-- Net sales for the quarter amounted to 51.6 MSEK which is a 30% increase YoY and a 5% increase QoQ. These increases are mainly thanks to stable sales at Pen Generations and increasing sales at Livescribe.
-- Gross margin for the quarter was 41% compared to 31% in the prior year. This margin is similar to the previous quarter (43%) and includes the effect of an escrow settlement of 375K USD and increased margins in Livescribe and Pen Generations.
-- Overhead costs in the quarter were 17 MSEK. This represents a significant reduction from 112 MSEK in the same quarter last year. This quarter’s costs are fairly consistent with the previous quarter (15 MSEK) in spite of the burden of the final obligations associated with the cessation of active operations in the Lund office.
-- Operating profit was 4.3 MSEK making two positive quarters in a row. This result stands in strong contrast to the -103.9 MSEK reported in 2016. The turnaround is attributable to rising sales, improved gross margins, and the significant cost reduction from the restructuring, as well as the one-time impairment losses (37.7 MSEK) in the prior year.
Anoto achieved operational profitability for two quarters in a row. However, significant revenue growth was not attained due primarily to reduced demand for existing pens as customers delayed ordering of pens in anticipation of a new pen arrival.
The new AP-701 pen, nicknamed the U-Pen (shortened from Ubiquitous Pen), is Anoto’s new pen with production that has started in November 2017. Most of the technical specs are improved from the previous pen while reducing the fully manufactured price. Manufactured cost reduction was achieved mainly from the pen design where we made it possible to reduce MVA (manufacturing fee captured by the factory) due to its design simplicity. The U-Pen has an updated firmware which enables the pen to be used in Anoto, Livescribe or Pengen platforms. In other words, it can be used as a forms pen, note-taking pen and a streaming education pen. It has a dual-mode Bluetooth chip (Classic and LE) and longer battery life (10 hours of continuous writing) in the smallest diameter (11mm) pen we have ever produced.
This pen is a record breaker in many aspects. It set the record for shortest development time (10 months) from start to finish. It also set the record for smallest development budget. It is the most compact pen in terms of diameter and length. It has the lowest manufacturing cost. And finally, it has the shortest manufacturing lead time. This pen fixed one crucial mistake in previous pens. Because previous pens used long lead time components, it took a long time to deliver finished products to customers. Shorter lead time on components means quicker delivery and improved service to customers.
The impact of the U-Pen is significant in Anoto’s new pricing strategy of charging less for hardware and maximizing recurring revenue through software and pattern revenue. Especially, the Enterprise Forms business is undergoing a complete restructuring of its business model, where we provide a pricing structure to enable lower upfront capital expenditure and increase usage of pens. In order to support such transformation, Anoto is developing a new platform to complement the existing Anoto Live Forms (“ALF”). The new Anoto Enterprise Forms (“AEF”) platform is targeted primarily at large enterprises and increases scalability and ease of integration into the customer’s own system.
Anoto previously had different platforms, different SDKs, different firmware among Livescribe, Pen Generations, 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 U-Pen, Anoto has finally achieved total convergence and integration. This is another reason why the advent of U-Pen is important to Anoto.
During the third quarter of this year, Anoto completed the first phase of development of ADNA technology, and commercially launched the ADNA Discovery app. The first phase is called “Interactive Paper” where Anoto developed nearly invisible pattern (to the naked eye) which makes books, newspapers, ads, and other paper products digitally interactive. ADNA technology is significantly different than any other existing options in terms of printability, uniqueness, and flexibility of applications. In ADNA, many different patterns can be applied to a single page, enabling different interactions with readers.
The most important aspect of this launch is that it enables easy adaptation of ADNA technology by customers. Instead of working as a service provider to few customers, ADNA is now a product rather than service. The current version of ADNA enables customers to apply ADNA to their products using the ADNA SDK and their existing app development resources.
In terms of cost, OPEX remained stable at 17 million SEK and the development cost for the U-Pen was kept to a minimum. Severance and restructuring costs for the Lund and Norrköping offices are still included in the third quarter OPEX number but expected to end in November 2017.
OUTLOOK and future strategy
I believe Anoto is now a completely different company. It has a different business model, dramatically improved, efficient cost structure and a well-defined strategy of diversification. It is my intention to create a stable revenue base for Anoto so that it is no longer dependent on large one-time deals to survive. The addition of Livescribe brings some stability as retail sales rarely fluctuate with volatility. Changing the composition of our customer base in the Enterprise Forms business from small scale SI partners to large scale directly serviced customers will also enhance stability. This is the essence of what I call, Anoto 2.0.
Anoto 2.0 is defined as an efficient and productive organization: simple product structure (one firmware base, one software platform, and one cohesive hardware portfolio), reduced dependence on hardware, more emphasis on recurring software and pattern revenue, and a diversified revenue source.
Anoto now has only four distinct business areas: ADNA, Enterprise Forms, Notetaking, and OEM. It has one unified R&D team, one manufacturing team, one integrated software and mobile app team, and one sales team. These lean teams efficiently manage the entire range of Anoto products.
Believe it or not, Anoto has completely transformed itself in one year. But we still have a ways to go. We’re finishing the very final steps in reshaping the company and we have started the development of another pen in the platform which is expected to be completed by June next year. When achieved, this will be a further reduction of our development time.
Q4 marks the beginning of Anoto 3.0. Production of the new AP-701 pen has begun in November 2017. Our goal in the Forms and OEM businesses is to concentrate on a limited number of large-scale customers who buy hundreds of thousands of pens per year. Currently we are in discussions with a global pharmaceutical company for the development of a biometric pen for Digital Audit Trail. Our pen has time and date stamp but with the biometric pen, it will be able to authenticate the user as well. This pen is expected to open new markets for a large scale use. We are also working with an education company to build an online education and testing platform using our pen. Our pen is an ideal input device for test taking and online education. We expect these initiatives will result in building a stable and sufficient revenue flow.
If we have five customers who each buys 200,000 pens a year, we will have a stable million-unit business with significant recurring software revenue. This means that the large ad hoc transactions on which Anoto has historically relied will now be icing on the cake.
We are now done with cost cutting but the focus on efficiency and productivity will continue. We are now finished with unloading the baggage of the past. I believe we now have all the right pieces to finally move ahead. Increasing revenue and profits will give us ammunition to invest in our future and achieve our goal for Anoto 3.0.
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 9 November 2017.
Q4 Report – 28 February, 2018
Please visit www.anoto.com/investors for the latest investor calendar information.
For more information
Joonhee Won, CEO Email: firstname.lastname@example.org
Anoto Group AB (publ.), Corp. Id. No. 556532-3929 Mobilvägen 10 SE-223 62 Lund, Sweden Phone: +46 46 540 12 00 www.anoto.com
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