonality. How should we reason based on everything you said in this presentation now going into Q4? Is there any more cost savings to get? Or this is sort of the base level and then adjusted for vacations and stuff in Q3?

Yes, I think you're on it. We don't see more cost reduction than we already maybe implemented now. We could see still some effects that we were not able to travel, even in Q4 either. At the same time, we've had some vacations in Q3, and we have had some work reduction part of Q3 as well. So it will probably be some effect into Q4 for that.

Yes, it's to say that the cost level now is the right cost level, but it will go up gradually when we start traveling, doing trade shows and things like that.

Right, right. That's understood. And then a final one for me. Just in the last few weeks, if you've seen any impact on sort of the Pro segment, I guess, in particular, from the second wave here or if it's still too early to say.

I think we generally see a partial and gradual recovery in Tobii Pro, and we see that continuing now in the early part of the fourth quarter as well. So we are -- we continue to be cautiously optimistic about the near-term developments.

And next, we'll take questions from Daniel Djurberg.

Yes. Many questions was asked already. I would like to ask you, though, on the Dynavox PCEye, given the improved outdoor eye control and so on without sunlight, et cetera. Can you say if this technology is also important for the rest of the group, i.e., for AR glasses or whatever, but into Tech or if it's more Dynavox operations?

So in the very near term, it's quite Tobii Dynavox-specific actually because it's less important for the products that most of our current customers have otherwise in Tobii Tech and Tobii Pro. But you're actually quite right that if we look a little bit into the future, there's definitely new use cases and products where outdoor eye-tracking capabilities are essential. So it's definitely something where we see opportunities and ways to leverage these investments in the future as well.

Perfect. May I ask you also, you are clearly a market leader and you state that there are normally 2 to 3 years' time to market until product is launched, et cetera, from the projects. And you talked about that you expect the AR consumer market to pick up here in like 2 years. So that should suggest that you have at least a couple of AR/VR projects that is tilting to the consumer markets already. Can you comment a little bit on your pipeline with regards to the consumer market? If you do believe that you will be the market leader there as well. Or is it tougher competition or if you can -- yes, anything would be great.

No, another good question. Short answer is yes. We have customer engagements with headsets that are targeting consumer markets. And we think that we are well positioned also for that development. Even though you're also correct in saying that that's an area where we expect to see more competition than on the pure from -- mainly from the some internal developments than what we see on the enterprise side.

We take the next questions from Daniel Thorsson with ABG.

Yes, yes. Do you hear me?

Yes.

Excellent. Okay. So a question on Tech. What are the key factors or insights you have that make you confident that we will see it take off in the consumer VR headset market within 2 years as we have basically said that for the last 4 years?

And I think we've actually sharpened our language a little bit compared to what we've said previously. I think we've been a little bit more fluffy in the time line previously. And I think we're saying now that we expect to see this start to happen within 2 years. So it is drawing closer. And I think it -- our confidence level here is as mentioned just recently is because we are engaged in development projects targeting this.

Okay. Excellent. Follow-up on that. Is the main competition still in-house development? And what visibility do you have on that?

Yes. The main competition is still in-house development. And if anything, I think when we compare to other sort of external suppliers, we feel that our position is strengthening, relatively speaking, day by day. We are learning tremendously much, and we are refining our technology and also our capability to interact with customers with each one of these designs and integrations that we do. So our market position relative to the external players is very strong. When it comes to internal developments, almost by definition, it's more difficult for us to have perfect insight. We obviously have relationships with more or less everyone in the space and industry. So we have pretty good idea of who is doing what and where and how and how do we relate to that.

Is there a risk that the more delays we get in the market in-house development could catch up with you as they are also working together with you and get more time to catch up?

I think so far, if anything, we're seeing the opposite, namely that some of the teams that are working and attempting to do eye tracking internally also discover that this is actually very difficult to do well. And it's really important to do it well, in particular, when you go into a mass market. So I think we see increased appreciation for the core competence and know-how that Tobii contributes with.

Okay. Excellent. And then a question on the headsets you have already launched or that you are integrated in. How much your revenues are coming from VR product sales today from HTC and then perhaps Pico in the very early days? And have they met your expectations?

So revenue from these enterprise headsets is modest. And actually, if we look in the -- in our VR segment, the majority of revenues are still from development projects and not from product sales of components or licensing revenue. So the actual revenue is modest. We expect it to increase also from the enterprise headsets, but the really big increase we expect to come when consumer handsets integrate our eye-tracking technology.

Okay. Good. We already touched upon it a bit here in Pro, but did you see a gradual improvement during the quarter of Q3? I guess that July and August were quite quiet months and September should probably have ended pretty strong here. Is that correct?

Yes. We saw a gradual improvement during the quarter as well in the Tobii Pro business. That's correct.

Okay. We are running a bit short on time here, but we have -- we'll try to capture as many of the questions as possible in the webcast. Firstly, related to Tobii Tech. Don't you think that trying to reduce the loss might hurt your growth and that you're being beaten by competition? Why not go for very high-growth rate while sustaining losses and keeping a competitive advantage?

Great question. Obviously, this is a very intense topic for debate of where do we strike exactly the right balance. And I think it's definitely behind these different aspects. On the one hand, continuing -- I mean, we are doing, and we actually -- even with these cost reductions, we're still doing large investments in Tobii Tech. We've made very large investments, both in developing core technology and enabling some of these markets. And of course, we do that because we believe tremendously much in the long-term potential in several of the areas that Tobii Tech is addressing. But there is also a balance between continuing to invest and on the other hand the cash and money that we have available at our disposal. And in particular, what happens in the COVID-19 situation actually is that because we are seeing short-term impacts on the profit generation for Tobii Dynavox and Tobii Pro, we have slightly less cash at our disposal. And then to balance that and make sure that we don't spend more money than we have, then we're also making a slight adjustment to the investment pace in Tobii Tech. But I want to emphasize, we are still investing a lot of resources and money in Tobii Tech. And of course, we do that because we believe in it. And if things go well, the pandemic is over and group -- Tobii Group comes into profit zone and also Tobii Tech continues to increase its revenue at high pace, then, of course, not too far into the future, we can also start increasing the investment pace even further.

And also on that, there is a question that I believe that you said some cost reduction would be a lot more long term. Would it possible to shed some light on this? What areas are being impacted?

So I think, in part, we've already addressed that with one of the other questions. But I think, in terms of the cost reductions, if we look to the group as a whole, they fall into 2 buckets. One is short-term effects that are specifically related to COVID-19 is both that we have, as many other companies, we've reduced discretionary spending, but also we have less cost for travels and trade shows, things like that. And those are effects that we should expect those costs will come back during 2021 as we hopefully put COVID-19 behind us. But then we also have these structural changes that we've made, where, in particular, in Tobii Tech and a little bit in Tobii Pro, we have actually reduced the number of consultants and a little bit also the number of employees. And these are more long-term effects. They will pertain until we again choose to come back and grow back the team up again.

When you say enterprise headset revenue opportunity is limited, why are you spending so much resources on enterprise technology then?

Also a good question. And first of all, we are getting paid for this. So both integration projects into these enterprise headsets is typically something we charge for and cover our costs with. And then on top of that, we, of course, have revenues from sales of components and licenses, et cetera. So on sort of an atomic level, they are profitable deals for us, but they also sit within the framework of developing some of the core technology, which we cover the cost base for, et cetera. And of course, the reason that we do this is we believe that there is a very large opportunity for eye tracking and for Tobii in the space of VR and also in AR. We do, however, also believe that it goes -- it has its natural course. It starts with the high-end enterprise headsets who can more easily afford the technology in the early stage, when it's still a little bit more expensive, a little bit less mature. And there, it's easier to also develop the ecosystems and more targeted specific applications and make use of eye tracking and gain a strong foothold in that market. And then based on that, building from that, both the acceptance of eye tracking as a technology, but also, of course, the learnings on the technology and having perfected how it works and optimize the production cost, the power consumption, we can then mature and become ready for taking this big step into the high-volume consumer handsets. So I think it's a healthy but also very natural and quite typical traditional way for a technology market to evolve.

And I think you partly answered this question, but maybe we could elaborate a little bit on it. When do you see the volumes really picking up then in the enterprise sector, if that should come before the consumer market?

We expect the volumes for VR and enterprise to grow gradually. So from quite low levels to slightly higher and some medium levels over the course of the next 1, 2, 3 years.

And I think that also has been answered, but it appears that both Oculus Quest 2 and Valve Index that eye tracking is not a must-have at this stage at least. If the market leaders do not include the functionality, what makes you confident that eye tracking for consumer-grade headset will see adoption in the coming years? And 2 more questions on that theme as well. Can you please give us a hint when you will see the first consumer headset with eye tracking? And are there any design wins in the consumer segment? I think we've touched upon this. I mean we can keep it quite short.

I mean it's correct observation that none of the consumer headsets have integrated eye tracking yet, whereas almost all of the enterprise headsets have started to incorporate eye tracking. However, if you listen carefully to what the manufacturers of consumer headsets say, they all talk quite openly about eye tracking as an important and coming functionality and feature also in the consumer space. Doesn't matter if you listen carefully to what spokespersons in companies like Sony or Facebook, Oculus, et cetera, are talking about. So -- and of course, we also have strong relationships in various ways with, yes, virtually everybody in this space, and that makes us even more confident that eye-tracking technology is coming also in the consumer headsets over the course of the next several years. I choose not to comment on whether we -- specifically on whether we have design wins in the consumer space. What I can say is we are working with companies that are targeting products in the consumer space. But for now, I do not comment on whether that should be considered as design wins or not.

Thank you. And a bit on the competition side here, how will your eye-tracking technology compare against NVIDIA's offering? And can we comment on Microsoft's newly developed hardware-agnostic AI-based gaze tracking? Is that a substantial competition for Tobii Aware, for example?

So for context for others listening in, both -- there's been some press over the past year where both NVIDIA has published research papers on eye-tracking technology and Microsoft has published research papers on eye-tracking technology. None of this is really new per se. These are research activities that companies like NVIDIA and Microsoft and others of that nature do in their research department. They've done so previously in past years as well. As far as we know, there is no plans with either of these companies to actually productize these research initiatives at this time. That can potentially change. We think it's really interesting, and we appreciate the fact that the ecosystem at large is putting a lot of effort into understanding eye tracking, playing with it in the laboratory and contributing together to grow a large ecosystem where this type of technology becomes ubiquitous across all of these devices. And we believe that we are extremely well positioned to take a strong market position as these markets unfold.

We have 4 more questions. I think we have time for them. I have a couple -- first, can you give some color on the market share gain or loss during COVID-19 in the 3 divisions compared to last year?

Difficult to know for sure. Our perception is that we are slightly gaining market share actually in all 3 business units, but that's our subjective perception.

Do you expect that the Google collaboration in Tobii Tech Dynavox can lead to future collaborations in Tobii Tech, for example?

There could be some opportunities, yes.

Isn't it a bit surprising that we haven't seen Tobii Aware in more than one computer? Related to the question about the mass market earlier.

Well, actually, Tobii Aware integrated in 3 model series with Lenovo, so it's not just one. But absolutely, we definitely are working on -- together with customers on bringing Tobii Aware into more product models in the future. And I would say this is actually one concrete example where we have seen some challenges to -- with both delays, product delays with our customers and also some challenges to get all the way over the finish line with some of our business development activities in the PC space due to COVID-19 as well. But we continue to believe that there is good opportunity for Tobii Aware in the PC market.

And lastly, one question for Linda. Are we closing in on new financial targets for Tobii?

We said we will come back to that as soon as this COVID situation is behind us. So we'll get back to you.

And with that, that was all from the...

Yes. Very good. So thanks for all the questions, everybody. That's great. And thank you for joining us. Take care. Do watch out for those monsters and goblins out there and go easy on the Halloween candy. See you on our next earnings call. Thanks, everyone. Bye-bye.

Thank you. Bye.