Invisio AB (publ)

Welcome to INDIASIO's presentation of Interim Report June-March 20th, 2024. For the first part of the conference call, the participants will be in listen-only mode. During the questions and answer session, participants are able to ask questions by dialing star 5 on their telephone keypad. Now I will hand the conference over to the CEO, Lars Høygaard Hansen. Please go ahead.

Thank you and good morning everybody. Welcome to our presentation of the second quarter and first half year results. I know this is a busy day, busy week with many companies reporting, so try to make it short and precise. So the headline for our Q2 performance is that we saw strong growth with record sales and several new products launched. During the quarter, it is a little bit unusual due to the fact that we have been delivering on

the

radio and intercom order that we received in the first quarter. So this stir up the numbers a little bit and we have tried to be as precise and clear as we can about what is the regular Invisio business and what is related to the deliveries of the radio order. So in the quarter, as said, our sales reached record high numbers and growth was strong. We also, for the Invisio-related business, saw very strong gross margin. We saw our OPEC's remaining largely stable and it has been for the past four quarters when we exclude certain one-offs that we saw during the second quarter. We have had a very busy quarter introducing new products that definitely strengthen our market leading position and we participated in several very, very busy trade shows. In summary, I think there is a business as usual, as you can say, in the sense that the market is very, very active and Invisio is well positioned and we look forward to taking advantage of the opportunities that the market presents to us now and for many years to come. Turning to revenues, we have seen seven consecutive quarters of strong revenue. In the quarter, we ended at 553 million Swedish kronor, which is of course all-time high and more than double of what we did last year. If we exclude the radio deliveries, we ended at 390 almost, which is definitely also the highest level in the history of the company and with minimal currency effects. We have, as usual, delivered in accordance with customers' requirements and this also shows

the

importance of our supply chain operations, our ability to deliver within a fairly short amount of time and also the importance of the inventory levels that we keep that will allow us to do faster deliveries. And we believe that the market activity in combination with our product portfolio and our increased sales resources will allow us to continue revenue growth in line or above our targets. So 105% revenue growth, including the radio order, and if we exclude the radios, it's a 44% difference. For growth margin, we have seen now that some of our newer products are starting to have an impact on the gross margin in a positive sense. We were at 63.2, almost a percentage point higher than last year when we excluded the radio deliveries. And if we take the total value of our revenues, including the radio order, then we were at 46.6%. And as we have communicated earlier, the gross margin for the radio deliveries, the radios themselves is less than 10%. So very good development in the underlying business, the regular in-visual business with a strong gross margin. When we look at order intake, somewhat lower than the same quarter last year, there's no strange about that. This is just usual fluctuations. Certain orders expected in Q2 were pulled or pushed into Q3. So we still have good hopes that the second half of 2024 will be very strong in terms of order intake. We continue to see that many customers prefer products that are tried, tested, ready-made, has been in the market for a long time. And that gives us a significant competitive advantage. And as we have also said before, we can see that customers have a preference for placing multiple medium-sized orders instead of a single very large order. And that's why we see less of the very large orders. But then we have quite a number of medium sized orders. So all in all, all good. We, as I said, expect to see continued strong order intake in the second half of 2024. Rapid deliveries, as I said, has become a significant competitive advantage. We have a strong order book, excluding the radios. It is around 643 million and the majority of it, 80 percent, we believe will be delivered within the coming 12 months. And the fact that we have an inventory of 270 million, also the highest level ever, is reflecting upcoming deliveries. But also it's reflecting our flexibility. So orders that we receive now in Q3 will actually, for a significant part, be delivered in Q3. So we have that flexibility and we can see with the current geopolitical climate, especially in Europe, that there is a huge advantage in being able to respond quickly to needs and orders. Turning to operating expenses, we had a few one-offs in the second quarter. First of all, a cyber incident that we have reported that was related to our company in the UK, which cost us a little bit of money, but it didn't affect our business, and it has not affected our ability to invoice or to operate and interact with our customers in any form or shape. So that's fine. We have also taken costs related to the CRSD preparations. Quite a, I would say, majority of those costs related with the initial setup has been taken now in Q2. And last but not least, we celebrated Invisius' 25th Jubilee, our year anniversary, with an event in Copenhagen for all our employees. But if we disregard these one-offs, our OPEC's level has remained largely stable over the past four quarters. Where we do increase our spendings is related to still R&D and sales in accordance with our growth ambitions. And so mainly headcount is behind any increase in operating expenses. And it is driven again by the opportunities and the market activities that we see. A-Bit margin has been above our target for the last seven quarters. It ended up at 18% in this quarter towards .8% same quarter last year. And again, the new products in the product mix and the improved gross margin is helping also drive our A-Bit margin. So we are quite happy with that. When we look at cash flow, it's a little bit different story. It's not that often we talk about cash flow, but this time there is a little of an explanation to do, since it was widely negative, but with very good reasons. First of all, we accepted to prepay the radio supplier for the radio order, where we also received a cash compensation to prepay. We also paid out dividends in the second quarter, 59 million, which adds to negative cash flow. And last but not least, we invoiced quite a lot of customers at the end of the quarter, which of course will be paid within the usual 30 days. So I think without giving any prognosis, I can say that the next quarter will be very strong in terms of cash flow. So nothing strange about this, just because of prepayment and a lot of invoicing to customers in the last part of the quarter. So as I said, the quarter has been very, very busy. We participated at Eurosaturi in Paris, one of the largest defense and security exhibitions of the year. And as you can see on this picture, we had a very large and impressive presence at the show, demonstrating our many new products. And I would say that this is the busiest show I have ever been to. There was packed with people in the Invisio booth all days throughout the show. And there were even people lining up to test our new Invisio X7 headsets, and to look at the new intercom products, the Invisio Link and the Invisio Control, but also to try out the regular portfolio as well as the Invisio Control, including the ADP. So a very, very successful show that just adds to the market activity level that we have seen for quite a while. Don't want to go too much into the product details, but the new Invisio Control app is something that has been asked for by our customers, and it makes it much easier for them to manage their tactical communication. So in a simple intuitive interface, it gives a real-time visualization of all the radios that is connected to the intercom system. And it makes it possible for the users or

the

squad leader or the radio commander to also decide who can talk to who, which radios are connected, etc. etc. So it's a very easy way of changing the settings and the setup, and also having an overview of how the intercom system is set up. So all, as usual, related to customer demand. So is also the wireless intercom capability that we are adding to our intercom. This is also something that has been asked for for quite a while. The intercom system is very, very popular still in many tests globally. And in the same way that many vehicles are being replaced and are being ordered for deliveries over the next years, we believe that our intercom system will be relevant in many of these tenders for vehicle intercoms. So the wireless addition here makes it possible to move around a vehicle within a certain distance. And be able to communicate wireless back to the vehicle and still be able to listen to the radios that are connected to the vehicle. So again, a new capability that allows you to move around freely around any vehicle that has the Invisio intercom inside. The product in itself is now for test and demo with key customers, and we expect it to be available for sales and invoicing in the first half of 2025. But definitely a new capability that will add to the success of our intercom so far. And in general, we have never had a product portfolio line up as the one we have today with best in class and all brand new products from the RA4000 Ragle Magna for vehicles, the Invisio X7. That is definitely state of the art and provides the best hearing protection of any tactical headset in the market. We have started taking orders for it already and we expect this to contribute to our revenues in 2024. Our Invisio V60, the audio data and power control unit also is in high demand. We have shipped thousands already and it is in great demand in different parts of the world for many types of users. So again, a brand new and market leading product portfolio. So one of the success factors for Invisio has always been our strong company culture, which we believe is a foundation for continued growth. In a simple way, our shared values and vision has definitely contributed to a very high employee engagement and loyalty and have also over the years made it easier for us to recruit the different types of skills that we need, not only in Copenhagen, but also elsewhere where we operate. We constantly get very high scores on our internal employee surveys when we make them. So it was very natural for us in June when Invisio celebrated its 25th birthday that we invited all our employees for a gathering where, apart from having a party and having fun, we also spent time talking about the new product line and having product trainings for everybody and many different important meetings took place. So definitely a strong culture driver for the company. A whole room. So in rounding up, I just want to mention the large order we received for intercoms, including third party radios. We have delivered the majority of it in the quarter. For the radios, as we have communicated earlier, there was a service margin of less than 10%. For the Invisio intercom part, there was a normal good gross margin. We expect another part of the delivery of about 10 million to be shipped in the second half of 2024. And then the remaining part will be shipped in 2025, probably in the third quarter, with a value of approximately 70 million, which will impact the gross margin by then. But this has been a great success for us, not only from an order intake and revenue point of view, but also being able to demonstrate to the customer and to our partners here that we can manage such a large order shipment in a relatively short period of time. Finally, I've said it many times now, the market activity continues to be very high in our markets. There is a strong interest from both existing and new customers in our different types of solutions and systems for vehicles, but definitely also for our dismounted solutions. So in summary, we believe we are exceptionally well positioned and with the investments coming into the defence markets over the next 10 years or more, we are definitely ready to capitalize on the opportunities presented to us. So with that, I will end the presentation and open for questions,

please. If you wish to ask a question, please dial star 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star 5 again on your telephone keypad. The next question comes from Daniel Thorsen from ABG Sundal Koliya. Please go ahead.

Yes, thank you very much Lars for the presentation and very, very clear data on the radio order. That's much appreciated. I had a couple of questions regarding Q3-24, but you stated it out here in the last slide exactly what's going to happen. I skipped those. I have a question on the competitive landscape. I understand that some of your gained market shares recently have been a result of competitors not being able to deliver products to the same extent as you. Is this still the case in the market or do you see some competitors starting to improve their delivery times that could challenge near-term order intake?

No, I don't think so. I think the competitive landscape is pretty much status quo. As we've said also here is that we believe being the market leader and having such a broad product portfolio of combined systems is definitely an advantage. Also, the fact that we as the only company in the industry keep a substantial inventory and are able to ship with fairly short notice. These are all factors that benefit us. I have not seen any change in that from any of our competitors at this point.

I see. That's positive. Then a question geographically here. You have guided for strong European growth, which we can see here. But I see that the rest of the world is down quite a lot here year over year, both in Q2 but also for the full first half of the year. Is there any specific market or event with certain tough comps from last year causing that?

No, I don't think so. This is, I would say, just usual fluctuations that could easily change with a few orders here and there. I think the activity level is high also in the rest of the world. We definitely expect to see good business outside of Europe and definitely also in North America. I think this is just a timing thing. There's no trend or any change in that. But there's no doubt that Europe is strong across the board.

I see. That's helpful. Finally, on the underlying gross margin here of 63%, that was a bit above what I expected at least. It's a strong number looking at the past quarters. Is it an unsustainably strong product mix in this quarter?

Or

is it a level that we can maintain?

I don't think so. I would say in the past we've also talked about certain legacy products that had a lower gross margin and so forth. As we move forward and some of these customers are changing to the newer products in our portfolio, then gradually the gross margin will improve because these lower gross margin products will be sold in fewer volumes and maybe even phased out at some point in time. It is a development. But it will fluctuate still between quarters. But I don't see this as unsustainable.

That's very helpful and thanks for the radio order details as well. That's very helpful.

You're welcome. Thank you. Thanks Daniel.

The next question comes from Jaume Ahlberg from Redeye. Please go ahead.

Thank you. Maybe first a question on the OPIX and the OAMOS for the cyber attack. What kind of risks do you see that this happens again? It's difficult or impossible to say, but how have you changed your attitude to prepare for this?

I think in these days it's difficult to predict what can happen on the cybersecurity front. But I think we are very well prepared. As I said, this was also isolated to local servers in our UK company and not related to the Invisio Group. We have been separated from an IT point of view from that. I think it was contained very well and we have had it under control during the entire process. We have been working with IT security questions for a number of years. I think we have done almost everything that you can do and still be able to run your business in a sensible way. I think we are well prepared. But again, I don't think that you can ever disregard the fact that the new methods come about. We still have to be on our toes, but we are definitely well prepared.

Regarding the cash flow, you mentioned it was partly due to prepayments of radio. But do you understand correctly that you also saw benefits from buying components or supply which could improve gross margin? Was that for this quarter or is that something that could impact positively going forward?

Not really. No. The elements for the cash flow was the prepayment and then it was the fact that we shipped a lot of products at the end of the quarter. And invoiced with our usual 30 days or something delivery terms. So the customers will not pay us until the end of July. So I assume cash flow will be strong in July and in the third quarter. And then the dividend payment. So it was not related to components.

Right. And regarding the intercom and the third-party radio order, you gave us some input on the radio part there. But how about the Invisio product of this order? Was that also mainly delivered in Q2? Yes.

They were delivered as systems. Because the radio is a vehicle radio. So it's a vehicle radio and our intercom. So we delivered everything as complete systems.

Okay. Good. And regarding order intake, you do mention that you see potential for even higher order intake in the second half. And partly by defence budgets or military budgets. Do you see anything concrete here that you can base this on or is it more like a hunch?

No. I mean, just the fact that there is a lot going on. And as I said, the activity level is high. And we, as I think we talked about also before, of course have a long so-called lead list of things we are working on and where we look at the probability and try to judge when exactly those orders might reach us. So I think we see a very active market. There's a lot of things going on. As I said before, also, I think the regular part, the replacing both for the vehicle communication is something that we will see increasing. And that is probably going to happen from the second half of this year and onwards. So there's a number of things that indicate that we could see a good order intake in the second half.

And you also mentioned that you see potential for considerable sales for the X7. Has this already been seen in Q2 or is it more coming in the next couple of quarters?

Yeah, I think right now we have a large number of units out for test. So those that have ordered already are some of our long-term special forces customers that have put in order. And we are in the middle of shipping the first deliveries to them. So I think slowly but surely we will see an uptake now in orders. And as usual, the special forces are the ones that can make the quick decisions. And then when it comes to larger armies, we probably will see a little bit longer decision time. But we are quite sure that some of our existing customers will upgrade, if you can call it that, to the X7 over time.

Alright, thank you very much. You're welcome, Hjalmar.

The next question comes from Iwejoo from SEB. Please go ahead.

Hi Lars, thank you for taking my questions. I have three questions left here. I'll do one at a time. Firstly, just a follow-up question regarding this large vehicle order. So you have delivered around two-thirds of the third-party reviews. And just want to clarify that for the intercom order. So is it fair to assume that also two-thirds of that has been delivered in Q2?

Yeah.

And can you remind us about the gross margin for the intercom system?

I think we have not specified the gross margin for the intercom separately. But as you can see, for the quarter with a .2% gross margin, this is definitely also including a strong gross margin for the intercom.

Okay, thanks. And my next question is regarding the software solutions which you have recently launched. Could you maybe comment on financial implications?

Yeah, I think you mean the app for the intercom?

Yeah.

Yeah, that will be part of the solution that we offer for customers when they buy a complete system. And we will be looking at the... It will probably be sold as a product together with a full installation of intercom and headsets and everything else. So it will be part of a package. Whereas the wireless intercom is more hardware. These are usual products like any headset or any other product that we sell.

Okay. In that context, could you maybe give us an indication on what would be the value per vehicle going forward when you include all those new solutions and hardware?

Yeah, I will be able to do that at some point in time. We have not communicated the price yet for the wireless intercom for competitive reasons, of course. And since we are not launching it until the first half of 2025, it is only indicative pricing to certain customers where they need that for budget purposes. But we are not communicating any price level yet for the wireless intercom. But we will get back to that.

Okay, fair enough. And my last question is regarding the X7. Could you also comment on the pricing for X7?

Yeah, again, it will be customer specific and program specific, meaning depending on volumes and everything else. But I can say that it is slightly more expensive than our existing X5. It is a more advanced headset and it gives a lot better hearing protection, as we said, than any other headset in the market. So with a healthy gross margin, it will add to both increased revenue and improved gross margin.

Okay, great. Thank you so much. Thanks, Ray.

The next question comes from Mads Quiskard from Carnegie. Please go ahead.

Thank you for taking my questions. My first goes to the order intake for the second half Lars. So can you be more specific? Are you part of any large attendance at the moment, where you are seeing sort of anything material that can impact your order intake in the second half?

I would say always. We always have things we are part of that will materialize. I know it's a very boring answer, but as always, we don't know the timing. But I think that as we can see, the market is quite active. And the reason for us also having a substantial inventory is because we can see that sometimes there is a need for a quicker delivery. But I would say it is not the order intake for the second half. It's not because of a few large things we are looking at. It's more because there is quite a number of things going on in many parts of the world. And it's just hard for me to say whether it will be in Q3, Q4, or some of it will be pushed into Q1. But there is definitely a high activity level, that's for sure. And I think we will... It's also still very difficult to find out exactly how much of the promised budget money is being released in each and individual countries. But there is no doubt that the trend is positive. Our best estimate is still that we will see some of this money start flowing from the end of 2024 and then into 2025 and onwards. But exactly when that happens and when it hits our types of products, it is a little hard to estimate. But my best message is that there is a very high activity level and we are quite confident. Also due to the fact that we have a very strong line-up of products, including the newer products here, that is going to help our order intake.

Okay, fine. Then I have a follow-up question on the radio order. So the 10 million you will book in this year, is that going to impact in Q3 or will it be in Q4, do you believe?

I

think

it will be in Q3.

Okay. Then on the capitalisation, which is up in the quarter close to 16 million, which is quite high compared to previous quarters, is that the run rate going forward or is it related to the number of product announcements you did in this quarter?

Can you repeat that, Math? I didn't hear the first part of it. What did you say? Yeah,

so R&D capitalisation of 16 million, which is quite high compared to the previous quarters. Is that the run rate going forward?

Yeah, I think we will have to get back to that as well, because we have of course a lot of things under development constantly. And as we increase our number of employees in R&D, then that will have an impact.

Okay, enough. Then my final question is on China. Can you just remind me what is the components in Visual Source from China?

I really don't... Also,

are you able to shift to other countries outside China?

Yes, I would say so. I would say that we are not depending on suppliers from China. There are probably some, I would say, very inexpensive standard components that are bought from Asia. But as you know, all of our manufacturing is in Europe basically and in the US. And we are not relying on Chinese components at all. Alright, perfect. Thank you. You're welcome.

As a reminder, if you wish to ask a question, please dial star 5 on your telephone keypad. Thank you. There are no more questions at this time. So I hand the conference back to the CEO, Lars Høygaard Hansen, for any closing comments.

Thanks everyone for your questions and for listening in today. And wish you all a continued great summer and look forward to talking to you again shortly. Thank you.