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

Good morning. Thank you, and welcome to Tobii's Q4 2021 Quarterly Earnings Call. Many of you may not know me. My name is Anand Srivatsa, and I am the CEO of Tobii. I took this role in December of 2021, and I'm joined here today on this call by Magdalena Andersson, the CFO of Tobii; and by Henrik Mawby, who runs Investor Relations for our company. Now for this earnings call, we will be taking questions after the presentation. So please feel free to post questions as soon as you have them, so that we can have a smooth question-and-answer session after this. This earnings call, of course, is quite significant for Tobii. This is our first earnings call after the divestiture of Tobii Dynavox. And given the significant change that this represents for the company, I thought that I would start the earnings call by giving all of you a little bit of context on the company, Tobii, and the business that we are engaged in. So let me first start by giving you a quick introduction on Tobii. Now Tobii celebrated its 20th anniversary last year in the summer of 2021, and we've been listed on the public NASDAQ Stockholm since 2015. When the company was founded in 2001, our founders were looking for a way to control the computer through eye tracking. And this is a journey we've been on for 20 years now, and in those 20 years, we have established ourselves as the world leaders in eye tracking. But over those 2 decades, we've gone farther than just delivering eye tracking alone. What we've done in those 2 decades is we've grown the signals that we deliver in our technology, starting from other biometrics like head pose, eye openness, et cetera. These are signals that we are able to deliver by processing images of the eyes. In addition, we've expanded in a second dimension, where we have taken these core signals and delivered what we call attention signals. These are signals that can help determine if a user is fixated on a certain location in a screen, if they are getting drowsy, for example, or distracted. Today, we deliver a broad range of capabilities to our customers from hardware solutions that enable them to deliver sensors and compute silicon to go and get the core signals that we deliver. We deliver core signals, as I explained previously. We deliver attention signals, and we even deliver user value directly to our customers. In these cases of user value, we are delivering software, services and hardware to help our customers get the insight that they would like from the core signals that we deliver. If we now take a step back and look and consider all the technologies that Tobii is delivering, it is quite clear that we are more than just an eye-tracking company alone. We are truly the pioneer in a new field of technology that we call attention computing. Now the goal of attention computing is to help machines better understand the user. And we believe that by harnessing the power of attention computing, we can achieve our mission of helping improve the world with technology that understands humans better. We believe that the opportunity for attention computing is quite immense because the need to understand the user is something that is quite profound in almost all industries. What [indiscernible] is that the technologies that we deliver in attention computing are seeing increased adoption and experimentation in 6 key market verticals, namely: behavioral studies and consumer research, gaming, education and training, virtual and augmented reality, health care and automotive. Now when we consider these 6 market verticals, how does Tobii address the opportunities in them? We primarily address these 6 market areas through 2 segments. One is through vertical products and solutions. These include combinations of hardware, software and services, and Tobii is delivering this directly to the end customer who is extracting the final value from our offerings. We call this segment, once again, Products and Solutions. The second segment we call Integrations, where Tobii solutions are integrated into our customers' offerings. For example, our solutions are integrated into a virtual reality headset, or our eye-tracking solutions are built into medical diagnostic and therapy devices. The end customer value is typically delivered by our partners and our customers who are taking advantage of the capabilities that Tobii is delivering. Now these 2 segments have different business dynamics. While we expect that both of them will demonstrate strong top line growth and deliver solid gross margins, the Product and Solutions business should see a smoother trend of revenue growth and margin over time. In the Products and Solutions space, there is less dependency on individual customers. But the business is, of course, susceptible to global impacts like the pandemic or, in some cases, market-specific head or tailwinds. On our Integration business, we expect that the margin and revenue growth will be more lumpy as our customers introduce ramp or end-of-life products. There is a strong dependence on customer success in this segment. And we believe that the impact of that is quite important on Tobii's overall performance in this space. Like the Product and Solutions segments, there is some risk to broad factors like the pandemic, and in some cases, market-specific head or tailwinds can have an impact on the results that we see in the Integration space as well. These 2 segments are how we are going to describe our business going forward, so it's quite important for us to actually lay out some context of how we expect these segments to perform going forward. Now let's switch gears and talk about our business results for Q4 2021. First of all, I'm really proud of my team for the incredible effort that we've put in during 2021. There was a significant amount of work in 2021 with the spin-off of Dynavox, which was completed in December 10. As you can all imagine, supporting the spin-off of this entity through the listing process, merging the rest of the organization into one entity and, at the same time, delivering on our business despite enduring the effects of the pandemic, supply chain issues, et cetera, this is something that's a pretty monumental accomplishment for us as a company. We have ended 2021 on a strong note as our business metrics have normalized to pre-pandemic levels. For Q4 2021, we delivered 10% organic growth, and this was quite significant given the strong comparison quarter that we had in Q4 of 2020. We also saw a strong growth in gross margin over the course of Q4 2021 versus last year. Magdalena will actually talk to some of the more financial details of our results coming up shortly. So I'd like to skip and talk a little bit more about some of the nonfinancial-related aspects that made Q4 2021 quite an interesting quarter for us. In addition to the strong business results, we had some significant progress in many of the areas we are engaged in. Notably in the gaming field, we saw that Microsoft Flight Simulator, responding to user demand, integrated support for Tobii, added eye and head-tracking technologies into their game. This is a demonstration that the journey we are on, which is changing user behavior, getting users to understand the kind of immersion that our technology delivers is truly bearing fruit. The fact that this engagement was driven by user demand is quite notable for us, and I believe that it is going to start the trend of more and more games integrating our capabilities in the future. In addition to our engagement with Microsoft Flight Simulator, we closed 5 design wins in the quarter, with a couple of design wins on the PC space with our Aware solution with MSI and with our Horizon gaming software product in the Lenovo Legion 5 Pro. We also closed 3 deals in the enterprise VR space, where people are using the advanced capabilities of Tobii eye tracking to deliver medical therapy devices that are based on virtual reality headsets. Additionally, in Q4, we announced a partnership with Pimax to bring eye-tracking technology into consumer VR headsets. I will talk a little bit more about virtual reality and the metaverse in general at the end of this presentation. Now with that introduction to the business, I'd like to hand it over to Magdalena to spend a little bit more time to talk about our financial results.

Thank you, Anand. Yes. Starting to look at our revenue, and as Anand just mentioned, we had an organic growth of 10% in this fourth quarter, backed by the tailwinds within the Integrations segment, where we saw a positive development especially within VR. Year-to-date, the organic growth was 12%, with the segment Products and Solutions in the lead. When comparing the whole year with 2019, which thus was before the pandemic breakout, the organic growth was 5%. And here, we see a very even growth between the 2 segments, having an organic growth of 5% for both Product and Solutions and for Integrations. Gross margin was 77% versus 70% last year, where the 7 percentage points increase stems from a product mix change towards more software products. Year-to-date, gross margin was 72% versus last year's 71%. Costs grew 31% organically versus last quarter. Around SEK 8 million were onetime costs, which came with a corresponding onetime income, that's not affecting the operating result. And then around another SEK 10 million were mere onetime costs. The remaining cost increase was a split between a growing organization to support increased sales and overhead dis-synergies resulting from the split. Year-to-date, costs grew 6% organically. Operating results improved to minus SEK 31 million for the quarter versus last year's SEK 43 million. And year-to-date, the operating result was minus SEK 186 million versus last year's minus SEK 230 million, thus achieving a SEK 44 million improvement during a year where we have experienced remaining headwinds from the pandemic and supply issues for many of our customers. And so looking into our segments. Product and Solutions had an organic growth of 2% in this quarter, although having a very positive development within gaming peripherals as well as in -- within the health care market within U.S. We also experienced difficulties reaching out to our business-to-business customers due to the pandemic, especially in Asia, and this thus hampered sales. Year-to-date, the organic growth was 17%. And as mentioned before, when comparing the whole year of 2021 with pre-pandemic levels in 2019, the organic growth was 5%. Gross margin in the quarter was 78% versus last year's 76%. And year-to-date, the gross margin was 75% versus last year's 77%. And then Integrations grew 37% organically in this quarter, where we saw a very positive development within VR and within health care. We received 5 design wins, as also Anand mentioned, 1 for Aware with MSI, 1 for Horizon with Lenovo and 3 for our Ocumen middleware solution with health care applications in XR. Year-to-date, the organic growth was minus 2%. During the year, there were several delayed customer projects due to the pandemic, projects we now see are taking off again. And comparing with the pre-pandemic level of 2019, the organic growth was 5% year-on-year. So although this year was still impacted by the pandemic, we clearly see an improving underlying business momentum. Gross margin in the quarter was 75% versus 50% last year. And the increase in margin came from a shift in product mix towards more software products. Year-to-date, the gross margin was 63% versus last year's 57%. And there are and will continue to be fluctuations in the gross margin between the quarters in both segments going forward, and this is mainly due to product mix. And then regarding our balance sheet and cash flow. There were some larger cash flow events during the quarter which affected the balance sheet before the split of the company. For instance, we made an early redemption of our bond, which was otherwise due in February 2022. We also carried out a directed share issue of SEK 300 million, mainly to finance Tobii Dynavox acquisition of Acapela Group. And of course, we also repaid all financial balances between Tobii Dynavox and Tobii. And now on the 31st of December, we had a balance sheet with an equity ratio of 69%, and cash at hand was SEK 438 million. And with that, back to you, Anand.

Thank you, Magdalena, for the details on our financial execution for the quarter. So now let's take a look back at the overall year of 2021. I'm quite happy to see that our expectations from our Capital Markets Day for our business metrics returning to our pre-pandemic levels did play out for the full year. As Magdalena noted, on an organic basis for the full year of 2021 compared to 2019, both of our segments, Products and Solutions as well as Integrations, grew about 5%. This is a really positive foundation that we have built for momentum going into the future and really creates the strong base for us to enter an era of sustained faster than historical growth that we projected in the Capital Markets Day. In addition to finishing the year off strong from a business execution focus, we also, of course, see very strong indicators from the market that there is momentum moving in terms of our direction. And specifically, I wanted to spend a few minutes talking about the momentum we see now around the virtual reality space. We see 2 major trends right now in virtual reality that are quite important for us to highlight because this has a significant impact on our long-term investment in this space. The first is that we see increased consumer demand for virtual reality. You can see a couple of quotes on this slide, one from Mark Zuckerberg that talks about demand from consumers for applications in the virtual reality space; and the second is a quote from the CEO of Currys, Alex, who talks about how the VR HMDs in Q4 2021 had a tremendous holiday selling cycle. Currys is one of the largest retailers in the world, and the fact that we're seeing consumer demand for both the applications that they would use in this VR ecosystem as well as driving sales of VR HMDs, these are really good indicators for sustained growth in this category. The second aspect that we see is strong industry momentum around virtual reality and, in general, around a term that the industry is condensing around called the metaverse. We already saw this trend pick up in Q3 and Q4 of last year, but we continue to see additional technology titans ramp up their efforts into the space. I think that we are very much in the early stages of the metaverse journey, and I expect that more and more companies will join the fray as this concept of the metaverse and the opportunity to deliver users value through either virtual reality-based experiences or augmented reality-based experiences pick up steam. We are already seeing the signs of increased customer activity for Tobii based on these trends. We saw them in Q4, and we expect to see that accelerate through the course of the year. In Q4 specifically, we announced our partnership with Pimax to bring eye tracking to a consumer VR headset. And we see with the news coming around virtual reality headsets that eye tracking is fast moving from being a required technology in enterprise VR today to a requirement for consumer VR headsets as well. The maturation of virtual reality and the strength in interest from industry titans in augmented and virtual reality validates our long-term investments in this space. We believe that we are extremely well positioned to create value for our customers with our world-leading technology and our proven track record of having delivered solutions into the marketplace. All in all, Q4 as well as 2021 has been very positive for Tobii, both from our own business execution as well as the external market dynamics. I think with this result and where we are today, 2022 will be a very exciting year for our company. With that, I'd like to open it up for questions.

Thank you, Anand. And as a reminder, there is a bit of a lag in the Q&A function on Teams, so please post your questions sooner rather than later. We will try to connect some of the analysts in the meantime, and we already have one question we can take while waiting for that. So Magdalena, what was the organic growth in Q4 for Products and Solutions if we exclude sales to Tobii Dynavox?

That's a good question. But Tobii Dynavox is an integrated part of our sales here in Products and Solutions, so we don't follow the business in that sense. I'm sorry, I cannot answer.

We don't have those details at this point. Let me see if we can connect some of you, analysts, as well. Sorry, 1 second.

And just to -- but to clarify, the sales to Tobii Dynavox is not within Product and Solutions. It's within Integrations.

Okay. And let's see. So we have some more questions coming in here. On PS VR2, why did you release the press release yesterday? I guess you have more significant negotiations ongoing with other OEMs. What are your criteria for this kind of release, a certain probability rate for signing? Or...

When we look at the release that we made yesterday, we -- as we indicated in the press release, we are in negotiations with Sony to be the eye-tracking provider in that headset. We decided to put the release out because Sony confirmed their plans to have eye tracking included in their headset in early January. We felt that based on where we were with the negotiations and our obligations as a listed company that we needed to put a press release out to be compliant with those regulations.

Thank you. And Daniel Thorsson, I see we have you on the line. Would you like to ask your questions?

Yes. Yes. Do you hear me?

Yes, loud and clear.

Excellent. Okay. So can you say something on key customers and customer concentration in the Integrations segment as of today? How does it look with the VR PC split? And which are the largest customers today?

Yes. I don't think that we can give specific commentary on customer sizes, but what we can say is we see sort of 3 major buckets of players or at least areas where our solutions are being used. One is certainly in the XR space, both virtual reality and augmented reality. So there are multiple customer engagements going on in that space. The second is on the PC side. As you see in Q4, we had a couple more design wins in the space, and so we see customers in that space as well. And then the third area is in the health care space, so devices that use our technology and deliver health care type devices into the space. We see sort of these 3 areas being fairly significant at this point in time.

Okay. Can you say something about the split? Which is largest today?

So today, the health care, actually, solution is probably the largest. This is where we would characterize devices like the Tobii Dynavox set of solutions that come out in the space, that would be the largest.

Okay. Just a follow-up there. How much is project-based and how much is product-based in the Integrations today of revenues?

I don't think that we're sharing that level of detail at this point in time on the Integration basis. I think what you should expect to those over time that we continue to expect more and more design wins and product shipments. The example that we have with Tobii Dynavox, for example, is very much product-based that they're buying products from us.

Yes. And then a question on the gross margin. You said that it was high this quarter, 77%. It has been around 70%. I mean how should we really think about that going forward? It will fluctuate, obviously. What visibility do you have? What can we have? And what should we expect?

Yes, it is -- as you say, it will fluctuate, and it will depend on what sort of -- because it varies from product mix to product mix, and we have some scale effects there as well. So it's not that it will stabilize and then you will see a very clear trend. But of course, over time, it will stabilize, but do expect to see that it will vary going forward, but hopefully, with not this big leaps as we have seen this quarter.

Okay. That's helpful. And then I have a question on depreciation. In the quarter, they were up SEK 10 million versus Q3, while amortizations from R&D is flat in the quarter. Did you have any onetime write-down in the quarter here or anything else?

No, no onetime write-downs.

The level we saw in Q4, that's a steady level for '22 as well on a quarterly basis?

Yes.

Okay. That's good. And then my final question is on capitalized R&D. That's up significantly both quarter-over-quarter and year-over-year in Q4 here. What should we expect for '22? Is that also a stable level going forward? And what's the reason for that?

Yes. We -- after taking down R&D somewhat during the pandemic, we are now increasing it again. And also, it depends on the projects that we are putting our money into, whether it's capitalized or not. And right now, we have a number of business cases, making us capitalizing, and you can expect to see it on this level or going up going forward.

Let's take another question from the chat. How is Tobii preparing to scale up towards the end of the year if you win some of these big deals with the big players? I'm assuming they're alluding to Sony maybe. And what if the scaling is hampered by the supply chain challenges that we see globally right now?

Yes. Maybe I can take this question. So again, when we look at the dynamics of some of our engagements here in the Integration business, some of them relate to us supplying hardware. In some cases, we are supplying more sort of algorithm or software kind of businesses. So when we think about scale, it isn't always dependent on our ability to supply. That being said, one of the key lessons we've learned in 2021 was that we wanted to make sure that we secured our supply chain to ensure that we could deliver to our customers. And that's an investment that we've taken in 2021, and we would expect that while we continue to see potential for supply chain disruption that we will take proactive steps to mitigate that. The other part of the question, which is in terms of maybe our R&D spend, Magdalena talked about the fact that we are now starting to scale that up. We do think that we are at the level now that we can absolutely already support some of these major engagements we're in. But we expect over time, of course, to continue to invest in our road map and to help us deliver the products that we need to take advantage of the opportunity that attention computing brings to us.

Thank you, Anand. And at this point in time, there are no further questions. So I propose we round off the call here and maybe some concluding remarks.

Again, I think for us, looking at how we performed in the year is going to be quite important. I think for Tobii, we've talked about the fact that we are entering a period of faster than historical growth. This is something that we expect will be sustained over the next several years. We think that our execution in Q4 2021 is very much in line to our expectations that we had going into Capital Markets Day and in line to our long-term goals of reaching EBIT profitability during 2023 and getting to SEK 1.5 billion in 2025. I think, again, our business execution in the context of all of the work that we've done in 2021 is a really strong result. And that, combined with the market dynamics starting to move in our favor, I think they increased the cause for optimism for us going forward. So I'm very happy with the quarter and Q4, and I'm really looking forward to what 2022 is going to look like.

I think also, actually, we had some questions drop in now.

So then I'm going to have to do the comments again. All right. Okay. No, no, it's going to be very difficult to do that the second time.

So let's dive into those as well. On Integrations gross margin, obviously, volatile. But going forward, is it fair to assume similar seasonal patterns that you shared in the report today, and on top of that, consider if you announce design wins, et cetera, which I presume is accretive to gross margin?

Hopefully -- or it will stabilize over time. So it's not that it's going to jump to 25 percentage points up and down. We are stabilizing, so -- and yes.

And I think on that note, it's fair to assume that as we grow, also single projects will have and single deliveries of hardware or software will have smaller and smaller impacts that will support the trend towards the stabilization. But I think volatility and no super specific seasonal pattern is to be expected in the coming quarter. We hear about the potential of implementing eye tracking in VR headsets. What about game producers? When do we see VR games with more eye tracking?

Yes. I think that one of the big elements that's out in the industry already is that with a company like Sony, who is a very major market maker in this space, they have announced their intention to have eye tracking in their headset. At the same time, they're going to actually be a big driver in the creation of VR games, not just related to eye tracking but related to VR content in general. So we think that, that is a major industry trend towards getting more VR content. And the fact that Sony has announced that they will have eye tracking, we would expect that, that ecosystem development, that software engagement will also include how to best take advantage of the hardware that Sony is putting out.

Good. And with that, I propose no more concluding remarks.

One more time.

But we say thank you for today.

Thank you.

Thank you.

Thank you.