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Edited Transcript of IVSO.ST earnings conference call or presentation 16-Aug-19 8:00am GMT

Q2 2019 Invisio Communications AB Earnings Call

Hvidovre Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Invisio Communications AB earnings conference call or presentation Friday, August 16, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Lars Højgård Hansen

INVISIO Communications AB (publ) - President & CEO

* Thomas Larsson

INVISIO Communications AB (publ) - CFO

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Conference Call Participants

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* Anders Knudsen

SEB Investment Management AB - Portfolio Manager

* Henrik Hviid

C WorldWide Asset Management Fondsmaeglerselskab A/S - Portfolio Manager

* Viktor Westman

Redeye AB, Research Division - Analyst

* Yiwei Zhou

SEB, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to today's presentation of INVISIO Communications Q2 Report 2019. (Operator Instructions) I must advise you that this conference is being recorded today, Friday, the 16th of August 2019.

I would now like to hand the conference over to your first speaker today, Lars Højgård Hansen, CEO. Thank you, and please go ahead, sir.

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Lars Højgård Hansen, INVISIO Communications AB (publ) - President & CEO [2]

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Thank you very much, and good morning, everyone. Welcome to the Q2 presentation from INVISIO and I am very pleased to report a record strong quarter for INVISIO.

We -- as you can see on Page 4, are in record mode in almost every line of the P&L. Our revenue is record-high. The gross profit, the gross margin and our EBIT and also our order intake during the quarter is record-high. So we are, of course, very pleased with these achievements.

And as many of you know, we had a little weaker start to the year in Q1 but we have definitely been able to compensate for that during the second quarter. And if we look at the first half year in total, we are up about 15% on revenue. We also still have a very good gross margin, above 60%, which is mainly due to a good product mix but also that we sell many products now directly both in the U.S. but also in selected countries in Europe, we have direct sales which has a higher gross margin.

Our operating profit was strong for the first half year, up 29% towards last year. And operating margin just below 20%.

What you might notice in the report is also that our OpEx, operating expenses, are a bit higher in this quarter. Some of it are related to our continued growth of the organization, both in the U.S. but also in Europe.

On the sales side, we add people where we feel it is relevant for us, not only in the U.S. organization but also related to our Intercom, which is slowly but surely progressing now also on the sales side.

But one of the major drivers for the increased OpEx in Q2 is the fact that many of our last year development projects, especially in the Intercom, but also orders are now in the final stage. And in the final stage, we do a lot of external testing, which means we go to external test houses and have the products tested and verified according to all military and other standards.

And we also, in this space, spend a lot of money on tooling. Tooling is -- which is for the part that are needed in the final manufacturing of the products. And we estimate that at least SEK 10 million of the capitalization that was done in Q2 was related to test reports and to tooling and, of course, also the increased activity level in R&D.

Our order book at the end of the quarter was SEK 90 million. As you know, we, after the end of the quarter, received an order from the U.S. Marine Corps that I will get back to shortly.

Turning to the next page, Page 5. We have modified our usual slides a little bit. We normally say that the business of INVISIO is very lumpy. It fluctuates a lot between quarters, both in terms of order intake and revenue, and that is still true. If you see these tables on the left-hand side, which is sales and also the order intake on the right-hand side of the slide, it is very clear that they both fluctuate quite a lot between quarters. But if we look at the sales on a rolling 12-months basis back to 2013, you will see that the trend is very clear. We are on a steady, long-term growth path despite the fluctuations that we see during quarters.

Now turning to the next page, 6. During the quarter, we saw a very strong development in the U.S. We received a first order from the new CASL program, which is a program under the United States Special Operations Command and they have a program called CASL, Communication Accessory Suite Land, and for this program, they chose our in-ear headsets and our V60 control unit and a selection of cables to be used for these military forces over the coming years. And we believe that this is a first order only and it will be followed by more over the coming years. We are selected for this program on a longer-term basis.

We also received a follow-up order from the SFAB units, Security Force Assistance Brigades, which we have seen a number of orders from over the last couple of years. This time, the order was about SEK 26 million.

Last but not least, we had a strategic order from a German police force. Again, over the last couple of years, we have spent considerable amount of time and resources trying to position ourselves in the police market where we see a lot of long-term potential. And this was one of the first breakthrough orders in Germany, and we are sure there are more business to be had in Germany but definitely also in a number of other countries where police and law enforcement are having similar needs to what the military has in terms of good communication and very good hearing protection. So a growth area that is definitely very interesting for INVISIO.

On Page 7, again, the U.S. Marine Corps, that we announced this week, chose INVISIO for their new hearing enhancement program and we received a first order of about SEK 43 million to be delivered over the next 6 months.

We believe this is a long-term program. Now I'm only referring to what was made public from the Marine Corps. When they started this program, they sent out an RFI in September last year that we and a number of other companies responded to, where they stated that they would like to, over the next 3 years, procure hearing protection and communication devices for somewhere between 7,000 and 65,000 users. So this is a first order of a number of units that is definitely lower than the 7,000. So we expect there to be good orders coming from the Marine Corps over the next years without having more details to share.

I would like, on Page 8, again to highlight our new Intercom System that is now very close to finalization. We are starting sales activities on a little broader scale. We have shown the product to customers at a recent trade fair in the U.S. and it will have a very prominent position at an upcoming trade show in Europe, in London, in about 3 weeks. So slowly but surely, we are in the final stages of development, which is also, as I said earlier, related to some of the capitalization that we do.

But we are, of course, extremely eager now to get it fully out to the market and bucket in more input and also spending more sales resources on this. As we've said many times, we believe that the Intercom is a very interesting product category that will contribute to INVISIO's continued growth over the years to come.

So Page 9. I repeat myself a little bit. Our focus in '19 is to continue the business expansion. We have, over the last 2 years, invested heavily, as you can see on our OpEx level, we have hired a lot of new people in both R&D, operations, sales. And all of that -- all of those investments has, of course, been with the aim of increasing and growing our company and our business and we see a high activity level on the customer side as well. So we are very confident that we still have a good period ahead of us and we will start seeing harvest from many of the investments we have made over the past years.

So on Page 10. This slide we have shown many times, but it's just reinforce that we are diligently following our strategy of increasing our market share in Europe, North America and Oceania.

We have geographical expansion continued in parts of Asia, Middle East and South America. In previous report, we talked about opportunities in Middle East being close. That is still the case but it's a new area for us and we can just say that it takes a bit longer for the first orders to go through because there are a lot of paperwork and a lot of decision-makers that needs to be involved, but we're still confident that we will see a good orders from the new geographies.

Product development, as I say, apart from the Intercom, we also have other products in the pipeline that are close to finalization that we have not announced yet. So again, that's why capitalization is high in the second quarter. But we continue to look at new products for the future as well.

Our scalable business model is also a part of the reason why our gross margin continues to improve. It's not only the direct sales and the product mix. It's also the fact that we are more and more efficient in our manufacturing model with our outsourced manufacturing partners. So this is one of the strongholds of INVISIO, the business model that we have.

Finally, on Page 11, a repetition as well. We are in a market where we see growth but where we also drive growth.

There is a high demand for modernization of soldier equipment in many countries and there's also a high cost related to hearing impairment and many more countries are realizing that it's better to prevent than having the cost after damage is done. And we helped the market and helped the customers by developing innovative solution that can, yes, reduce the cost of hearing damage but also help them be more efficient in their line of work. The market is still in its infancy on our current business and then the potential for the new Intercom that we estimate could be of the same size as our current business in some years.

So with that, I conclude the presentation of our Q2 and first year -- half year report, and we are now open to questions. Operator, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from the line of Viktor Westman of Redeye.

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Viktor Westman, Redeye AB, Research Division - Analyst [2]

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Congrats on the strong figures. Can you hear me?

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Lars Højgård Hansen, INVISIO Communications AB (publ) - President & CEO [3]

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Yes. Thank you, Viktor.

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Viktor Westman, Redeye AB, Research Division - Analyst [4]

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Okay. Yes, can we talk a little bit about the inventory and working capital management?

I noticed that the inventory increased even more even though you delivered some of the U.S. big order here. Did you change your inventory policy? And do you have a more aggressive way of keeping stock of components?

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Lars Højgård Hansen, INVISIO Communications AB (publ) - President & CEO [5]

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No, not necessarily. But again, we are still expecting orders and we also still have the order book on hand that we'll mainly be taking out of inventory.

But one of the things that is a challenge but also a stronghold for INVISIO, is the fact that more and more customers are asking us to deliver full kits for each user which means that a user, a soldier, will be handed a bag where there is his hearing protection, his control unit and a number of cables. And that means that we have to deliver a full kit to every person. And sometimes, all the different parts that goes into the kit has different lead times and therefore, we need to gather everyone or everything in our warehouse before we can pack it and ship it out. And that means that sometimes, one single cable can make delays to a full shipment. So we might have -- just as an example, we might have SEK 30 million of inventory that is ready to ship out but we are missing 1 cable that will come in 14 days or in a months or whatever. And as soon as that last cable is in, we can pack the rest and we can ship it. But we need to be the warehouse until all parts are in. And we see that more and more that their customers want to have kits, depending on what role the user has. It could be a reconnaissant person, it could be an artillery person or whatever role they have, they get different kits. So that's the reason.

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Viktor Westman, Redeye AB, Research Division - Analyst [6]

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Okay. Very good. And let's talk costs a little bit.

So you mentioned that there is a higher cost in the quarter and it seems like a lot of it is due to finalizing the Intercom. But if we exclude the activated costs there and -- is there any particular one-off things in the SEK 48 million OpEx?

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Lars Højgård Hansen, INVISIO Communications AB (publ) - President & CEO [7]

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No. I'll hand over to Thomas, our CFO.

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Thomas Larsson, INVISIO Communications AB (publ) - CFO [8]

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Yes. This is Thomas Larsson, CFO in the company.

No, we haven't got any one-off cost in here. And it's mainly added employees in sales and R&D.

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Viktor Westman, Redeye AB, Research Division - Analyst [9]

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Okay. So we will not see a drop after the Intercom hits the market because then there -- it would be a cost in selling the product? So is that fair to say?

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Lars Højgård Hansen, INVISIO Communications AB (publ) - President & CEO [10]

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Yes.

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Viktor Westman, Redeye AB, Research Division - Analyst [11]

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Okay. Good.

And one last question was on the gross margin. Is -- are there any larger mix effects there? Or is this nice gross margin? Is this a pure direct sales effect?

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Lars Højgård Hansen, INVISIO Communications AB (publ) - President & CEO [12]

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Yes.

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Viktor Westman, Redeye AB, Research Division - Analyst [13]

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Very good. And maybe if I can squeeze in one more from the German police force deal there. So this is a procurement, right? So that means that you expect more cities in this space to order from this procurement?

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Lars Højgård Hansen, INVISIO Communications AB (publ) - President & CEO [14]

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Yes. And also more states to follow that has the same needs, yes.

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Operator [15]

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(Operator Instructions) Your next question comes from the line of Yiwei Zhou of SEB.

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Yiwei Zhou, SEB, Research Division - Analyst [16]

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I have two. Firstly, regarding your product launch.

I remember you mentioned last time you will have a couple of product launches during the year. Should we expect them -- is it still the case? Or should we expect them to coming in the remaining year?

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Lars Højgård Hansen, INVISIO Communications AB (publ) - President & CEO [17]

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We haven't decided. But as you can see from the capitalization and what we said about them being almost done, you can make the conclusion that we have products that are almost done and are in the final phase.

But when we announced them to the market, we have not fully decided yet. It depends a little bit on certain customers, agendas but also on a competitive situation. There's no point in letting any competitor know what we have up our sleeves. So we will get into the market when we think it is relevant. We, of course, always talk to our customers on a long-term basis. So those that needs to know, they know.

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Yiwei Zhou, SEB, Research Division - Analyst [18]

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Is this -- so is it fair to assume there is risk the launch would be postponed to next year?

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Lars Højgård Hansen, INVISIO Communications AB (publ) - President & CEO [19]

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Not the customer launch, maybe the public launch. So maybe for other -- the relevant programs or tenders and customers that -- they will see these products and work with them already.

But for the general public, we will decide when we think the right time is to make the announcement. That's more marketing launch, if you like.

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Yiwei Zhou, SEB, Research Division - Analyst [20]

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Okay. Okay. But would you press release it when you do the customer launch?

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Lars Højgård Hansen, INVISIO Communications AB (publ) - President & CEO [21]

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Yes. When we get to the public launch, we will press release it. Or if we get a significant order, of course, we will also press release it.

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Yiwei Zhou, SEB, Research Division - Analyst [22]

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So you mean you will sell to your customers or show to your customers before announce to the market?

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Lars Højgård Hansen, INVISIO Communications AB (publ) - President & CEO [23]

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Yes.

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Yiwei Zhou, SEB, Research Division - Analyst [24]

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Okay. Okay. Fair enough. Same question on capitalization. You mentioned in relation to the product launches.

Then what will be the run rate to when the product -- into the -- are launching to market? Should we expect to come down?

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Lars Højgård Hansen, INVISIO Communications AB (publ) - President & CEO [25]

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Yes. I mean we -- in the first 6 months, we had about SEK 23 million in capitalization and that is very high. And again, more than -- or at least half of that was related to test reports and tooling and so on. And once that is done, then that level will come down.

So in the second half of the year, the capitalization will be a lot less because then we will start on new products that start from scratch and that are not so -- in the beginning of a development project, it's mainly R&D resources, salaries that goes into the capitalization.

But at the end of a project, there are a lot of these external costs, like this then and tooling. So it will come down in the second half. That's the answer.

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Operator [26]

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And your next question comes from the line of Anders Knudsen of SEB.

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Anders Knudsen, SEB Investment Management AB - Portfolio Manager [27]

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Just on the order for -- from the marine. You talked about the RFI a year ago. Perhaps you could talk a little bit about the competition in relation to that? I don't know how much you can talk about it.

But is this exclusive deal from now on? Or could we also see others being supplying this?

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Lars Højgård Hansen, INVISIO Communications AB (publ) - President & CEO [28]

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Anders, as far as we know, and I'm almost 100% sure, this is exclusive. There's only one winner and that's us. So that's, of course, extremely exciting. And we were also very excited that the Marine Corps would allow us to -- normally, as you know, many of our customers are quite restrictive in the information that they will allow us to publish. But in this case, they allowed us to mention Marine Corps and so forth. So we are very happy about that and we are confident that we are the only ones chosen for this program.

To my knowledge and that's only my best guess, I think there was somewhere between 15 and 20 companies that responded to the RFI. I'm not sure how many were selected for testing. I think there was only maybe 2 or 3 that was selected for testing where INVISIO was one. And then finally, we were selected as the winner.

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Anders Knudsen, SEB Investment Management AB - Portfolio Manager [29]

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Congratulations with the strong results.

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Lars Højgård Hansen, INVISIO Communications AB (publ) - President & CEO [30]

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Thank you.

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Operator [31]

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(Operator Instructions) Your next question is a follow-up question from Viktor Westman of Redeye.

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Viktor Westman, Redeye AB, Research Division - Analyst [32]

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Sorry if I asked this question before.

But the new product, is that incremental development or adjacent areas like the Intercom?

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Lars Højgård Hansen, INVISIO Communications AB (publ) - President & CEO [33]

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Yes.

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Viktor Westman, Redeye AB, Research Division - Analyst [34]

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Which one?

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Lars Højgård Hansen, INVISIO Communications AB (publ) - President & CEO [35]

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No. I will not say more than that. We always do -- we're always in the process of developing next-generation products. So that's the majority of what we're looking at right now and what we are able to talk about.

So it -- I wouldn't call it incremental, I would call it -- that of course, we are always looking at what's next and the next-generation products for what we already have. But also expanding our portfolio. If you look back just a couple of years, you will see that the portfolio of both assets and control units have expanded and adding a new control unit, for instance, is not just incremental. We can see now that many customers are actually choosing more than one control unit because they have different needs when they have their line of work. So it's not only that, it is actually a lot of extra sales potential.

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Viktor Westman, Redeye AB, Research Division - Analyst [36]

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Okay. Very good. And just on the Intercom timeline here. It's still the case? Do you expect smaller orders in Q4?

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Lars Højgård Hansen, INVISIO Communications AB (publ) - President & CEO [37]

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Yes, we do. But whether it's 100% firm, I mean, it could be but it could also be delayed into Q1. That could also delay -- it could depend also on what type of funding the particular customer has.

Even though a customer says, "Yes, I would like to order so and so many, and I would like to have them before Christmas." We still need to -- yes, sometimes they don't have the funding until they get into the new budget year or something.

So I'm a little cautious about promising anything to Q4. But I think it is realistic that we can start seeing smaller orders in Q4.

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Operator [38]

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And your next question comes from the line of Henrik Hviid of C WorldWide.

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Henrik Hviid, C WorldWide Asset Management Fondsmaeglerselskab A/S - Portfolio Manager [39]

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Congratulation with the good result, Lars.

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Lars Højgård Hansen, INVISIO Communications AB (publ) - President & CEO [40]

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Thanks, Henrik.

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Henrik Hviid, C WorldWide Asset Management Fondsmaeglerselskab A/S - Portfolio Manager [41]

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One question is regarding this Intercom here. I understood on Viktor's question that you believe you'll see some small orders here in fourth quarter/first quarter 2020. My question is how deep is your post -- how many clients have you talked with about this new Intercom here.

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Lars Højgård Hansen, INVISIO Communications AB (publ) - President & CEO [42]

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Quite a lot on different levels. But it's also, as we will demonstrate at the DSCI trade show in a couple of weeks, it's a very, very advanced product that can do a lot of things. And they will -- it's not like a headset that you can buy and put it on and then you understand it. This Intercom System is extremely advanced and it can do a lot of things. So there will be a lot of interaction with the customers and testing from their side in terms of actually finding out how they would like to use it and how many cables and what the total configuration of the system should be. So it is a very advanced product. And again, the sale process is going to be a little more advanced than our current products.

So therefore, it can take a little longer time in the beginning. But we are, since a long time, since the first time we showed the product as a prototype, we are of course in dialogue with many customers that would like to start testing and -- but again, it's new territory.

So we are not really sure how long the process will be. But we -- from the experience we now have from headsets and control units, we think that the process could be a little shorter than what we saw in the early days of our headsets and control units.

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Henrik Hviid, C WorldWide Asset Management Fondsmaeglerselskab A/S - Portfolio Manager [43]

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Then I have one additional question regarding the Marine contract here.

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Lars Højgård Hansen, INVISIO Communications AB (publ) - President & CEO [44]

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Yes?

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Henrik Hviid, C WorldWide Asset Management Fondsmaeglerselskab A/S - Portfolio Manager [45]

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This -- how many -- how big is the total contract? Is it 80,000 total?

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Lars Højgård Hansen, INVISIO Communications AB (publ) - President & CEO [46]

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It is not a -- no, we have not been giving any promises or any -- we've only seen or we only know what is available in the RFI and what has been publicly announced, that they have an ambition to buy between 7,000 and 70,000 or 65,000 systems. So that's all we know. They have not given us any guarantees or anything because it also -- it's also related to how much money are they -- I think that's why they have this -- I think all 65,000 needs hearing protection, period. But the reason they make this 7,000 to 65,000 is because they don't know exactly how much money they're going to get in the budget for the coming years for this.

And until you know the prices, they don't really know either how much money they need.

So now they can start putting -- and the next government budget in the U.S. will start from November this year. So we believe that after November, they will probably at some time give us some more information on what money they have and how much they would like to buy.

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Henrik Hviid, C WorldWide Asset Management Fondsmaeglerselskab A/S - Portfolio Manager [47]

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But those -- this order of SEK 43 million, that's equal as 65,000 or 6,500?

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Lars Højgård Hansen, INVISIO Communications AB (publ) - President & CEO [48]

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No, no, no. It's less. We are not allowed to disclose the number, but it's less.

So it's less, it's not -- it's less than 7,000. So it's not like they have bought the first 7,000 already, no.

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Henrik Hviid, C WorldWide Asset Management Fondsmaeglerselskab A/S - Portfolio Manager [49]

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Okay. So -- but this is a new -- you have to clear me. The Marines, they tried 10 or 15 years ago to get a system?

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Lars Højgård Hansen, INVISIO Communications AB (publ) - President & CEO [50]

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Yes.

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Henrik Hviid, C WorldWide Asset Management Fondsmaeglerselskab A/S - Portfolio Manager [51]

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And that was a big miss?

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Lars Højgård Hansen, INVISIO Communications AB (publ) - President & CEO [52]

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Yes.

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Henrik Hviid, C WorldWide Asset Management Fondsmaeglerselskab A/S - Portfolio Manager [53]

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And now they're coming back?

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Lars Højgård Hansen, INVISIO Communications AB (publ) - President & CEO [54]

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Yes.

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Henrik Hviid, C WorldWide Asset Management Fondsmaeglerselskab A/S - Portfolio Manager [55]

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Okay. So it’s from scratch, they're starting to build up new...

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Lars Højgård Hansen, INVISIO Communications AB (publ) - President & CEO [56]

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Yes. So they -- 10, 12 years ago, they bought a system from a Norwegian company that is part of Honeywell and that system has never really taken off with the Marines.

So now they are back and they have been allocated money and as we wrote in the release, we also believe that -- I don't have any more details but we believe that they are going to have certain new systems -- weapon systems that are very, very noisy. So they have a need for advanced hearing protection. That is urgent.

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Henrik Hviid, C WorldWide Asset Management Fondsmaeglerselskab A/S - Portfolio Manager [57]

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Is this deal under this new U.S. purchase agreement you made already?

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Lars Højgård Hansen, INVISIO Communications AB (publ) - President & CEO [58]

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They could be, but it's a first order. They could buy through a GSA contract and say -- well if they want to, but it's up to them. But they did not do that for the first one.

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Operator [59]

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(Operator Instructions) .

We have a follow-up question from Yiwei Zhou of SEB.

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Yiwei Zhou, SEB, Research Division - Analyst [60]

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Lars, it's Yiwei again. I realize, in the quarter, you only generate SEK 4 million from Europe. Could you please add a bit -- a little bit more color on the -- on order intake from Europe and the activity level in this market?

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Lars Højgård Hansen, INVISIO Communications AB (publ) - President & CEO [61]

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Well, I would say that as everything else fluctuates, so I mean we are a global company. So in some quarters, the U.S. are very strong. Other quarters, you will see it, also depending on what larger programs and tenders are out there.

So I would say that the activity level in Europe is very high in a number of markets and we expect to see good business from European markets also in '19 and going forward.

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Yiwei Zhou, SEB, Research Division - Analyst [62]

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So are you expecting large orders from the European market in this year?

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Lars Højgård Hansen, INVISIO Communications AB (publ) - President & CEO [63]

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Always. That again, is it possible? Yes. Will it happen? I don't know. Because again, it's back to some political decisions and funding and how long the process takes.

But there are activities ongoing. So we could have larger orders from Europe and from other geographies before the end of the year. Absolutely.

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Yiwei Zhou, SEB, Research Division - Analyst [64]

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Okay. And how about the U.K., your existing customer? I mean they used to buy more than SEK 100 million. But this year, we haven't seen anything, I guess.

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Lars Højgård Hansen, INVISIO Communications AB (publ) - President & CEO [65]

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No. The order we received in '17 from the U.K. of SEK 100 million was delivered during '17 and early parts of '18. And it always takes quite a long time before it gets distributed out to the users and they actually start using it in full.

So it is a long process in our delivery. And I would say that we still believe that the customer is very happy about what he has received, and we will also see more orders coming at some point in time. But I cannot give more details on when.

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Yiwei Zhou, SEB, Research Division - Analyst [66]

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All right. So are you still -- are you in the dialogue with them to...

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Lars Højgård Hansen, INVISIO Communications AB (publ) - President & CEO [67]

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Always.

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Operator [68]

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Thank you. There are no further questions at this time, sir. Please continue.

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Lars Højgård Hansen, INVISIO Communications AB (publ) - President & CEO [69]

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Thank you very much, and we conclude the session for today.

Thank you for participating, and hopefully, talk to you again soon.

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Operator [70]

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Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may now disconnect.