Swedish-based lighting manufacturer, Profoto, is now listed on the Nasdaq Stockholm after successfully completing an IPO, making it one of the only publicly-traded companies dedicated solely to photography. The associated prospectus gives a rare insight into the risks and opportunities looming in professional photography.
The prospectus, published last month, sets the share price at 66 Swedish krona (kr), roughly $10.24. Some photo industry pundits will be astonished to discover the offering was over-subscribed, with more than 16 million shares released, totalling more than $167m. Investors apparently believe the professional photography industry has a healthy future in front of it.
While other publicly-traded photography manufacturers have tentacles in other sectors like healthcare and electronics, Profoto relies entirely on photography, with a sharp focus on professional lighting.
The value of a prospectus is that it’s a legal document required to provide full investment details, without the usual sugarcoating or marketing spin associated with corporate communications. Profoto identifies several risks facing the Swedish photography lighting manufacturer.
Before running through some of the more insightful observations, it’s worth highlighting that at the time of writing (July 19) Profoto’s shares are priced at 80 kr. So investors who jumped in at the IPO are currently up a nice 21 percent. And if everything goes well, Profoto plans to pay a dividend in the future – provided it manages to navigate the following risks:
AI could replace flash photography
AI and computer-generated post-processing lighting effects could wholly, or partially, replace flash photography. Look no further than the Apple iPhone Portrait Lighting mode, which uses AI to apply several ‘studio-quality lighting effects’ on a subject. Smart phones currently have quite advanced AI technology to automatically adjust settings. What’s stopping this technology being one day adopted into, say, a premium Canon full-frame?
While it’s hard to imagine AI replacing premium studio lighting gear for the moment, Profoto accepts that light shaping technology ‘continues to rapidly develop’ and it must stay at the front of the pack. Profoto also views video as a threat to stills photography. This would also reduce the need for flash lighting.
‘There is also a risk that the market for traditional still photography will be replaced by video filming, which could result in the Company’s products becoming outdated, a shrinking market and a loss of revenue for the Company.’
With super high resolution video technology becoming more accessible, it’s possible video stills could replace photos. Some cinematographers and photographers are already doing this in certain situations, and with 8K resolution video, it is increasingly feasible. Profoto’s plan is to establish organic growth in the video market and build its market share, along with potential collaborations and/or acquisitions of other companies.
Pandemic hits Profoto
Covid-19 had a significant negative impact on Profoto’s financials, with 2020 earnings decreasing by 36.6 perfect compared with 2019. Profoto highlights how photographers, like many industries, continue to be limited by pandemic-related travel restrictions like lockdowns.
‘This risk is particularly relevant for Profoto due to the fact that the photographic industry is highly dependent on travel, events and other venues where people meet physically in different settings and closings, and there is a risk that the current decline in travelling, events and other venues remain also after the pandemic, or that it will not bounce back to the levels before the pandemic.’
Profoto has been battered by low-cost competitors selling similar products for a fraction of the price. In 2019 Profoto even threatened to sue Chinese lighting manufacturer, Godox, for patent infringement of the A1 round-head flash, calling the Godox version a ‘blatant copy’, which was of course denied.
So there’s no surprise Profoto’s prospectus mentions how competitive the lighting market has become, with Chinese competitors – primarily Godox – emerging as a major risk.
‘There is a risk that the Company fails to compete effectively, or otherwise faces increased competition, where competition from actors in so called low-wage countries is estimated to be a particular high risk for Profoto. Increased competition from competitors in low-wage countries could force the Company to lower prices which would result in a lower level of profitability for Profoto. It could also adversely affect the Company’s brand reputation since the Company strives to operate within the premium segment and believes price to be the single most important communicator of the product’s quality and value.’ – Which seems to be another way of saying ‘we charge high prices so that our customers know we are a premium brand.’
Profoto then identifies the risk and sheer cost of developing and maintaining worldwide intellectual property rights over its technology, citing that in 2020 it invested 13 percent of net sales on research and development. To put that into context, according to Profoto’s 2021 First Quarter report 2020 Net Sales amounted to roughly $81m, suggesting it spent around $10m on R&D.
Maintaining intellectual property rights through patents and trademarks is therefore paramount, but it isn’t easy on a global scale.
‘Further, there is always a risk that the Company’s intellectual property rights are subject to infringements or unauthorised dissemination, intentionally or unintentionally, which could result in the Company being forced to spend the time and financial resources in order to defend its intellectual property rights and know-how. It is uncertain whether Profoto would be fully compensated for the negative effects of such infringements…’
While Profoto isn’t currently involved in any legal disputes, the prospectus acknowledges the Godox dispute by stating Profoto has ‘distributed so-called warning letters due to the Company considering that certain of Profoto’s competitors are infringing on Profoto’s intellectual property rights’.
Sidenote: Profoto outsources all ‘non-core business operations’
Profoto has an ‘asset-light business model’, which is a cute way of saying it outsources non-core operations like production, warehousing, IT, service, and repairs to low cost countries. (One of those aforementioned ‘so-called low-wage countries’ perhaps?) For instance, Profoto lights are made by two third-party electronics manufacturers – one in Russia and Poland, and another in Thailand.
The Profoto financials
Profoto also, for the first time, released financial reports to the public. Net Sales for the January – March 2021 quarter amounted to 153m kr, roughly $24m. This represents a 13.2 percent increase on 2020 when adjusted for currency effects, which shows a slight rebound from the onset of the pandemic.
Pre-Covid, Profoto was running consecutive profits with year-on-year growth. The company finished 2018 with a 148.5m kr ($23m) profit, and in 2019 this jumped to 222.1m kr ($34.5m) with revenue at 839.9m kr. In 2020 the total revenue was only 531m kr, and Profoto finished the year with a small loss of 17.4m kr – roughly $2.7m.
While the slight rebound is nice, Profoto has still observed pandemic-related sales trends continuing in 2021: equipment used for photographing products for e-commerce strengthens, while a decline of sales continues for products geared toward wedding and event photographers.
Profoto has divided sales on a geographical basis into three regions: Asia-Pacific (includes Australia), the Americas, and EMEA (Europe, Middle East, Africa). In the 2021 first quarter each region garnered about a third of sales, and this is quite different to the 2020 first quarter, when the Americas and EMEA dominated the geographic sales.
This quarter, Asia-Pacific sales boosted by 77.3 percent, while the Americas dropped -14.6 percent and EMEA fell 13.6 percent. Profoto attributes the Asia-Pacific growth due to Covid-19 restrictions shutting down the region in early 2020, while the Americas and EMEA apparently experienced similar restrictions at the beginning on 2021.
The company is targeting a 10 percent net sales growth rate.
Here’s a statement from Profoto CEO, Anders Hedebark, from the financial report:
The pandemic had a severe negative impact on Profoto’s market during the second and third quarters of 2020. Our most loyal customers, the professional photographers, had less and less to do. Canceled trips, trade fairs, weddings and sports events – that explains a lot. We worked hard to adapt our costs and we really did succeed at doing so. For example, after increasing the degree of outsourcing, we now have a completely different fixed cost base that will still allow us to continue to grow.
During the first quarter of 2021 we saw that China and Japan began to open up their societies, while Europe and North America continued to have restrictions and shutdowns. As vaccination campaigns gain momentum, we should see a return to a normal market that includes travel and normalization of the rate of weddings and sports events, which will provide good prospects for growth for Profoto. Product development and new product launches are crucial to Profoto’s growth, something we have not given up on during this time. During the quarter, we had a major launch – Profoto’s new flagship product Pro-11, an upgrade to the Pro-10, which is used by many of the world’s leading photographers. The Pro-11 is mainly purchased by rental studios and rental companies, which in turn rent it out to fashion photographers around the world. The launch has been highly successful.
Sales in the quarter increased by 13 percent on a currency- adjusted basis, while profit increased several-fold. Profitability is back at a very high level. While this is a good start, we are not yet back where we should be in terms of sales and growth.
Many companies have had problems with components and shipping during this quarter. I won’t say that such problems did not affect us, but we have nevertheless been able to handle them, even if delivery times of some products increased marginally.
The field of photography and image creation has tremendous potential. Profoto is the world leader in lighting products for professional photographers, driving innovation and awareness of how to create better images through light. Light makes the difference between a good and a great image.
We have been preparing Profoto for an IPO on the Stockholm Stock Exchange for some time, in part to expand our ownership base and in part, to gain access to the Swedish and international capital markets – all for the purpose of promoting our continued growth and development. Now we are well prepared for this new step in Profoto’s history.
So in essence – we are on the way back to our growth journey!