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Edited Transcript of TOBII.ST earnings conference call or presentation 19-Jul-19 12:00pm GMT

Q2 2019 Tobii AB Earnings Call

DANDERYD Aug 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Tobii AB earnings conference call or presentation Friday, July 19, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Henrik Eskilsson

Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit

* Johan Wilsby

Tobii AB (publ) - CFO

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Conference Call Participants

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* Daniel Thorsson

ABG Sundal Collier Holding ASA, Research Division - Research Analyst

* Johannes Ries

Apus Capital GmbH - Founder

* Mikael Laséen

Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst

* Sebastian Olsson

SEB, Research Division - Analyst

* Thomas Graf

Handelsbanken Capital Markets AB, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Tobii Earnings Call Q2 2019. (Operator Instructions) I must advise you that this conference is being recorded today, Friday, the 19th of July, 2019.

And now I'd like to turn the conference over to your speaker today, Henrik Eskilsson. Please go ahead.

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [2]

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Thank you, Joanne. And thanks for joining this call, everyone. Johan and I will run you through Tobii's progress in the second quarter this year. So next slide, please.

Tobii revenue for the entire group grew by 21% or 13% adjusted for currency compared to Q2 last year. In Tobii Dynavox, we saw a solid underlying sales, but the actual revenue growth was somewhat hampered by delays in our internal process of funding of insurances.

Tobii Pro had a weaker quarter in part because we increased the order backlog due to longer delivery times from service sales and sales of large solution orders.

Tobii Tech, on the other hand, grew rapidly. External sales was 87% higher than in Q2 last year. And we also saw several important launches and announcements from major partners and customers in the ecosystem. And I'm very happy to welcome Anand

Srivatsa as our new Division CEO of Tobii Tech.

Let's go into some more detail on each of the business units, starting with Tobii Dynavox. As you know, Tobii Dynavox is the global leader in assisted technology for communications. This is Tobii's largest business unit. It makes up over 60% of the group's gross sales. Our solutions in Tobii Dynavox are often profound and life-changing for our users. As one example, we had a fun day in the office last month when we had a visit by Sebastian, one of our long-standing Swedish power users. He started using a Tobii Dynavox P10 eye-controlled computer back in 2008. Sebastian has cerebral palsy and cannot communicate without his eye-controlled computer. But he's a really smart young man and despite a very severe disability, he has finished his high school degree and we have also celebrated his graduation together with him.

Next slide, please. Revenue in Tobii Dynavox grew by 24% or 3% when we adjust for both acquisition and currency effects. Underlying sales demand was solid, but the actual revenue growth was somewhat hampered by delays in our funding process in the U.S. And what we call funding is the administrative process, whereby a device is prescribed by a therapist and subsequently approved for payment by an insurance company.

And recently, we've had internal delays internally in this process due to increased inflow of sales, in combination with some staff turnover and time required to train new experts. And this has resulted in an increased backlog of customer cases currently in process.

The value of these customer cases in process increased by more than 10% in the second quarter, which corresponds to around SEK 15 million in future order value.

So if we adjust for this effect, sales in Q2 as well as in the first half year was in line with Tobii Dynavox long-term target of 10% growth per year. We have, of course, taken actions and expect the process flow to normalize in the second half of this year.

Next slide, please. We continue to invest to grow the markets and the business for Tobii Dynavox. One major investment is the large-scale trainings of professionals that will come back in the industry. In the second quarter alone, we trained approximately 9,000 professionals on assisted technology for communication. We continue to develop our software Snap and have launched a new version, which among other things expands the language support to 13 different languages. And we also continue to make other large investments in product development and we have several major new products in the pipeline.

In the quarter, we delivered over 7,000 new voices in the form of apps and/or devices.

Over to Johan and Tobii Dynavox financials.

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Johan Wilsby, Tobii AB (publ) - CFO [3]

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Hi, everyone. In Q2, we saw continued momentum with meaningful revenue growth, if you consider our growing admin funding pipeline. This quarter, we saw an organic 3% growth restated for FX and M&A. And restated for the admin pipeline that Henrik explained, we saw an increase of 10% year-over-year. We are happy to report both growth in eye tracking as well as touch-enabled technologies.

Gross margin was down 1 point in the quarter compared to Q2 of '18, but even more importantly, up sequentially, despite no integration synergies from the Smartbox acquisition. Our operating expenses were up in Q1 (sic) [Q2], which is mainly due to the acquisition of Smartbox, but more in line with Q1 of '19 and there were several onetime costs that affected our EBIT in the quarter, around SEK 8 million primarily M&A-related.

The Q2 EBIT margin was 2 points down versus last year. But sequentially, it improved. EBIT adjusted for nonrecurring items was 12% in the quarter, which is acceptable in the nonintegration stage with Smartbox, but still not where we aspire to be as our long-term target for EBIT margin is 15% to 20%.

Year-to-date June, we saw -- we see revenue growth of 7% adjusted for FX and M&A. And taking the funding pipeline delta out of this, we saw around 10%, which, again, is in line with how we see the business growing over time.

Operating margin was 8% for the same period. And restated for nonrecurring items, this was 11%.

A couple of words around the Smartbox acquisition, which is under antitrust review currently. On May 30, CMA announced its provisional conclusions from the second phase of the investigation. In conclusion, CMA continues to believe that the acquisition of Smartbox can be expected to result in significant reduction in competition in the U.K.

Tobii cooperates with CMA, but continues to believe that the acquisition is not anticompetitive. To the contrary, we believe it can be beneficial for our users. We expect more information from CMA in late July and in parallel, we're preparing a number of different scenarios and action plans.

So back to Henrik.

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [4]

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Thanks, Johan. Let's move over to Tobii Pro. Tobii Pro is the global leader in eye-tracking solutions for understanding human behavior. This business unit makes up roughly a quarter of the sales of the group, and we also here hold a very strong market position. Tobii Pro has a global market share above 60% in its field.

Next slide, please. Tobii Pro has a normal seasonal pattern, where both revenue and EBIT tend to be significantly weaker in Q2 and Q3 each year and correspondingly significantly stronger in the fourth and the first quarter of each year. In the second quarter this year, we repeated this pattern. But also with this is consideration, reported revenue in Tobii Pro was low and only increased by 1% and being down by 5% adjusted for currency compared to Q2 of last year. A major reason is that we have had a large increase in our order backlog during the quarter. In other words, incoming orders that were not yet invoiced and thus not recognized as revenue in this specific period. This in turn was driven by a larger share of sales being services and sales of large solutions, both of which have longer delivery times than normal product sales.

In addition, we also had weaker underlying sales in some geographies. For instance, we saw a temporary decline in U.K. academic sales due to Brexit-related uncertainties.

The previous several quarters have been really strong for Tobii Pro, and we remain positive on the continued outlook for growth and improving profitability also in this business unit. The underlying market demand continues to be strong, more and more customers across a variable range of industries are adopting eye tracking as a method to gain insight into behavior of customers, employees and in scientific research.

Next slide. We also continue to make significant investments to enhance our product portfolio in Tobii Pro. In the second quarter, we announced 2 important product improvements: one was for Tobii Pro Lab, our flagship analysis software, which received a major upgrade to enhance the abilities to conduct efficient eye-tracking study for websites; and our Tobii VR Analytics software, which enables eye-tracking studies in complex virtual 3D environments was upgraded to support the recently launched HTC Vive Pro Eye VR headsets.

We have several major products underdevelopment also in Tobii Pro, which you should expect will result in important product launches over the coming year.

Next slide. We're also continuing to strengthen our global sales organization for Tobii Pro to be able to cater to increasing customer demand. Sales of eye-tracking solutions and services is a highly complex sale, and we tend to be most successful in this through our own highly specialized sales and consultant organization.

In Q2, we opened a sales office in Chile to more proactively grow our business in Latin America. And as we mentioned already in the previous earnings call, we also opened a new sales office in Singapore in the first quarter this year. As part of opening our sales office in Latin America, employees and customers from our former reseller in the region Eye On Media were assumed by Tobii Pro.

Johan, your turn and -- the Tobii Pro financials.

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Johan Wilsby, Tobii AB (publ) - CFO [5]

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All right. As Henrik mentioned, Q2 was a quarter below our expectations for Tobii Pro with a negative 5% FX-adjusted growth, even if we saw an increased backlog due to increased share of solution sales as well as services.

Gross margin came in at 72%, down 1 point year-over-year and also lower sequentially. Product versus services mix in the quarter was behind some of the decreased margin, and we also saw some negative scalable elements at these revenue levels.

Operating expenses showed some growth versus last year due to the investments that we are doing in both sales coverage and product development. FX-adjusted growth was around 8%. And the quarter's operating expenses are in line with the last 2 sequential quarters. Going forward, we expect more modest growth in Tobii Pro's expenses.

EBIT margin was negative, which was lower than last year. As you know, we tend to have a strong seasonal pattern, where Q4 and Q1 are the strongest from a profitability view. And this second quarter was worth the normal, given the relative weaker revenue growth and gross margin.

On a year-to-date basis, revenues grew 10% and the operating margin was 10%, up 1 point from last year's first half.

Over to you, Henrik.

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [6]

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All right. Let's move to Tobii Tech. Tobii Tech is the world's leading supplier of eye-tracking technology for integration into consumer electronics and other products. Our current main focus segments are PC, VR and Niche Applications.

Next slide. The second quarter this year was a rather exciting quarter for Tobii Tech. Sales to external customers increased by almost 90% adjusted for currency compared to second quarter of last year. Total sales, so including also internal sales of Tobii Pro and Tobii Dynavox, increased by 50%.

Several major partners and customers of Tobii Tech made important announcements and launches during the quarter related to Tobii and eye tracking. This includes announcements from Dell, HTC, Intel, Qualcomm and Lenovo.

Next slide. Towards the PC segment, Tobii Tech today has a range of sensor solutions. Tobii Aware is our entry-level offering, which we offer as a software license to PC OEMs. This enables PC OEMs to make their devices smarter and better understand the user at and modest costs. Tobii Aware fits nicely with some of the central ideas of Intel's Project Athena, which I'll come back to shortly.

Due to the low cost points, Tobii Aware is a good tool for Tobii to achieve higher volume and device adoption at an early stage of market evolution, but obviously with a much lower ASP for Tobii compared to full eye-tracking systems. On the other hand, with a very high gross margin, since this is a pure software license.

Tobii IS5 is our high-end eye-tracking platform, which we sell to PC OEMs, who embed it into their devices. This provides advanced eye tracking to the PC and enables numerous additional use cases and benefits compared to Tobii Aware.

Initially, the IS5 is mainly targeted to gaming PCs, where in addition to making the PC more intuitive and user friendly in general, it also enables specific gaming benefits in game experiences, streaming, game training, et cetera.

Tobii Eye Tracker 4C is our standalone eye-tracking sensor peripheral, which offers full-fledged eye-tracking capabilities, but works as an add-on to any PC or desktop monitor. All of these are key parts of our strategy to make eye tracking a major technology for PCs.

We are engaged in several important customer dialogues in the PC segment, with Tobii Aware currently attracting the strongest interest in the near term.

Next slide, please. A very important announcement for Tobii Tech in the quarter was Dell's launch at Computex of their new Alienware m15 and m17 gaming laptops with built-in Tobii IS5 eye tracking. The m15 and m17 are Alienware's next generation of their thin and light gaming laptops. These are beautiful gaming machines, packing a lot of the latest technology, of course including Tobii eye tracking. And the fact that our IS5 platform is significantly smaller than our previous IS4 platform has been an absolute prerequisite to fit inside the thinner form factor of these new devices.

Next slide. This also means that previously up until this year, Alienware had integrated Tobii's eye tracking only in the Alienware 17 model. Now this year, in January, Alienware launched eye tracking also in their Area 51-m gaming laptop. And now in Q2 when they're introducing eye tracking into their m15 and m17 as well, they are now available with the Tobii's eye tracking across their entire product line of next-generation gaming laptops. And Alienware is by many perceived as the world's top PC gaming brand. They know gaming really, really well. And they've been working with eye tracking with Tobii since late 2016. So by now, they also know eye tracking really well and they know Tobii really well. And the fact that they are taking this step going from one product model to have eye tracking across their entire product portfolio is a huge vote of confidence from Alienware in eye tracking and Tobii as a supplier.

We move to the next slide. Also at Computex, Intel announced their 1.0 specification of Project Athena. Project Athena is Intel's vision for the next generation of ultraportable laptops. This is a very large initiative that gathers almost the entire PC ecosystem and is likely to be the guiding star for how modern PCs will look and behave over the coming several years.

The tagline for Project Athena is, "Laptop Innovation Rooted in Human Understanding." A core concept of this is that our PCs will become better at understanding user to provide a more intuitive, user-friendly and supportive experience. And these are ideas which marry very well with Tobii's technology and with eye tracking. Both our Tobii Aware solution as well as our high-performance IS5 eye-tracking platform fit nicely with these concepts.

Tobii is a partner in Project Athena and Intel is presenting us and our technology together with other partners and technologies as part of Athena showcases.

Overall, megatrends are in favor of eye tracking and we're clearly taking important steps forward in this segment. The PC market is a very large long-term opportunity, but this is not a sprint. It's a marathon where large-scale penetration takes time.

Next slide, please. In the second quarter, HTC also started shipping the new HTC Vive Pro Eye VR headsets with built-in eye-tracking technology from Tobii. This is the first major VR headset in the market with built-in eye tracking and is a powerful start for large-scale adoption of eye tracking in VR.

This picture on this slide is snapshot of the front page of the HTC's Vive website. Check it out for yourself, if you have a few minutes. This website does a really good job of highlighting the very compelling value of eye tracking in VR.

Next slide. In May, Qualcomm announced their Smart Viewer reference design for VR. This is based on their new Snapdragon XR1 chip, which is Qualcomm's first system on chip targeted solely at VR and AR devices.

Tobii eye tracking is fully integrated into Qualcomm's Smart Viewer reference design. This is the second reference design we do with Qualcomm and we collaborate with them to make eye tracking a key feature in future mobile, VR and AR headsets.

In addition to the Vive Pro Eye and Qualcomm's latest reference design, we had good progress during the quarter on other important customer and partner collaborations in VR and AR. Among these, we landed one new design win and made good progress in ongoing customer projects.

Overall, we now see the very first high-end headsets with built-in eye tracking hit the market this year with fairly small expectations on sales volume. Next year, we expect numerous more headsets with built-in eye tracking also in more of the mainstream models. And by 2021, we expect really significant volumes to kick in. Within 3 to 4 years, eye tracking will be mainstream and standard in VR and AR.

Next slide. We had really good traction in our Niche Application segment as well in the quarter. We saw increasing sales to those integration customers that have already launched their product and we have several more on the way to the market. We landed several more design wins in this segment during the quarter in devices for cognitive assessment, reading diagnostics and vision therapy.

Next slide. And we have searched long and hard to find the perfect candidate to take the helm of Tobii Tech, and I am super happy to welcome Anand Srivatsa as the new Division CEO of Tobii Tech. Anand was most recently Vice President and General Manager of Intel's entire Desktop, Systems and Channels group with profit and loss responsibility for a significant part of Intel's business. Anand brings excellent leadership skills and a wealth of knowledge and insight about our ecosystem, our customer base, relevant technologies, et cetera. Anand is American and has worked extensively both in the U.S. and Asia. He will move to Stockholm with his family to lead the Tobii Tech organization from our headquarters. As Anand takes charge of Tobii Tech, I will be able myself to again better focus my attention on Tobii group as a whole.

Johan, back to you on Tobii Tech financials.

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Johan Wilsby, Tobii AB (publ) - CFO [7]

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All right. Thanks, Henrik. Tobii Tech revenues in the quarter were up 50% year-over-year adjusted for FX, but the external revenues were up 87% on the same basis, which is really strong. This quarter, customers from all subsegments contributed to these revenues. Gross margin was down 3 points to 47%, primarily due to a different product mix driving, obviously, a different COGS mix than last year.

As communicated earlier, our organization in Tobii Tech has reached the capacity needed to execute the business plan and hence, the operating expenses were in line with the last few quarters. Year-to-date, revenues grew by 45% and the operating loss was at a similar level as of the first half of '18.

Next slide. Let's sum things up with the Tobii Group overview. Revenues show continued growth in the second quarter, an increased by 13% adjusted for currency effects year-over-year despite the buildup of different backlogs in Tobii Dynavox and Pro.

Gross margin for the quarter was 69%, down 1 point compared to last year, but up sequentially. Obviously, the delayed integration for Smartbox impacted this quarter's growth margin.

Tobii's EBIT for Q2 was a negative SEK 51 million, which was an improvement from Q2 of '18 despite having SEK 8 million of nonrecurring costs included.

First half group's revenue grew by 27% to SEK 765 million and the operating loss was SEK 88 million, which is an improvement versus last year. Excluding the nonrecurring items in first half, the loss would have been SEK 71 million.

Next slide, please. Final slide of this financial section. Cash flow was a negative SEK 81 million in Q2. The change versus last year was primarily driven by an increase in our net working capital besides the operating loss, primarily an increasing inventory and receivables, which are partly affected by the reevaluation effects from a weaker Swedish krona. At the end of June, we had a cash position of SEK 314 million. This concludes the numbers. Henrik, so back to you.

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [8]

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Yes. So quick summary for the quarter. In Tobii Dynavox, we saw solid underlying sales with revenue growth hampered somewhat by delays in our internal funding process. Tobii Pro had a weaker quarter, in part because we increased the order backlog. Tobii Tech grew rapidly, external sales almost 90% higher than Q2 last year. And Anand is joining Tobii as our new Divisional CEO for Tobii Tech.

We continue to execute on ambitious plans for all of our 3 business units and with a strong focus on profitability to reach our goal of Tobii group profitable already next year.

With that, we're handing over -- back over to you Johan and any questions we may have from the teleconference.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Sebastian Olsson from SEB.

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Sebastian Olsson, SEB, Research Division - Analyst [2]

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Henrik and Johan, Sebastian [on for] Ahlqvist. So my first question is on Tobii Pro. In what regions did you see the lower order intake except of the U.K.? And what have been the reason for this? And secondly, on Dynavox, if you could please elaborate a bit more on the demand of touch versus eye-tracking products during the year? And what should we expect on the segment growth levels in H2? And just the final one on Tobii Tech. If you could just give us any indication of how large share of the total VR OEMs today you collaborate with?

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [3]

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Thank you, Sebastian, for those questions. The first question was on Tobii Pro and which regions we have somewhat weaker sales in the quarter. One was, as we mentioned, in U.K., specifically on the academic side due to uncertainties around scientific research funding given Brexit-related uncertainties, et cetera. We do believe that this is also a temporary effect. Another region, which specifically in Q2 had slightly lower sales was in China, which was lower this year compared to Q2 last year. On the other hand, the first quarter this year was actually really, really strong in China. So when we kind of dissect the different regions in Tobii Pro on a quarterly basis, they tend to ebb and flow a little bit. Big picture, we are -- over an extending period of time, we're growing quite nicely in the China market.

Your second question was relating to the growth in Tobii Dynavox, whether it's touch and eye tracking. And generally, in the second quarter and in the first half this year, it's been fairly evenly in terms of growth rate in touch and eye tracking, a bit higher growth rate on the touch side compared to eye tracking. And going forward, we do expect to see growth roughly the same magnitude in both of those areas.

And your third question was relating to Tobii Tech. And if I understood it correctly, the sort of share of VR headset manufacturers that we are collaborating with. And I would say, as a rough indication, we are actively collaborating with VR headset manufacturers that sort of, when you count their entire product ranges, make up approximately half of the existing VR markets. So a very significant part the VR ecosystem. I hope that answered your question, Sebastian.

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Operator [4]

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Your next question comes from the line of Daniel Thorsson from ABG.

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Daniel Thorsson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [5]

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A question on Dynavox. Do you expect the backlog and admin situation to normalize in the second half of 2019. Does that mean a quick bounce back to high organic growth already in Q3 or more of a gradual improvement?

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Johan Wilsby, Tobii AB (publ) - CFO [6]

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Well, I can start out. So the reason behind this backlog is primarily due to that we have seen an increasing staff turnover, so we have a need to replace people working in that part of our team and also train them to be really effective. So it will be a gradual sort of come back with that sort of pipeline buildup, I would say. I don't know if you want to add something here, Henrik.

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [7]

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No. Generally, the -- these funding processes are pretty -- they're pretty long and extensive in time. So it doesn't bounce back immediately. It just takes some calendar time.

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Daniel Thorsson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [8]

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Okay. And then a short one on Dynavox. Do you expect any nonrecurring costs in Q2 -- Q3 or Q4 related to the Smartbox acquisition that you already are aware of?

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Johan Wilsby, Tobii AB (publ) - CFO [9]

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Not that we are aware of. I mean the -- we expect to hear from the CMA at the end of July, as I mentioned. And then once we hear their decision, there will obviously some cost involved, I would expect. But to what level, I don't know right now.

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Daniel Thorsson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [10]

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Okay. That's fine. And then 2 questions on Pro, if I may. Demand for larger products and more services in the quarter, is that the change in the market demand in general or more of an accident that it happened just this quarter? And then the second one on Pro. Addressing Latin America more aggressively, now entering Chile, does that mean that growth in mature markets has started to flatten out a bit?

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [11]

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So on the first question, we do see a general trend both towards higher and higher proportion of service sales, in particular with commercial customers that really want our help to interpret eye-tracking data and draw a meaningful conclusion from us. So we see a lot of opportunities to continue expanding this research consulting business. It's a very large opportunity there long term. And that's a general trend.

Also, I think seeing larger and larger solution sales is also a long-term trend. I do think though that it was also a bit of a spike effect specifically in the second quarter. So it's a little bit of both the trend and spike effect.

On your second question relating to Latin America, no, you should not interpret this as flattening out in sort of larger regions and markets for us. Latin America is not a new market for Tobii Pro. We've been active in the Latin American market for many years already through resellers. So I would rather see it as a sign that the Latin American market has reached a size and potential where it actually makes sense for us to more proactively address that market. Another factor behind this is that many of our largest customers are global in nature and they want us as a supplier to be able to serve them on a global basis. And that becomes in itself a very strong competitive advantage for us to have such capabilities.

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Daniel Thorsson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [12]

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Okay. That's very helpful. Have you paid anything for taking over Eye On Media place in Chile?

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Johan Wilsby, Tobii AB (publ) - CFO [13]

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Yes. We have. It's a small asset purchase deal. It's actually disclosed in the report with -- it's sort of less than SEK 1 million. So it's very tiny.

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Daniel Thorsson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [14]

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Okay. Okay. And final one on Tech. Can you say something about the split in Tobii Tech external sales in Q2, if you simplify the split between PC, VR and niche markets?

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [15]

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Specifically, in the second quarter, the split of revenue between those segments was roughly even.

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Daniel Thorsson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [16]

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Okay. So similar pattern as we saw in Q1?

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [17]

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Yes.

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Operator [18]

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Your next question comes from the line of Thomas Graf from Handelsbanken.

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Thomas Graf, Handelsbanken Capital Markets AB, Research Division - Research Analyst [19]

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I just wondered a bit more about the Tobii Tech and the sale increase there -- external sale increase. Thank you for the split. That was helpful. But we've seen many new announcements during the quarter. Have any of these been -- have you been able to capitalize on these in this quarter or are you still waiting? Or could you give some flavor on that would be really helpful?

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [20]

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Thanks. No. That's a good question. On a general level, the sales increase that we've seen in Tobii Tech over the past 2, 3 quarters has largely been driven by deals that were announced earlier in time. So I think that sort of announcement and product launches in this quarter, they will help drive revenue growth going forward in coming quarters largely.

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Operator [21]

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Our last question comes from the line of Johannes Ries from Apus Capital.

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Johannes Ries, Apus Capital GmbH - Founder [22]

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Maybe also a short follow-up on Tobii Pro. So 2 new products you've shown here. Even in the press release, you talked about new product set in the pipeline. Could that be a driver maybe for growth in the coming quarters?

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [23]

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Johannes, I'm not sure I heard the question probably. Can you please repeat the question?

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Johannes Ries, Apus Capital GmbH - Founder [24]

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No. No. So 2 new products you have in your presentation shown in Pro. And although I think in the press release you mentioned further products, which are in the pipe -- in the labs, which are coming in the next foreseeable future. Could that be drivers maybe for growth -- for increasing growth rates or coming back to growth in Tobii Pro?

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [25]

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Yes. Thank you for that question. So as a first comment, we generally yield a strong underlying demand in the market. So I'm not overly concerned with the lower revenue growth specifically in the second quarter, where we have had several quarters of very strong growth in Tobii Pro. And we see positively on the future sales trends, just generally speaking, just based on sort of market demand and market development. But also, of course, we do know that improving products and launches of new products are -- tend to be a strong contribution to driving additional revenue growth in Tobii Pro. Obviously, the product improvements that we have presented this quarter are important product improvements. So we definitely expect those to help drive sales, but we do have significant products -- additional products underdevelopment that we expect to bring to market during the course of the coming year. And definitely, we expect some of these products to be significant revenue drivers as well.

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Johannes Ries, Apus Capital GmbH - Founder [26]

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And with more growth, given that you have not made a lot of investments in R&D and biddings and channels, there is margin -- to the target margin in the foreseeable future. I think the target margin was 15% off the top of my head, 15%?

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [27]

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Yes. No. I think that's -- we have -- as you mentioned, we have our financial goal in Tobii Pro of 15% to 20% EBIT margin. We have said that that's our goal for 2020. We do continue to believe that, that is very much the appropriate goal and target for Tobii Pro. And if you look over several past quarters, we have seen a very positive improvement trend in the profit margin for Tobii Pro. The Tobii Pro business has a very high gross margin, which also means that revenue growth very nicely translates into increasing EBIT on the bottom line.

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Johannes Ries, Apus Capital GmbH - Founder [28]

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Bottom line is more affected by OpEx, which were investment for the future?

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [29]

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Yes. We are however -- also in Tobii, we are keeping the OpEx at a roughly flat level from where we are right now, which means that continued revenue growth does translate into increasing EBIT.

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Johannes Ries, Apus Capital GmbH - Founder [30]

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Super. On Tobii Tech, on the IS5 platform, maybe you can repeat a little bit advantage compared to IS4. And you mentioned because of its smaller size, lower price, more power, it attracts more customers. Maybe you can add a little bit more to this because I think it's a very important strategy going forward?

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [31]

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Absolutely. You're doing a good job at describing the difference as a benefit, so let me know Johannes if you need a sales job. We can always have a look at that. But -- no, but you're right. One of the -- some of the design goals with the IS5 platform was specifically to make it significantly smaller, so that it actually can fit into these new, modern, thin and light gaming laptops.

So the integration of eye tracking into Alienware's new m15 and m17 would have been completely impossible based on the previous IS4 platform, but are now fully made possible with IS5. And of course, this is actually a much bigger factor than many people realize because when you design a PC, the industrial design of that device is very, very important. So putting in an eye-tracking sensor that's going to look -- make your device look less nice and big and bulky and things like that, that's a no go. So having a smaller form factor is very critical, and it's also very difficult to accomplish.

Another important improvement with the IS5 is that the illumination system for the -- that creates the reflection points that are needed for eye tracking have been moved to an invisible wavelength for the version of IS5 that goes into laptop PCs, which means that in previous integrations, as a user, you've actually been able to note this a faint red light coming from the eye-tracking system, which quite a lot of users have actually reacted to and, again, something that impacts the industrial design of the device. With the new IS5, this is completely invisible. So as a user, you can't notice -- you don't see it. And of course, when you have both the invisibility of the illumination and a smaller form factor, all of a sudden there is no sort of -- there is no -- you don't pay anything on the designing of device to put in eye tracking. So that's really important.

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Johannes Ries, Apus Capital GmbH - Founder [32]

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Super. Maybe going forward, what will in the next 1 or 2 years stronger growth drivers, so PC, laptop business or VR business. Both are successful, but what's maybe the near-term opportunity? Because you mentioned virtual reality 3, 4 years it will be standard, but possibly on -- [to assist that.] So what will maybe, in your eyes, short term is the stronger driver?

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [33]

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So I think going forward -- in the near term, I think that we will see revenue growth into the tech-driven mostly by PC and Niche Applications. We do see significant revenue growth in Niche Applications, so PC and Niche Applications. But then in the medium term as VR starts kicking into volume, then we definitely expect that to be a significant contributor as well.

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Johannes Ries, Apus Capital GmbH - Founder [34]

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Yes. And in the PC space, it's very impressive for me to see this Intel topics into Latina and -- but also set your eye in VR with Qualcomm that are really big players that could help you really to be in the standard solutions going forward?

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [35]

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Yes. The trend...

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Johannes Ries, Apus Capital GmbH - Founder [36]

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So the assumption was right here...

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [37]

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Yes. (inaudible).

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Johannes Ries, Apus Capital GmbH - Founder [38]

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Okay. Latest point on the cash side. You have burned another SEK 81 million, even if your sheet next year to come profitable. Two things, the cash is enough because you nearly burnt a quarter of your cash you had at the beginning of the quarter.

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Johan Wilsby, Tobii AB (publ) - CFO [39]

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Yes. Johannes, so yes, the -- we had a negative cash flow in the quarter. A lot had to do with some temporary buildup of working capital. And obviously, that we will gain from in second half as well. So -- but -- as we've said before, the business plan we have is fully funded in itself by the equity issue that we did a couple of years back. And then in addition, we brought in some funds via a bond earlier this year for acquisition purposes.

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Operator [40]

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We have one further question from the line of Mikael Laséen from Carnegie.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [41]

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I have a few questions. First of all, the nonrecurring cost that you had in the Dynavox segment, what was that related to?

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Johan Wilsby, Tobii AB (publ) - CFO [42]

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It is specifically related to the CMA process.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [43]

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Consultant fees and things like that or...

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Johan Wilsby, Tobii AB (publ) - CFO [44]

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Yes. Mainly in the legal space.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [45]

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Okay. All right. And when it comes to Dynavox, you had increased personnel turnover. Can you explain why?

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Johan Wilsby, Tobii AB (publ) - CFO [46]

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You mean related to the funding teams, right?

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [47]

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Yes.

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [48]

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Yes. I don't think -- we don't feel that we have, per se, systemically any increased staff turnover. Generally, we have very low staff turnover and continue to have so, but we had a little bit of a fluke spike for a variety of reasons, including health reasons that led to us having a staff shortage and some higher-than-normal turnover specifically in those departments in the quarter. And it's just -- it's very specialized expertise to know how to do these -- to process these type of paperworks and applications. So it actually takes quite some time to train new experts in the field.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [49]

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Okay. How many employees are working with these processes in the U.S.?

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [50]

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In total, roughly 40 people.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [51]

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4-0?

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [52]

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4-0.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [53]

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Okay. Yes. And I was wondering about the order intake for Tobii Pro. If you can maybe be more specific there about the order intake and the order book during the quarter?

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Johan Wilsby, Tobii AB (publ) - CFO [54]

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You mean in terms of the buildup of the backlog?

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [55]

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Yes, please.

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Johan Wilsby, Tobii AB (publ) - CFO [56]

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Yes. So you can think of around SEK 10 million. That equates to roughly 10% growth on an FX-adjusted basis.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [57]

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So the order backlog increased by SEK 10 million?

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Johan Wilsby, Tobii AB (publ) - CFO [58]

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Around SEK 10 million.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [59]

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Around SEK 10 million. Okay. Great. Yes -- and my -- yes, I think final one was regarding the Tobii Tech outlook. If you can help us with the drivers -- sales drivers in the second half '19 and 2020. You mentioned a bit here about PC notebooks and Niche Applications, but if you can sort of elaborate on that a bit more in detail. I expect -- or I guess that you expect sequential increase from here, a quite substantial increase, I hope. But can you maybe help us out with the outlook and revenue trend there?

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [60]

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Yes. It's obviously, somewhat tricky since we do not provide specific forecasts in that sense in short term, though I think we resort to saying that, yes, we do expect continued revenue growth in Tobii Tech. And near term, I think we should expect that to come primarily from PC and Niche Applications, a little bit from VR as well. But as we mentioned before, the real sort of kick in VR is later in 2020 and in 2021 in terms of really significant volumes.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [61]

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Okay. So given that the new notebooks were launched quite late in the quarter, I guess, I assume that you didn't have that much effect from it, but there could, of course, be inventory buildup ahead of the launch in Q2...

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [62]

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Yes. So both of your statements there, I would say, are quite accurate. On the one hand, we did not see full effects in the second quarter. But on the other hand, there was some inventory buildup happening in the second quarter.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [63]

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Okay. And final one. Can you talk about the notebook developers that you talked and discussed IS5 with? And similar way, maybe as you have discussed VR opportunities, how many discussions are ongoing and things like that?

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [64]

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Yes. It's a little bit trickier to do this in a concise way in the PC ecosystem. It's so much more fragmented. Generally speaking, we do have intense dialogues with several PC manufacturers for a number of different products and -- product lines and product models. In the near term, we see, in particular, strong interest for Tobii Aware, but we also see interest for the IS5 platform, but I don't quantify further than that.

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Operator [65]

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Thank you. We will now take some questions that have been submitted via the web, after which we can come back to those waiting with questions on the phone lines.

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Unidentified Company Representative, [66]

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Yes. We have some questions from the web. And [Kent Roger] and [Hans] are thinking about our financial targets and concerned about are we going to reach them? And if we don't reach them, what about costs? How do we manage costs? How we're considering costs?

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Johan Wilsby, Tobii AB (publ) - CFO [67]

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All right. I'll start out on that. Obviously, we do planning on a continued basis for the next few quarters and we have some solid plans in place in terms of securing our profitability for 2020. And obviously, that means that we will have -- as we have said in the -- in our earnings report and probably these calls as well, we'll have an increased focus on our resource priorities. And you will see lower growth in operating expenses.

Specifically, I've called out a number of times that we have reached the size that we need to execute the Tobii Tech sort of business plan, et cetera. So that's what you should expect. We don't plan cost cuts, we have this in our own management. I don't know if you want to add anything here, Henrik?

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [68]

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No. I think that's good.

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Unidentified Company Representative, [69]

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Okay. So another question is the loan we raised in -- earlier in March. That was to fund acquisitions. So what does happen with acquisitions? Are you still thinking about acquisitions?

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [70]

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So obviously, one very clearly stated reason for the bond loan was to ensure financing of acquisitions done, so -- including, of course, Smartbox, et cetera. But we also have a pipeline of potential acquisition opportunities going forward. As always, we are very picky and choosy in terms of doing acquisitions. Our main growth strategy for Tobii Tech is organic growth, but we do see interesting and exciting opportunities that we evaluate on a continuous basis. So we'll see what happens there going forward.

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Unidentified Company Representative, [71]

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And one question from [Mattias.] I think it's for you, Henrik. Can you mention any more examples of the niche markets within this segment? Do you -- what kind of opportunities do you address and see?

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [72]

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By far, the largest cluster of customers and applications within the Niche Applications segment is in the medical field. There's actually a fairly large number of different very strong benefits and use cases for eye tracking in the medical field. Everything from different forms of assessments or diagnostics and everything from cognitive assessments to reading diagnostics to vision assessments to concussion or Parkinson's or Alzheimer's or glaucoma, there's a lot of different conditions that you can assess effectively with eye tracking, simply because eye tracking is saying a lot about what is actually happening in a person's brain. And related to that is also under development from numerous partners different therapy methods. So everything from vision therapy to cognitive therapy, reading therapy and so forth. There is also several customers in the medical space that are using eye tracking for interaction in medical environment. Everything from more efficient or particular interactions in surgery rooms to assistive technology, including competitors also to Tobii Dynavox. So we supply eye-tracking technology to -- and other forms of interactions in the medical space. So those are a couple of examples.

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Unidentified Company Representative, [73]

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Okay. We have a question from (inaudible) from Spain. So the orders that you have commented on today, so assuming that's Tobii Tech, what kind of visibility do we have in terms of sales and profit in cash?

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [74]

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So -- I mean, generally, in Tobii Tech, we make money when our customers make money and sell their products. So our typical revenue stream is either that we sell an eye-tracking sensor system like the IS5 and then for every unit that Dell ships anywhere m15 laptops, they ship an eye-tracking sensor from Tobii and we're selling a sensor for every unit. Or it can also be based on licenses per unit. So we obviously have forecasts from our OEM customers. They provide us with rolling forecasts typically with a fairly high degree of accuracy 3 months into the future, but also rougher projections roughly 6 months into the future. And that gives us a good estimate, although not certain of what our revenue is likely to be going forward. We do not share these estimates externally though.

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Unidentified Company Representative, [75]

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Okay. So we have one question from [Mattias.] I think we handled the first part in terms of sales pitch within Tobii Tech for PC, VR and niche. But when it comes to growth, which one has contributed most to the growth? And how do we see that moving forward?

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [76]

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I think we have touched on it in part. But specifically, in the second quarter, even though the sales split was roughly even between the 3 segments, it was actually Niche Applications and VR that showed largest growth relative to the second quarter of the year before. But again, going forward, near term we expect PC and Niche Applications to grow the fastest. Whereas medium to long term, we definitely expect VR to pick up significantly as well.

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Unidentified Company Representative, [77]

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Okay. I think that's it for the webcast. We have one more -- do we have any more questions from the line, operator, Joanne?

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Operator [78]

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We have one question on the phone line from the line of Daniel Thorsson from ABG.

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Daniel Thorsson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [79]

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Yes. Just the final one on Tobii Tech. You mentioned in one of the bullets here that you have a defined win in the VR segment in the quarter. Does that relate to the Qualcomm or the HTC launches? Or is that something totally new that you just can't disclose as of now?

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [80]

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It's related to neither HTC or Qualcomm. It's through a different customer.

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Daniel Thorsson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [81]

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So it's a third one that you haven't disclosed yet?

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [82]

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Correct.

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Daniel Thorsson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [83]

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Okay. Did you have any expected timing on when you will disclose who that is?

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [84]

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I do, but I won't disclose that right now.

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Unidentified Company Representative, [85]

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Okay. So I believe that's it for us.

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [86]

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Yes. Thanks, everyone, for attending our earnings call today, and thanks for good and relevant questions. So bye for now, everyone.

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Operator [87]

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That does conclude our conference for today. Thank you for participating. You may all now disconnect. Speakers, please standby.