This is a republished Q4 report with the attached PDF file in English. There is no new information in this report.
- We are now done with cost reduction and restructuring. We wrote off additional USD 1.9 million (MSEK 16.4) non-recurring costs in Q4 again to clean up our balance sheet. This includes approximately USD 0.4 million of severance related expenses, USD 1.2 million of intangible amortization, and USD 0.2 million of bad debt write off.
- Net Sales in the period amounted to MSEK 173 (236). The net decrease is attributable to a combination of sales decreases in the Forms and Notetaking businesses and an increase in revenue at Anoto Korea (previously called Pen Generations).
- The decline in Forms revenue is primarily attributable to the delayed ordering of existing pens as customers expected a new pen (AP-701) release in Q4 of 2017. In addition, Anoto changed its pricing policy in the Forms business. Instead of selling pens at a high one-time cost, we lowered pricing on the hardware and require recurring fees. Customers now pay an annual pen license fee and software fee along with mandatory pattern purchases.
- Although we believe that this is the right pricing model in the long run, we inevitably suffered some decline in revenue for the quarter as we turned down many renewal requests based on the old pricing scheme.
- While Net Sales decreased by MSEK 63, Operating losses dramatically decreased to MSEK 37 (260) mainly attributable to improved gross margins and the cost reduction from restructuring.
- Gross margin improved to 41% (34%) due mainly to the change in product mix as Anoto is beginning to get more license fees, software usage fees, and pattern usage revenue.
- Overhead costs in the period were MSEK 108, significantly down from the prior year (MSEK 339), due to the restructuring and cost reduction efforts across all operations in spite of the burden of the final obligations associated with the cessation of active operations in 7 Anoto offices around the world.
The last battle with the old Anoto started in Q4, 2017. We changed our Forms pricing policy. The old pricing scheme was a complete mess because there was too much complexity and variance among agreements. Across the board, pattern was given out free of charge. In some cases, we were selling pens below manufacturing costs. One commonality was that there was no or very little recurring income and there was no company-wide pricing policy but only those which were determined by the former Anoto sales people who received commission on sales.
We have now implemented a simple pricing structure and one global price policy. We updated our customer database to determine active customers versus inactive customers. We were getting complaints about the lack of responsiveness from our sales support desk although our support desk was running at full capacity. We decided to prioritize support tickets from active customers and not be swamped with the calls from “partners” who had not given us any orders for the last five years.
Our new pricing policy is volume weighted. High-volume purchasers can now enjoy a declining price model according to their annual volume of pen purchases. All customers now pay annual pen license fees, software usage fees, and pattern usage fees. We no longer freely give away millions of pages of pattern to those who buy a few pens. We encountered some resistance, especially from heavy pattern users who are accustomed to paying nothing for the pattern.
We made a conscious decision to take a step back in order to move forward. We may be losing some old Anoto customers who used to buy a few pens at high cost and got to use pattern for nothing. But we are adding new customers who like the new AP-701 pen and the fact that they can buy it much cheaper if they order a larger volume. Cevahir Group in Turkey is such a customer. They paid 100,000 USD as an annual pattern fee already and gave us a purchase order for 70,000 AP-701 pens.
We now have the capacity to produce 20,000 AP-701 pens per month in Korea and we are setting up an additional production facility in China with a long-term manufacturing partner.
The impact of the new pen platform is significant for Anoto’s new Forms pricing strategy of charging less for hardware and maximizing recurring revenue through software and pattern revenue. In order to support such a transformation, Anoto is developing a new software platform to complement the existing Anoto Live Forms (“ALF”) solution. The new Anoto Enterprise Forms (“AEF”) platform is targeted primarily at large enterprises. It increases both scalability and ease-of-integration into a customer’s own system.
Anoto previously had different platforms, different SDKs, different firmware among Livescribe, Anoto Korea, and Anoto. Although the three different platforms all used Anoto technology, different pens could not share Anoto patterns and mobile apps. Duplication in expenses maintaining the different platforms was inevitable. With the new pen platform, Anoto has finally achieved total convergence and integration, which will enable reductions in the annual cost of updating and maintaining firmware, mobile platform, and SDKs. Until now, we had to update three different platforms whenever there was an iOS or Android update.
Although it was a conscious decision, our revenue declined substantially in Q4. Despite such a decline in revenue, we would have made a modest operating income of $46K USD before we charged $1.9 million in one-time charges. Major components of this charge include $1.2 million of intangible assets, $223K of bad debt expenses, and $385K of departed executive severances and employee salaries.
OUTLOOk and future strategy
“The reasonable man adapts himself to the world;
The unreasonable one persists in trying to adapt the world to himself.
Therefore, all progress depends on the unreasonable man.”
George Bernard Shaw
Anoto is entering a new stage of development and I am most excited by Anoto’s prospects for 2018. We made substantial progress on the ADNA front. For example, we reached an agreement for the company who manufacturers the private label golf balls for one of the world’s largest members-only warehouse chains to use ADNA on their packaging. In this use case ADNA will provide customers with a freshness indicator and quick ordering capabilities similar in concept to the Amazon Dash buttons. This is a first entry into this world renowned retailer and we hope to convince them to use ADNA in other areas such as food and vitamins. Similar exciting projects are in active discussions with several industry dominating customers in Asia and the USA plus various government agencies in Japan.
In Q1 of 2018 we started pre-marketing a biometric pen that incorporates a fingerprint sensor and the reception has been overwhelming. We were invited by a major Japanese company to exhibit our engineering prototype of this biometric pen in their Exposition in April. They are dedicating a booth for our Biometric pen before the commencement of commercial production in the second half of this year. It was an opportune move to launch the premarketing of the biometric pen in Japan because of the scandal at Nissan Motors which led to a recall of 1.21 million vehicles at a cost of 25 billion yen ($222 million USD). The reason for the recall was due, in Nissan’s words, to “discovering final vehicle inspections were not performed by authorized technicians.”
With the addition of fingerprint sensors, now our pen knows 1) what one writes, 2) when one writes, and 3) who is writing.
Perhaps the most interesting developments have been in the “million seller” project that I described in the last Q3 report. We now renamed this Anoto Cocoon projects. One such example is an MIT affiliated startup who uses our pen to diagnose Alzheimer’s and in the early detection of dementia. It received US FDA clearance in January of 2018 to market its products. We have a revenue sharing model with this company and expect to receive royalties when they will start to roll out in 2018. It also received The Not Impossible Connectivity Award in 2018. Our Live Pen 2 is now a US FDA registered medical device.
Another Anoto Cocoon example is an online education and test platform company that has just developed an education platform using Anoto pen-based diagnostic testing. We have initiated discussions with a major US education publisher about selling them this newly developed education platform technology. Similar to the startup, this company uses analytical and temporal data derived from the pen to accurately capture and diagnose a student’s problem solving and understanding skills.
A newly incubated project is focused on making the power of ADNA easily available for Augmented Reality (AR) use. ADNA can make important contributions in several areas of AR including Marker-based AR and Superimposition-based AR. We are in discussions with several AR companies to provide ADNA as a technology platform for AR applications.
Software and mobile app technology
Anoto is also in discussions with world-class software and mobile app companies regarding providing Anoto technology as a paper interface platform. Both Microsoft Surface Pro and Apple iPad Pro may have stylus pens that interact with the screen but those pens don’t work on paper. Anoto is developing connectivity that can be used with OneNote, Google Keep, and other notetaking apps and software to be linked seamlessly with the software/app and paper.
We are now at a stage, both financially and product development wise, where capable and professional executives can join the company. We are recruiting a VP of sales for North America and one for Asia. We are also recruiting a product manager for Software and Apps. We also are trying to fill gaps in marketing and R&D. The people at Anoto are no longer talking about the present but about the future. Topics such as restructuring and instability are things of past. We are now very much looking forward to a new Anoto. Such changes in corporate culture are also a sign that we are ready to build up our team.
Hope and Dream
Anoto in the past thought it had such a unique technology that it should only be equated with premium in terms of pricing and usage. To me, premium symbolises a high priced but small niche market. One of my goals was to bring the price of the pen down and make it more affordable and attractive. With the arrival of the AP-701, we now have the basis to start this process. Cheap and mass market are not dirty words in my dictionary. Anoto technology can have numerous uses that stretch beyond our imaginations. Anoto pattern technology, in particular, is especially suitable for the recent advancements in AR and digital print areas. We are calling this the Anoto Technology Extension phase. We dream that one day, we will be talking about Anoto Everyday, Everywhere.
Joonhee Won CEO, Anoto Group AB (publ)
This information is information that Anoto Group AB (publ) is obliged to make public pursuant to the EU Market Abuse Regulation and the Securities Markets Act. The information was submitted for publication, through the agency of the contact person set out above, at 08:45 CET on 28 February 2018.
Annual Report – 31 March, 2018
Annual General Meeting – 15 May, 2018
Please visit www.anoto.com/investors for the latest investor calendar information.
For more information
Joonhee Won, CEO
Anoto Group AB (publ.), Corp. Id. No. 556532-3929
116 74 Stockholm, Sweden
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