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Edited Transcript of TOBII.ST earnings conference call or presentation 24-Oct-19 11:00am GMT

Q3 2019 Tobii AB Earnings Call

DANDERYD Oct 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Tobii AB earnings conference call or presentation Thursday, October 24, 2019 at 11:00:00am 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

* Ola Elmeland

Tobii AB (publ) - IR Manager

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Conference Call Participants

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* Daniel Thorsson

ABG Sundal Collier Holding ASA, Research Division - Research Analyst

* 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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Ladies and gentlemen, thank you all for standing by. Welcome to the Tobii Earnings Call Q3 2019. (Operator Instructions) Also I must advise that the call is being recorded today, Thursday, the 24th of October 2019.

And without any further delay, I would now like to hand over the call to your first speaker today, Mr. Henrik Eskilsson. Thank you. 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, Ramon, and thanks for joining this call, everyone. As usual, me and Johan will run through Tobii's progress in this time in the third quarter this year. So let's move directly to the next slide, please.

And let's start with a high-level summary for the third quarter. Revenue for the entire Tobii Group grew by 15% or 8% adjusted for currency. Tobii Dynavox reported a substantially improved EBIT margin of 14%, which is a significant improvement from both previous quarters and the same quarter last year. Equally, in Tobii Pro, we reported a very much improved EBIT margin, in this case of 13%. And Tobii Tech roughly doubled its external revenue.

Also, we have recently launched 2 very important products, the new I-Series in Tobii Dynavox and the Tobii Pro Fusion product in Tobii Pro.

Let's go into some detail on each of the business units and starting with Toby Dynavox. As you know, Tobii Dynavox is the global leader in assistive technology for communication. This is Tobii's largest business unit and makes up close to 60% of the group's overall sales.

Next slide. We continue to invest for long-term growth of Tobii Dynavox and to be able to provide a voice to more and more users in need. A very important recent event was the launch of the new I-Series early this week. And I will come back and talk more about this in a minute. Perhaps a little bit counterintuitive, as we know from experience that we typically see a bit of slowdown of sales when we shift over to a new product. And this is both because resellers are hesitant to carry stock of an older product when they know a new product is underway and also that we need to reprocess a lot of orders through the reimbursement process, which can take up to a few months to accomplish.

We generally saw a good sales growth in Q3 of most of the products in the portfolio. And specifically, we saw a slight drop in sales of old I-Series due to imminent shift over to the newly I-Series.

We've also seen some improvements in the bottlenecks in internal funding process that we mentioned in the last earnings call. Next slide, please.

So let's talk a little bit more about the new I-Series. The I-Series is Tobii Dynavox' eye-controlled and medical-grade flagship product. It makes up roughly 50% of all of Tobii Dynavox's revenue and it does extremely important, both for the business units and for Tobii group as a whole. The old I-Series was originally launched 6 years ago and has been a major success and driver for growth in Tobii Dynavox ever since. The new I-Series has been redesigned from the ground up. It is a major improvement of an already proven and successful concept. The new I-Series is much lighter, much faster, much more durable. It comes equipped with Tobii's latest state-of-the-art IS5 eye-tracking technology. It features an innovative partner window that enables true face-to-face communication, and it comes with brand new, innovative and user-friendly software called Computer Control.

And I'm obviously, very gassed about this product and confident that this will reinforce our position as market leader and drive profitable growth for Tobii Dynavox in several years to come. Next slide.

As you may recall, we have talked about our world-class comprehensive product portfolio that spans all price bands and covers a broad spectrum of user needs. On the bottom, from a price perspective, we have pure assistive technology communications software that can either run as a low-cost communication solution on consumer electronics like an iPad or run together with our more sophisticated devices. Then we have midrange solutions that consist of devices that are consumer-grade and offered at attractive price points but still designed for assistive technology for communication.

These are typically sold to schools and other funding bodies with low imbursement grades.

And on the top end, we have our medical-grade solutions that are typically sold, together with extensive support and service packages. This is where the new I-Series sits as our top of the line model. In each price band, we have both touch-based solutions and eye-tracking based solutions with some of the product examples illustrated on the right-hand side in this picture.

So over to you, Johan, and the financials.

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

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All right. Hi, everyone. As communicated during the quarter, CMA decided that we have to divest Smartbox and hence we have implemented IFRS 5 in our accounting, which means that the acquisition is no longer part of Tobii Dynavox segment or the group. This change impacts both the profit and loss statement as well as the balance sheet.

In this stand-alone view, Tobii Dynavox showed good sales growth for many of our products and some improvements in our internal funding process, but we also experienced material negative effects in the quarter from the product transition to the recently launched I-Series. Revenues grew by 6% in the quarter or flat adjusted for currency. In addition to the product transition mentioned, we had negative nonrecurring adjustments linked to our provisions for sales through insurance companies in the USA are reported.

Gross margin came in at 68%, in line with previous year, but trending upward from previous quarter despite the nonrecurring revenue items that impacted gross profit negatively as well. Our operating expenses were in good control and grew only due to currency impact in Q3. The Q3 EBIT margin was up materially versus last year, up 5 points to 14%, and we also see an upward trend from previous quarters.

In the first 9 months, the business unit delivered FX-adjusted revenue growth of 5% and an EBIT margin of 11%, which is up 2 points from last year.

Over to you, 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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All right. So next is Tobii Pro, which, as you know, is a global leader in eye-tracking solutions for understanding human behavior. Tobii Pro makes up close to 30% of the sales of the group and holds a very strong market position with a global market share above 60%. In Tobii Pro, we service thousands of different customers that use our eye-tracking solutions to understand human behavior in a myriad of situations, industries and applications. As one of many, many examples is the space agency, NASA that uses Tobii eye-tracking for a number of different things, including to train control operators, as shown in the picture on this slide. Next slide, please.

Another example is wayfinding studies, how do people actually navigate around in specific environments. And in this area, we've done several large studies with major airports on this topic, including Munich airport, London Heathrow and Kastrup airport with a purpose of optimizing the passenger journey.

Next slide. Last week, we launched the brand-new Tobii Pro Fusion product. Pro Fusion is our latest high-performance, research-grade, yet, very small and portable eye-tracker. This is designed for advanced eye-tracking studies, both inside and outside the lab. Typical research fields, where this is the ideal tool include behavior research, psychology, neuroscience and medicine. It features very impressive and absolutely world-leading eye-tracking performance.

Next slide. This slide helps us put the Pro Fusion product into some context. And also Tobii Pro has a very strong world-leading product portfolio. It includes both eye trackers that are connected to a computer screen, such as the entry-level product Pro Nano, the left on this picture, the new high-performance Pro Fusion, and the top end Pro Spectrum eye trackers. The portfolio also includes our best-selling Pro Glasses, which is our mobile or wearable eye-tracking system. And we also have our leading Tobii Pro Lab software that enables our customers to design, conduct and analyze the results from advanced studies using these different eye-tracking devices.

Tobii Pro Fusion is a tremendous improvement over older products in the same product category and reinforces Tobii Pro's position as market leader and also this important segment of the market. Next slide.

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

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Okay. Over to the financials. Tobii Pro revenue growth in Q3 rebounded from a weaker Q2, and we saw continued lower share of solution sales. In the third quarter, revenues increased by 18% and 10% adjusted for currency. Gross margin came in at 76%, which was flat year-over-year, but up sequentially. As we have indicated before, operating expense growth was down considerably, especially in R&D and showed a 4% growth adjusted for currency. EBIT margin improved materially compared to last year and was up 8 points. Remember that we tend to have strong seasonal patterns in Tobii Pro. And in Q3, which is one of the seasonally weak quarters, an EBIT margin of 13% is really good. Even though it was partly positively impacted from a change in an earn-out consideration. In the first 3 quarters of '19, Tobii Pro has delivered FX-adjusted revenue growth of 5% and an EBIT margin of 11%, which is up from 8% last year. And remember that revenues in 2018 was positively impacted by the effect of taking over a large portion of our former competitor, SMI's customer base, hence, a lower revenue growth number this year. Back 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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Thanks, Johan. So let's move over to Tobii Tech. The picture you see on this slide here is from the eSport event called PUBG Grand Slam that took place in July, and this is yet another large eSport event where eye-tracking was used to showcase what the competitive teams were looking at during gameplay. And the broadcast from this event alone was seen by well over 1 million unique viewers globally.

Let's go to the next slide. We continue to see very strong growth in sales to external customers in Tobii Tech in Q3. The sales to external customers grew by 101% or 86% adjusted for currency. And this was mainly driven by strong sales growth in the PC segment as Dell started volume shipping of 2 new gaming laptops with built-in Tobii eye-tracking. The total revenue for Tobii Tech grew by 44% or 33% adjusted for currency. Again, this was driven by the external sales. The internal sales was actually somewhat lower than last year mainly due to the transition effects around the launch of the new I-Series in Tobii Dynavox.

Next slide, please. We also continue to make progress in VR. In July, we announced our Tobii Spotlight technology. Tobii Spotlight technology optimizes the possibility to process high-resolution graphics only where the eye focuses, which is usually referred to as Foveated rendering. Foveated rendering dramatically reduces the need for graphics processing power and is one of the key reasons why eye-tracking is becoming a necessity in VR. We announced Tobii Spotlight technology in a panel on Foveated rendering, together with NVIDIA and HTC. Next slide.

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

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Okay. Thanks, Henrik. Tobii Tech's external revenues doubled in the quarter, while sales in the PC segment contributed strongly. However, this quarter, we saw somewhat weaker internal sales due to the product transition in Tobii Dynavox we mentioned earlier. Overall, sales were up 44% or 33% adjusted for currency. Gross margin was down 5 points to 45%, primarily due to product mix driven by increased PC sales.

Operating expenses were in line with previous quarter and our earlier communication around the Tobii Tech organization, having reached the capacity needed to execute the business plan.

EBIT for the quarter was a negative SEK 73 million, which was an improvement year-over-year. On a year-to-date basis, Tobii Tech has delivered FX-adjusted external revenue growth of closer to 70% and an EBIT of negative SEK 224 million.

Next slide, please. Moving over to the group. The group revenues showed continued growth in the third quarter and increased by 8% adjusted for currency effects over last year, where Tobii Pro and Tobii Tech contributed mostly to this growth. Gross margin for the quarter was 69%, down 2 points compared to last year, but in line with first half of '19.

Tobii's EBIT for Q3 was a negative SEK 32 million, which was a large improvement versus last year, partly due to that, we had materially lower growth in operating expenses. In fact, OpEx has been relatively flat over the past 3 quarters. On EBIT, specifically, I want to call out the FX impact we had since a large part of sales and the Tobii Dynavox and Tobii Pro teams are based out of Sweden. So we have a Swedish krone effect in many of our line items in the P&L. This is also the case in our financial net, where it also includes positive FX effects.

In the first 9 months of '19, the group delivered FX-adjusted revenue growth of 8% and an improved EBIT of almost SEK 40 million compared to 2018.

Next slide, please. As usual, let me wrap up the financial section with a look at our cash flow, which was a negative SEK 61 million in Q3. The change versus last year was driven by an improved EBIT, counteracted by an increase in our net working capital. Our cash position was SEK 257 million at the end of the quarter and excluding the Smartbox part, SEK 234 million.

As communicated earlier, the implementation of IFRS 16 leasing at the start of '19 impacted the balance sheet as well as our EBITDA. And you can read more about this change in our report.

So this concludes the walk-through of the numbers, and back to you, Henrik.

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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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All right. So repeating a quick overall summary. Revenue for the group grew by 15%, 8% adjusted for currency. Tobii Dynavox reported the much improved EBIT margin of 14%. Tobii Pro also significantly improved EBIT margin to 13%. Tobii Tech roughly doubled its external revenue, and we've recently launched 2 very important products recently. The new I-Series in Tobii Dynavox and Tobii Pro Fusion in Tobii Pro.

With that, we're handing over to you, Ramon, and questions from the teleconference.

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Questions and Answers

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Operator [1]

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Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Our first question is from the line of Daniel Thorsson.

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Daniel Thorsson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [2]

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So do you hear me now?

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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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Yes, we do.

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Daniel Thorsson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [4]

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Daniel from ABG. So I start with the question on Dynavox. Do you think the negative effects you saw in Q3 for launching I-Series, in the end of the quarter, will that revert in Q4? Or will that be a lag of 1 to 2 quarters?

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [5]

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Daniel, Henrik here. From experience, we know that we see these transition effects when we launch new products, and it's always a little bit difficult to know exactly how they're going to play out. I think it's reasonable to assume that we will see some transition effects also in the fourth quarter, which means that the truly positive effect of this new fantastic product line is something I expect to see more clearly in the beginning of the next year.

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Daniel Thorsson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [6]

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Okay, that's very clear. And then the one question on Pro. How large were the reversal of earn-outs in the quarter? You mentioned them, I tried to look in the report, I find SEK 12 million, but it seems to be related to Q1 '18 if I'm not wrong. Can you clarify that?

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

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Yes, I will. So the SEK 12 million related to 2018, you're correct. It was a bit more than SEK 2 million that was reversed in the quarter.

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

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Okay.

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

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And it relates to the Acuity acquisition.

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

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Okay, that's very clear. So it's a positive effect of SEK 2 million on EBIT in Pro. I see.

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Johan Wilsby, Tobii AB (publ) - CFO [11]

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Correct.

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

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Okay, excellent. And then on Tech, can you say something about the sales split and external revenue between PC, VR and Niche in this quarter? It has been around the same levels in Q1 and Q2 if I'm not wrong. And now you say that PC is a bit stronger. And what magnitude?

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [13]

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Yes. No, I think that's correctly reasoned. We saw a very strong sales growth in PC. And we actually, specifically in the third quarter, we had a relatively weak quarter when it comes also to VR and Niche Applications. In VR, we're still mostly -- it's pre-revenue for volumes. It's a lot of project revenue, and they have a tendency to be -- to vary quite a bit from quarter-to-quarter, and it was a little bit lower, specifically in the third quarter. And in Niche Applications, we also had for a couple of reasons, a slightly lower sales in the third quarter, and we expect that to pick up going forward as well. So actually, the share of sales that was PC was significantly larger than VR and Niche Applications in the quarter specifically.

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

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Okay, that's very clear. It sounds like it was probably more than 50% of revenues.

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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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Yes.

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

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Yes, I see. And then we -- another one on Tech. What will happen to internal sales growth near-term here, and you explained the negative effect from the I-Series launch in Dynavox. Will we see a similar effect in Q4 as well? Or will that revert and grow in line with the organic growth we see in Dynavox and Pro instead?

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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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Over time, we expect the internal sales to grow roughly in line with the organic sales growth in Tobii Dynavox and Tobii Pro. And usually, it should follow relatively closely Tobii Dynavox and Tobii Pro development quarter-by-quarter as well.

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Daniel Thorsson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [18]

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Okay, but it may have a negative effect in Q4 as well. It sounds like.

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [19]

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Well, at least, I think that the -- I think it's reasonable to assume that the positive effect from the new I-Series will really kick into gear in the beginning of next year, both for Tobii Dynavox as well as for internal sales for Tobii Tech.

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Daniel Thorsson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [20]

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Okay. Excellent. And then a final one. We saw HTC launching a separate eye-tracker from 7Invensun for some of its VR headsets in the quarter. Is that something you also offered but lost? Or is that outside your product portfolio?

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [21]

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So HTC has not launched another eye-tracking product. They have launched a VR headset called the Cosmos. And one of our competitors 7Invensun has launched an accessory product that goes along with the Cosmos. And we have chosen to not provide eye-tracking accessory products to VR headsets because we do not believe in the quality of the user experience and the business model that you can deliver in that kind of solution.

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Daniel Thorsson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [22]

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Okay. So that's a separate launch. And do you think that is a potential way forward for VR? Or do you think that it needs to be integrated long term?

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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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We believe that eye-tracking needs to be and will be integrated. And that's why we think doing it the peripheral way, which is -- first of all, it's difficult to do it with proper quality. But second, it's more of a distraction than anything else.

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Operator [24]

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Our next question is from the line of Sebastian Olsson.

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Sebastian Olsson, SEB, Research Division - Analyst [25]

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Actually, I think some of my questions have already been answered, but I have one question on Tobii Pro. You mentioned the backlog remains high. Will you please give us any indication of what the backlog is like compared to the last quarter? Is it increasing or decreasing or being flat? I think that's it.

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Johan Wilsby, Tobii AB (publ) - CFO [26]

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So backlog is actually increasing slightly in Q3 in Tobii Pro, not materially, but some.

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Operator [27]

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Our next question is from the line of Thomas Graf.

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Thomas Graf, Handelsbanken Capital Markets AB, Research Division - Research Analyst [28]

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Just a quick question about, furthermore, on the bottlenecks you had last quarter in Dynavox and Pro. What happened this quarter that almost solved it? And have you solved the staff issue you had and so on? Could you just explain what has happened compared to last quarter?

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Johan Wilsby, Tobii AB (publ) - CFO [29]

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Sure. So in Tobii Dynavox, we discussed the internal administrative processes for funding last quarter where we have experienced bottlenecks. And as I said, in just, I think, related to some of my slides, we see a slight improvement in that process. We still have work to do on that. And the shorter lead times. So there's more work ahead. And then I think when you talk around bottlenecks for Tobii Pro, I think you refer to the backlog. And that was the same question that -- the same answer as given to Sebastian, slightly going up, but not by much.

I don't know if you want to add anything, Henrik.

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [30]

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No. I think the reason why we see a larger backlog in Tobii Pro is that we continue to see a larger proportion of service orders, service business, service sales and also a larger proportion of sales that are fairly large and complex orders to big customers, and that has the tendency to have slightly longer delivery times and that increases the backlog.

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Thomas Graf, Handelsbanken Capital Markets AB, Research Division - Research Analyst [31]

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Okay, okay. For Tobii Pro then, can we expect the same transition phase from the new Pro Fusion as we have for the I-Series in Dynavox will be lag there as well? Sort of...

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [32]

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It's a good question. I don't think we really know definitive answer to that, to be honest. It's not as apparent as it is in Tobii Dynavox, where -- for instance, in Tobii Dynavox when we launch new product, in particular, for North America, we have to run the funding cases through the fund -- large portion of the funding cases through the funding process, the reimbursement process again, and that just takes numerous months. In Tobii Pro, it's more of a normal B2B business and what happens when you launch a new product. And on the one hand, you had a positive effect because it's new, it's fresh, it's great product, people want to buy it. On the other hand, you also have a situation where you need to be out, spend a lot of time with customers who want to see and test drive the new product before they are ready to make a purchase decision or when it comes to academic researchers to submit the research grant, which can also sometimes have lead time. So difficult to say, actually.

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Operator [33]

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(Operator Instructions) There are no further questions at the phone. Please continue.

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Ola Elmeland, Tobii AB (publ) - IR Manager [34]

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Okay. Thank you. This is Ola. We have a lot of questions on the web. I'm not really sure we can cover all of them, but we will do our best to cover most, I can promise.

So the first question, Henrik, is on IS5. There is one participant that had expected more IS5 wins, how are we doing on that?

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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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So first of all, we are growing our sales, both in terms of units and obviously, in dollar revenue quite dramatically now with the larger volumes that we have with Dell. As you know, Dell has gone from having Tobii eye-tracking integrated into 1 gaming laptop to have it across their entire range of gaming laptops as of this summer. And this move more than triples our volumes of eye tracker sales and IS5 sales with Dell, specifically. So it's a great vote of confidence. We've been working for a long time together with Dell and the fact that they now take those steps to dramatically increase volume means that they fundamentally believe in eye-tracking as a key part of their product. We also see examples in other parts of our business where we have, for instance, the new I-Series in Tobii Dynavox, which is based on the new IS5 eye tracker. Also actually, the Pro Fusion product is a derivative of the IS5. So the different components of the IS5 with camera modules, custom image sensor, IT basic, et cetera, are put together into a slightly different configuration in Pro Fusion. We also have several design wins, for instance, in our Niche Applications segment for the new IS5 as well. But of course, we are working hard to also accomplish further design wins for IS5, both in these segments as well as in the Niche Application segment.

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Ola Elmeland, Tobii AB (publ) - IR Manager [36]

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Okay. And there was a relating question, and that is a status update on Tobii Aware. So perhaps you can start with the PC offer in general?

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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, I think that's good as maybe a little bit of background or so. In the PC segment in Tobii Tech, we have 3 main offerings, one is our own gaming peripheral, should call it, Tobii eye-tracker 4C. The other is our Tobii Aware, which is our software-only entry-level solution for integration in PCs. And then we have our Tobii IS5, which is our high fidelity eye-tracking solution for high-end gaming PCs, et cetera. We launched the first product with our new generation of Tobii Aware in the middle of this year, came to market in one of Lenovo's Yoga, desktop PCs, so this has been under development for some time. We see a lot of interest for Tobii Aware from PC manufacturers and are working hard to bring to market together with partners, additional products with Tobii Aware integrated during next year.

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Ola Elmeland, Tobii AB (publ) - IR Manager [38]

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Okay. And then we had one question here on gaming, you talked about gaming before. So when will we start making money on gaming? Why is gaming important and when will we make money on gaming?

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [39]

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So gaming is, obviously, in itself, a large market opportunity for us. It's also an early adopter market for the even bigger overall PC market. And as already mentioned, we are seeing significant volume increase, more than tripling our volume now with Dell, which is specifically on gaming. We're also seeing good growth of our gaming peripherals in the market. If we continue on a positive growth trajectory like this, we do expect the gaming segment within Tobii Tech or the gaming part of the PC segment to contribute to the result of Tobii Tech in the course of the next few years.

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Ola Elmeland, Tobii AB (publ) - IR Manager [40]

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Okay. And then we have some questions on VR. So why is the VR market developing so slowly? Or is it?

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [41]

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Yes, exactly, is it? I think it's a matter of perspective. I think we look at VR overall as an ecosystem. It has actually gone from nothing. VR virtually did not exist only 4, 5 years ago. And today, this year, it's expected that roughly 8 million VR headsets will be shipped worldwide. That is a pretty fast evolution actually in development of an entirely new category of devices in the world. There is a lot of people who thought that this would move even faster and perhaps overhyped the expectations on VR as a market overall. But I think that we are seeing robust and reliable growth in the VR market. IDC estimates that the VR market is growing by 30% this year, and will continue to actually accelerate growth and reach tens of millions of devices over the coming few years. In VR, eye-tracking -- within VR, eye-tracking is making rapid progress and we expect eye-tracking, as mentioned several times before, to become a de facto standard in VR over the course of the next few years. And we are working together with a large part of the entire VR industry to accomplish integration of eye-tracking technology into future VR products. But also that doesn't happen overnight. This is a development that is progressing very nicely, very robustly, but it takes a few years to evolve.

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Ola Elmeland, Tobii AB (publ) - IR Manager [42]

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Okay. And back to the operator, I think we have some other incoming questions on the line.

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Operator [43]

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Yes, sir. We do have -- it's from the line of Mikael Laséen.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [44]

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Yes, just a couple of quick ones. First of all, maybe you've already talked about this in the call, but I came in late. But can you explain the provisions, the changes in provisions for insurance companies that you mentioned in your report, how that is affecting you?

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Johan Wilsby, Tobii AB (publ) - CFO [45]

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Sure. So in the U.S., we take provisions around how customers are paying us, i.e., bad debt and also contractual rebates with insurance companies, we take those provisions versus revenues. And we have to make a slight shift in those provisions in the quarter, and that impacted Q3 revenues with around $1 million negatively. So obviously, without that, revenues would have been higher.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [46]

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So that is a one-off that has happened now.

And now you have provisions in line or what is the correct level, I guess?

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Johan Wilsby, Tobii AB (publ) - CFO [47]

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Correct. But these are provisions that will -- depending on payments, vague behavior by customer, et cetera, over time, these will move up and down. But in this quarter, we had a retroactive sort of change in terms of how we provision, which is -- we have a negative impact of $1 million.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [48]

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Okay. Yes. And there was another question about Tobii Tech and the PC side. So I'm also curious about the pipeline of interest and how that is developing. You're not mentioning this in the report and it would be great to hear more detail about what is happening.

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [49]

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Henrik here. As usual, it's difficult for us to share too much detail about the pipeline ahead of time. We have, as mentioned, we have dialogues, both dialogues with numerous traders in the PC market around various upcoming products. We see -- we continue to see strong interest for the Tobii Aware solution and we also see clear opportunities for IS5 going forward. But I think we'll have to come back when we have more concrete information to communicate.

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Operator [50]

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No further questions, sir. Please continue.

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Ola Elmeland, Tobii AB (publ) - IR Manager [51]

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Okay. There are still incoming questions on the web, so I thought we could do a couple more. So there are 2 around update status on the VR projects that we said we have sort of a handful ongoing. So what's happening there?

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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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So generally, we continue to have a handful of projects and important and serious engagements with major players in the VR ecosystem. And these are generally moving forward nicely. Integration of eye-tracking into VR headsets is a relatively complex process, both from a device integration perspective and the technical development that has to happen, but also from truly incorporating eye-tracking into the ecosystem of these VR manufacturers to get eye-tracking experiences or benefits from Foveated rendering or eye-tracking analytics into the software ecosystem as well. So this takes careful planning and quite a lot of work. And part of that is for us. The part of it is also for our customers and partners. But overall, this is progressing nicely and we continue to feel that we have a very strong market position when it comes to eye-tracking for VR. And again, as mentioned before that eye-tracking will become, over the next couple of years, more or less standard in VR.

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Ola Elmeland, Tobii AB (publ) - IR Manager [53]

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Okay. So then a specific question on HTC Vive Pro, how is that doing in the market?

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [54]

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So the HTC Vive Pro is out and shipping and it's getting good reviews from customers and also enticing a lot of excitement from developers that are learning how to create value from this new capability of eye-tracking in VR. So I think it's very important. The HTC Vive Pro Eye in itself is not a high volume product. It's a fairly high-end enterprise VR handset. So it is contributing to sales. But it doesn't in itself, yet, make a material bang on revenue. Hopefully, this is a precursor to numerous more products and models coming in -- of VR headsets coming into the market with eye-tracking as we plan. And the Vive Pro Eye is, in part, a very important tool to see the software ecosystems ahead of that.

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Ola Elmeland, Tobii AB (publ) - IR Manager [55]

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Okay. A couple of questions on the subject of financial targets. How do you feel about them today and are you more comfortable today than we were a year ago?

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [56]

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So overall, we feel that we have appropriate financial targets for Tobii. And in particular, we have a very strong focus on reaching our overarching group target of becoming profitable in 2020. And we see consistently also in this quarter, growing sales, continued high gross margins and essentially a flat cost base. And on a trajectory that takes us to profitability in 2020.

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Ola Elmeland, Tobii AB (publ) - IR Manager [57]

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Okay. There is a very visionary question here, I think, well, perhaps it's not. When will we have eye-tracking in mobile phones?

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Henrik Eskilsson, Tobii AB (publ) - Co-Founder, CEO, President & Interim President of Tobii Tech Business Unit [58]

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Good, an interesting question. It's difficult to say. We do not currently focus a lot of proactive efforts on the smartphone segment. One of the reasons for this is that although we believe that there are exciting benefits and use cases for eye-tracking in smartphones, we believe that the ecosystem needs some time to really validate and figure out how to implement and make use of those. And therefore, we think this market may take some time to develop. Compare that to other markets like VR, where the benefit and use case is extremely strong and very apparent. And therefore, we prefer to put a higher proactive focus on that type of market and opportunity. Also same thing in Niche Applications, where a lot of our customers have exceptionally strong value from use of eye-tracking. But that said, we do believe that eye-tracking will become commonplace in smartphones over time as well. But it's quite difficult to know on what time line.

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Ola Elmeland, Tobii AB (publ) - IR Manager [59]

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Okay. So there are some other things on our agenda soon. So I think we'll have to stop there for today.

So thank you, everyone, for listening in, and back to you, Ramon.

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Operator [60]

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So that does conclude our conference for today. Thank you all for participating. You may all disconnect.