Tobii AB (publ)

Good morning and welcome to the presentation of Tobii's Q3 2024 results. My name is Karolina Strömlid and I'm head of investor relations. Our CEO Annan Srivatsa and our CFO Magdalena Rodell-Andersson will as usual take you through the development of the quarter. After the presentation there will be a Q&A session and you're welcome to start posting your questions in the chat at any time. And for those of you who have registered to ask questions live, please raise your hand to participate. And with that I hand over the word to you Annan.

Thank you very much Karolina and welcome everyone to Tobii's Q3 2024 earnings announcement. As we shared in our last update, Tobii is quite a different company after our significant transformative acquisition of FotoNation. With that in mind, we've had two key focus areas post this acquisition. Number one is to work on reducing costs as we think about how we can form the new company that we are building and to operate within our existing cash reserves. I'm really happy to note that we have made a solid start in Q3 2024 with the measures we've taken already starting to show up in our financial results. We believe that the actions we're taking now and the actions we will take in the future will allow us to exceed our previously communicated guidance of reducing more than 200 million SEC of cash related operational expenses compared to a Q2 2024 baseline. So that was job number one. Job number two of course is to ensure that we have a successful integration of the acquisition. Once again in this quarter, we continue to take positive steps in that direction. We are continuing to increase Tobii's credibility in the automotive interior sensing market with over 550,000 vehicles on the road with Tobii technologies at the end of Q3. In addition in this quarter, we continue to work with OEM programs as they progress towards start of production which will lead to additional license revenue for us in the auto sense business segment. Finally, we're also starting to realize some of the synergies from the acquisition which are both going to deliver to us a better overall product portfolio but also the opportunity to reduce our necessary investment to deliver our next generation platforms. We expect that these synergies will continue to show value and financial results over the next coming quarters. Now on the financial side, I'm happy that the combination of net sales improvement and the cost reductions that we've taken have allowed us to deliver a significant EBIT improvement year on year for Q3. But I will allow Magdalena to talk you through the financials in more detail. Now before we go into the individual financial results, I wanted to set the context of who Tobii is as a company. We are organized into three business segments. Our products and solutions business segment sells vertical solutions to thousands of customers year from universities that are pushing the frontiers of science to enterprises that are looking to harness attention computing to get insight about their customers or their employees. We also of course sell to gamers who are trying to get more immersive experiences from their entertainment choices. In Q3 2024, products and solutions represented 44% of the revenue for the company and in the quarter this segment posted a profitability number of minus 22 million SEC. This is four million SEC better than the quarter that we had before and we believe that the steps we have taken in pruning our product portfolio and adjusting our cost base will move this segment towards profitability as we get into the next couple of quarters. On the integration side, this business takes Tobii technologies and has it incorporated into our customers' devices. The primary target customers here are VR and AR headset makers, medical device manufacturers, PCOEMs. This quarter, this segment delivered 51% of the company's overall revenue and this revenue includes some revenue attributed to the acquisition we have made of PhotoNation. From a profitability perspective, this segment delivered 49 million SEC of EBIT. The second straight quarter that we are profitable and I expect that this business segment will be profitable for the foreseeable future. Finally, on the AutoSend segment, this is our new business area. The focus customers are around automotive OEMs and automotive tier ones who incorporate the technologies we have into vehicles and cars on the road. In Q3 2024, this segment represented 5% of our revenue with a profitability of minus 44 million SEC. The profitability is 16 million SEC better than Q2 of this year and we expect that of course as the synergies that we extract from the acquisition continue to materialize, we will continue to make positive progress on the profitability for this segment as well. With that context, I'm going to hand it over to Magdalena to explain the financial development in more detail. Magdalena.

Thanks, Arnold. And yes, as Anand just pointed out, we had a strong total growth in this quarter, 40% that is, while the organic growth was minus 6%. The EBIT was minus 70 million SEC, which is an improvement with 52 million SEC versus last year and a good step in the direction towards profitability. So, the net sales growth in the quarter of 40% was supported by business related to the acquisition, and most of which belong into the integration segment. This development is in line with our previously communicated estimates for the acquisition and as we also have pointed out before, this is a business that will decline when going into 2025. The organic growth in the quarter was minus 6%. Year to date, the net sales grew with 14% and the organic growth was minus 11%. Gross margin in the quarter was 80% compared to 75% last year, while the increase was due to a shift in mix between the segments. The same applies for the year to date figures, 78% compared to last year, 75%. Visible in the quarter, besides the strong growth in net sales, was a positive impact from our cost reduction program. Cash related operational expenses, that is excluding depreciation but including R&D capex, was 223 million SEC in this quarter compared to 276 million last quarter or in Q2. So we have estimated the reduction of expenses of over 200 million SEC during a 12 month period when comparing with our baseline Q2 2024. And then although this first quarter showed a reduction of over 50 million SEC already, you should not expect the same level in Q4. Since we also have some positive effects from vacation effects in this quarter of around 15 to 20 million SEC. And in addition, we are continuing the cost reduction program also during this fall and So we expect to see some additional one of course in Q4 before going into Q1 next year with on yet an even lower level with costs compared to the one now seen in Q3. Thanks to the strong growth in net sales in combination with the executed cost reductions, the EBIT in the quarter was minus 70 million SEC compared to minus 69 million SEC last year. And year to date, the EBIT was minus 157 million SEC compared to last year's minus 170 million SEC. And then going over to the segments. Present Solutions had an organic growth of 1%. After several quarters of weak performance in Asia, this region turned to growth in this quarter. And in the other regions, we saw a mixed bag with growth in the US and some decline in Europe. Yet to date, the organic growth was minus 12%. Gross margin in the quarter was 59% compared to last year 68%. And this deviation was mainly due to a mix effect between products. Yet to date, the gross margin was 63% compared to 69% last year. The EBIT in the quarter was minus 22 million SEC. Still unsatisfactory in the sense that it was negative. But the positive development in this quarter was the slight improvement versus EBIT in Q1 and Q2, albeit with the lower top line and thus accomplished through a lower cost base, which is something that we will bring forward also into future quarters. Yet to date, the EBIT was minus 71 million SEC. Integrations net sales grew with 104% in this quarter and the organic growth was minus 17%. Net sales from the acquisition thus contributed very positively to this segment, which is according to plan. As previously communicated, this net sales is expected to decline when going into 2025. Year to date, integrations grew with 69% in total and with minus 9% organically. The gross margin was 97% in the quarter compared to last year's 89% and 96% year to date versus 89% last year. These very high figures were also a consequence of the acquired net sales, which came with a high margin. The gross margin level should thus be expected to go back to 2023 years levels again when we are entering 2025. EBIT in the quarter was 49 million SEC and year to date, the EBIT was 56 million SEC. This is an EBIT level that I'm extra happy to present, of course, that is black figures. And even though one might comment that the EBIT was somewhat helped by the acquired net sales that will decline when going into 2025, we do expect this segment to continue to deliver a positive EBIT also going forward. And then the Outer Sun segment had a net sale of 11 million SEC in the quarter and 26 million SEC year to date, which is aligned with our previously communicated range of reaching 30 to 50 million SEC of net sales for the full year 2024. The gross margin was 94%, both in the quarter and year to date, a level reflecting the high share of software. The EBIT was minus 44 million SEC in the quarter and minus 143 million SEC year to date. This segment is still in an investment phase and will continue to be so for some quarters still. And then our balance sheet and cash. The free cash flow of the continuous investments was minus 96 million SEC compared to minus 121 million SEC in Q2. After the acquisition, we have had large cash outflows since we added many new employees and not an equivalent amount of net sales. We are now going into what normally is our strongest net sales quarter, Q4. And in addition, with the cost reductions actions that we have already taken and to that, adding also the cost reductions that we are executing on now in Q4, we expect the cash outflow to go down considerably going forward. Cash and cash equivalence was 138 million SEC in the end of the quarter. And in addition, we have an unutilized revolving credit facility of 50 million SEC. And then finally, to sum up regarding cost and operational efficiency. In Q2, we in the report, we stated that we were to reduce cash related operational expenses with approximately 200 million SEC over the four quarters and having Q2 as a baseline. With the actions now that we already have implemented and the actions that we are planning for Q4, we keep that statement, but with a slight moderation, now stating more than 200 million SEC instead of approximately 200 million SEC. Here in Q3, we have presented a reduction of around 50 million SEC, but as already mentioned, 15 to 20 million SEC of this reduction is due to vacation effect. So going into Q4, the cost base will increase again, both due to less vacation, but also due to possible one of costs that will be added in conjunction with the additional actions that we are taking now in Q4. With that, we will be entering 2025 with an even lower cash related operational expenses than what we had now in Q3. And the actions we are taking are sorted in three buckets. The first bucket is our product investments. We have a broad range of products and we continuously take steps to focus our product portfolio. For instance, where do we prioritize further development? What products should we only maintain? And what products should we possibly exit? And if so, of course, without losing any net sales or value. The second bucket is the organization outside of R&D, which sums up to the sales and marketing and administrative expenses in the P&L. Here we are doing reorganizations and new prioritizations, while at the same time securing the efficiency effect from working more streamlined globally and with a higher degree of low-touch sales. And then the third bucket, where we have the realization of synergies from the acquisition. When we bought Fortunation, we already had plans for how to proceed after closing the acquisition. Of course, that was only theory, but now we are actually converting theory into practice. And we are happy to say that we are following the plan, while at the same time securing solid deliveries with ongoing customer relations. And with that, over to you, Anand.

Thank you very much, Magdalena. Let's shift gears a little bit and talk about our AutoSense business segment. I would like to give you a sense of what this business segment is all about and where we are standing today is Toby. Now, the automotive interior sensing market has been going through significant evolution and has actually broken up into three major domains. The first of these domains is driver monitoring systems. These are systems that are primarily focused on improving the safety of the car by making sure that the driver is focused on the act of driving. Driver monitoring systems have actually been deployed as early as 2006. But in recent years, we have seen increased regulation that mandate the use of driver monitoring systems and will substantially increase the penetration of this technology. In 2026, the European Union expects that all new cars will have a camera-based driver monitoring system for them to be put on the road. And this represents a major inflection point in the adoption of these technologies. At the same time, interior sensing is starting to morph as more and more capabilities are brought into the cars from the sensors that are present inside of them. The first evolution that we've started to already see is occupancy monitoring, where this technology is really driving towards making the experience in the car more convenient and more personal. Occupancy monitoring systems are typically driven not by government regulation for safety, but by OEM's desires to go and deliver a more differentiated experience, something that they can monetize much more effectively than you can with safety features alone. The third change that we start to see in this market is the adoption of a new type of technology that can more cost-effectively deploy the value of driver monitoring systems as well as occupancy monitoring systems. And we call this single-camera DMS and OMS. Toby is a pioneer in this space, and we expect that our technologies in single-camera DMS OMS will be in the market in 2025 on cars on the road. The benefits of single-camera DMS OMS is that they offer the OEMs the opportunity to monetize these occupancy monitoring features while meeting the government regulations around driver monitoring, delivering all of this inside a much more optimized cost envelope, a single-camera, potentially a single-compute platform. So this broadly is the evolution of what's happening in interior sensing. Let me talk about where Toby stands today in these different areas. Now on the DMS side, we count seven OEMs as customers who have given Toby design wins for our DMS technology. We have over 50 models that these design wins are going into, and as of Q3 2024, we are approximately at 250,000 vehicles on the road that are shipping with Toby technologies. In the quarter, we've continued to make progress with existing OEM programs to move them forward towards start of production that will happen in 2025, increasing the number of vehicles that will start shipping Toby technologies on the road and, of course, leading to more licensed revenue. On the OMS side, we are the clear leader in occupancy monitoring. We count two OEMs as customers of ours across 20 plus models, and so far we have more than 300,000 vehicles on the road that are already shipping with our OMS technology. Finally, on single-camera DMS OMS, we believe that we are a pioneer in the space. We expect that our solutions will be in vehicles on the road with a premium German automaker in 2025. We today have two OEMs that we count as customers that have chosen us for design wins across 50 plus models. In Q3, our SCDO solutions, these single-camera DMS OMS solutions, have started to enter homologation testing with this premium German automaker. Homologation refers to the regulatory testing that's required to get type approval for a vehicle, and getting this validation for the SCDO technology is going to be a major stepping stone to increase the pace of adoption of this technology. The demonstration that this can both meet the regulatory requirements and deliver the OMS features that customers are looking for in a more cost-effective package, we believe that we will be able to demonstrate that as we get into the late parts of this year and early next year. So summing all of that up, where are we at in total from an AutoSense perspective? In total, we count nine OEMs as our customers. We have credibility with our technologies being in the road with over 550,000 vehicles shipping with Tobii technologies, and our design wins count more than 120 models in the space. Given where we are today with the credibility of putting technology on the road, working with leading OEMs, as well as our leading position in sort of the next evolution of interior sensing, I hope it is clear to all of you that we believe we are the top three player, we are the number three player in interior sensing today, and well positioned to become the leader in the space as the interior sensing market moves from DMS only to occupancy monitoring systems and single camera DMS OMS. Now let's get back to the Tobii results for the quarter. As I said, I'm very pleased with the results for the quarter with the combination of improved net sales and the results of our cost reduction action, which have enabled us to deliver significant EBIT improvement on a year on year basis. I'm also quite happy that the focus we have on integrating the AutoSense acquisition are starting to yield results. They're yielding results in the credibility of Tobii as a supplier by being able to demonstrate that our technologies are on the road, that we continue to make progress on the OEM programs. They're making progress in enabling us to deliver a more comprehensive product portfolio that brings the best of what Tobii and PhotoNation have to offer. And finally, we're starting to see the realization of the cost synergies that we believe will allow us to invest in future platforms with much lower investment going forward. Looking forward, we expect that the cost reduction actions we've implemented starting in Q2 will continue forward. As Magdalena mentioned, we will be taking some one time costs in Q4 as we further implement cost reduction actions. This will mean that we are actually going to be on a lower cost OPEX profile in the quarters to come, Q1 and beyond. Given the actions we've taken already so far and the actions we continue to take on a full year basis, I'm confident that we will be able to deliver a full year EBIT improvement on a year on year basis. With that, I'd like to open it up for questions and answers. Carolina.

Thank you, Anna-Hanna and Magdalena. Yes, I will start with a number of questions from our analyst Daniel Djureberg and take them each at a time. The first question is, what is the rolling 12 month run rate OPEX entering Q4, excluding amortizations and depreciations? The cost base was said to increase again.

So I don't have the rolling 12 and the reason for why we set the base sort of, when we compare the base with Q2 is that this is the first quarter where we had the acquisition in for three months. The first quarter we didn't have the amortization in for January. So that's why we try to sort of guide from the baseline we have in Q2 and then we talk about what the operational expenses are in Q2 and what they are now in Q3 and what to expect in Q4 and then going into Q1 and Q2.

The second question is, please remind us about your banking facilities. To me you will need some additional SEK 200 million to secure your profitability. What is your view? Would you consider a directed equity issue to secure this?

We are monitoring our cash position thoroughly and we are working in a very dynamic environment and there we do the things that we feel that we can control and that is now taking out costs, of course driving sales, but that's not as controllable. And with those actions we are taking, we believe that we can work within the cash resources that we have at hand.

We do have a 50 million SEK revolving credit facility as Magdalena has mentioned before.

The next question is, it feels like you're late on the cost savings implementation. Is this correct or do you follow your plans?

I would say that we are following our plans. Again, I think when we take these cost savings initiatives, some of which we've already taken in Q2, they do take some time to show up into our bottom line results, but you're starting to see some of it materialize already now. These cost savings initiatives are quite significant. We think that as we implement them, you will start to see the results of that bear out in the quarters that are upcoming.

Thank you. And then a question around design wins. Can you comment on the new design wins in the quarter and how many new cars have been added to the road without the sense in 2024 and what is your ambition for 2025?

So again, I think we are starting to share where we are on a cumulative basis. If I take the second part of this answer, we'll have to do the quick map, but I think we are showing you the chart that shows how many cars we have on the road in total. Keep in mind that all of these cars that are on the road come from the acquisition we have made. From a Toby perspective, our automotive design wins will be in vehicles on the road in 2025, which is what we had announced when we had gotten those set of design wins. What we see on the overall design win front is the combination of the new Toby AutoSense business is a very compelling partner for customers and we see increased RFQ activity. I think that a lot of this RFQ activity will accelerate as we can demonstrate the fact that our SCDO program can actually go through homologation. So hitting this milestone, being able to validate that this can meet the regulatory requirements for DMS and deliver the OMS features that OEMs are looking for, I think that will be a significant step in accelerating new design wins.

Thank you. And our next question comes from our analyst Erik Larsson at SEB. Erik, please go ahead and unmute yourself.

Yes, can you hear me? Yes. Okay, great. I have a few questions. I'll take them one by one as well. The first one on integrations. You talked a bit about this, but I just want to make sure I understand. It looks like M&A contribution in integrations is around, say, 63 million and you flagged that the revenue from the acquisition will come down in 25 and 26. So could you say in any way how much this should decline one year from now, roughly?

I think the majority. You see that since we are sort of showing both total and organic and as you also can, as you just did counted backwards, what does the acquisition contribute with? That's attributed to the integration part. Most of that will decline in 2025. So then we will continue to work on delivering the autism segment and sort of get more top line there.

Okay, so a majority of those should decline, but regardless you expect integrations to report a positive EBIT from other things? Yes. Okay, great. Then just a question on restructuring in general. I couldn't find that you incurred any sort of one of four restructuring costs this quarter. Am I correct?

You're correct.

Okay, but my understanding is that we could still see some going forward.

In Q4, you should anticipate some.

Okay, great. And then finally on products and solutions, I would say it's a relatively weak quarter in the historical context. So I'm just curious, is it solely weak demand or have there been any changes to the market dynamics? Should we assume it will continue to be weak in 2025?

Yeah, what I would say is again, what we've seen on the products and solutions side is a change, of course, in the macro environment in many cases, which are actually quite regionally specific. You know, we've talked about a couple of quarters ago that we saw weakness in Asia, which was something that we didn't see for the years before that. So I would say that what we saw in Q3, while you write that from a historical perspective, this is not the level of results we would like. We did see the Asia business actually start to come back or stabilize instead of being sort of in decline. It's a little bit too early to say where the trend is, but what I would start to explain, I think, is that what we have seen on the last couple of quarters is sort of a sequential change in some geographies. And we think that as the macro economic environment stabilizes, and as we continue to go and focus our product portfolio and where we think we can get the most success, this business should start to get back to growth.

All right, that's all for me. Thank you.

Thank you, Erik. And those were all the questions for today. Please feel free to reach out to us if you have any further questions. And thank you for joining us today. And we look forward to seeing you again on February the 4th when we release our Q4 results. Wishing you all a wonderful Friday.

Thank you very much. Bye

bye.