The Noteworthy Rise of an E-Ink Tablet Maker

Welcome Shareholders,

Every Sunday, We'll highlight one company to do an in-depth breakdown of their business, financial situation, and whether or not it's a worthy investment opportunity - large or small. In today's edition, we'll look at a consumer electronics maker looking to create a device that can be positioned between Laptops and Smartphones.

Since the introduction of the iPad in 2010, tablets have massively grown in popularity due to their versatility in offering experiences, including content creation, consumption, and productivity. However, tablets have hit an awkward phase in their life, quickly seeing their market share erode both from larger smartphones and hybrid PC devices. Furthermore, many users are looking to minimize the number of devices they use due to the ever-increasing barrage of notifications and distractions from modern-day apps. Oslo-based consumer electronics startup reMarkable is looking to bank on both these trends by selling a tablet replicating the experience of writing on a real piece of paper. However, with an entry price point of $299 and a minimalist feature set, the device could have limited appeal with the broader market. Can Remarkable move past its niche user base and become a behemoth in the tablet space?

What is Remarkable?

Norwegian startup Remarkable focuses on building E-ink writing tablets for reading documents and books, sketching, and note-taking to emulate the experience of writing on paper. The Remarkable Tablet is primarily geared toward students, artists, and, in recent years, professionals. According to management, the prominent use cases for the Remarkable are to read, edit, create, and share documents.

In addition, the device also offered the capability of converting handwritten notes into typed text using optical character recognition (OCR), allowing users to share it within teams or groups quickly. The company also has a companion app on phones and desktops, enabling users to transfer data between devices. In addition to the Remarkable Tablet, which sells for $299, the company also sells various accessories. This includes cases ranging between $70 and $129 and a few different styli costing between $79 and $129.

Surpassing a Million Devices

After being founded in 2013 in Oslo, Remarkable worked for three years to develop and conceptualize a tablet by collaborating with Taiwanese firm E-Ink. Remarkable funded its development cycle through two seed-funding rounds, raising $10 million from a range of Nordic-based family offices, early-stage, and angel investors. The company launched the first generation of its Tablet in 2017 after raising money through preorders in 2016 on crowdfunding platforms. While it had initially targeted selling 5,000 devices, the company's crowdfunding resulted in 35,000 devices and $60 million in revenue a year into its release. The first-generation Tablet was priced at $500 and primarily targeted writers and note-takers. The Tablet featured a 10.3″ e-paper display and used the company's own operating system built on top of Linux. The device was built to reduce latency, thereby aiming to bring the experience as close to writing or drawing on real paper. Remarkable's first Tablet was a sleeper hit, resulting in 100,000 units sold over the first year.

After its success, the company decided to raise $15 million in a Series A Funding round from center firm Spark Capital to scale its production and reach new customers. The company eventually built on the success of its first Tablet by launching the second generation of its Tablet three years later. It slashed the price by $200 and made the quality of life improvements, including doubling the processing power and memory of the device and reducing the display repose time to 21 ms while also tripping the battery life, thereby increasing its appeal and sales reach. In addition, it cut the device's thickness from 6.7 mm to 4.7 mm to make it the thinnest Tablet in the world. These changes were a hit with customers, resulting in the company selling over 1 million devices by the end of 2021, generating $300 million in revenues and $31 million in iterating profits. Remarkable also adopted a strategy seen increasingly across consumer tech companies by introducing subscription services to capitalize on its existing user base.

In 2021, the company introduced its subscription service dubbed 'Remarkable Connect,' which comes in two tiers. The basic tier, which costs $5/month, lets users upgrade to unlimited cloud storage for documents on the device, while the $8/month tier adds support for Google Drive and Dropbox integration, in addition to features including handwriting conversion, screen sharing, sending documents by mail and syncing across devices. As a result of its success, Remarkable disclosed that it had received significant investor interest after beating sales expectations and that it had raised money from international investors in 2021 at a billion-dollar valuation.

Like many, you may be reading about reMarkable so far and wondering to yourself, 'Who is this device really for?' and if there are users willing to pay $299 for a tablet with limited functionality when Apple is selling its entry-level iPad for $30 more. It is fair to say that there is some skepticism surrounding the company is justified, given the dominance of the iPad in the tablet market. However, remarkable is looking to capitalize on a few trends in the tablet market and the broader consumer electronics industry, giving it a potential edge.

The Death of the Tablet

Remarkable is looking to capitalize on the fact that Tablets may go extinct in the next decade, with the third category of devices looking to eventually replace them. The Tablet has been widely successful since the announcement and introduction of the iPad in 2010, with over 1.5 billion devices currently on the market. However, the device's significance has been slowly fading in recent years for various reasons. Annual Global Tablet sales are forecasted to reach 132 million units in 2022, a significant decrease from the 230 million units sold at the height of the frenzy in 2014. The main reason for the Tablet's decline is primarily due to the great tech convergence. The lines between tablets and PCs have been blurring in the past ten years. Since 2014, hybrid devices such as Microsoft's Surface tablet, Google's Pixel Book, and Apple's iPad Pro have set their sights on the personal consumer market. Apple made an ad titled 'What's a Computer?' in 2017 with the launch of its new iPad Pro, which sparked plenty of anger, memes, and controversy within the community. The advertisement showed a kid with an iPad asking her neighbor the aforementioned question, which is meant to show how versatile the iPad is and that traditional computers are so outdated that a child doesn't even know what it is.

While the ad may have slightly exaggerated the demise of the personal computer, it has no doubt shown that the Tablet will eventually replace laptops in the workplace. Tablet accessories, including an accompanying stylus and a keyboard cover case, have helped the transition. Five years of software updates to enhance multitasking capabilities and increased processing power due to rapid development in mobile silicons have enabled the iPad to catch up with the Mac in most tasks, including word processing, spreadsheets, and other content creation-focused tasks. The iPad and Mac lines now share the same silicon and architecture, making the lines thinner between the two product lines. When developers eventually build software geared toward tablets, the gap could be further reduced, bringing the devices to parity. The convergence in features that have led to tablets capturing a chunk of the PC market share is also similarly impacting tablet sales, which in itself is being affected by smartphones. While smartphones initially ranged between 3.5" to 4" when Tablets were introduced, they have been steadily growing in size over the past decade. Demand for smaller phones has slowly but surely been shrinking, and not even Apple can stop the inevitable death of the small iPhone (the company is killing off its mini line of phones). The number of phones with screen sizes between 5" and 5.5" has fallen from 305 million in 2019 to 220 million in 2022. At the same time, larger devices - phones with screens of between 6" and 7" are forecasted to sell 660 million units against 465 million units just three years prior. Looking at the sales figures, it is clear to see why smartphone makers are shifting away from making smaller phones.

When first introduced between 2007-08, smartphones were the next evolutionary step over keyboard-equipped devices like the Blackberry or Nokia. However, over the next decade, the needs of consumers moved away from calls and messaging to much broader use cases. The introduction of a fully-fledged App Store unlocked a multitude of possibilities, from gaming to the go-to streaming video, while the growing importance of cloud and camera capabilities only strengthened the argument that Smartphones could be the only device required on the go. One by One, the smartphone has swallowed up feature after feature that was originally in the domain of the Tablet, including reading news, web browsing, to multimedia consumption. The introduction of foldable phones is the final and most damming argument that smartphones could replace tablets in the next decade. Over the past three years, everyone from Samsung to Motorola to Huawei has introduced their version of a flip or folding phone. The flip phone dates back to the early 2000s but is another step towards miniaturizing technology in your pockets. Larger tablet-style foldable phones such as the Samsung Galaxy Z Fold, on the other hand, are the real threat to tablets over the next decade, acting as a hybrid device bridging the gap that currently exists between tablets and phones. Critics argue that the technology and the price point of foldable will keep them away from the mass market, but these issues are expected to subside over time, enabling.

While the eventual death of the Tablet will inevitably impact some, it also presents an opportunity for companies such as Remarkable to take advantage of the situation. The growing capabilities of smartphones and hybrid devices such as tablets have led some to question if there is a market for a 'Third Device' that can take up the eventual mantle of the Tablet itself. Remarkable's solution, which caters to a few interesting trends in the past few years, could be a viable contender.

Digital Detox

Looking from a traditional tablet lens, it is clear that Remarkable's Tablet has a host of issues, from being underpowered to featuring a subpar screen and having limited software functionality. However, executives at Remarkable would argue that these are features rather than bugs. Consumers have largely moved online for work, social, and other recreational experiences due to the advancements in smartphones and increased speeds offered by carriers. While there are significant benefits due to the growing advancement, such as ease of use and the ability to always be connected, there are also certain drawbacks, including addiction and loss of focus. Market research from Dscout showed that Americans, on average, touch their phones an astounding 2,617 times a day. This phenomenon has created a new trend, where consumers are looking for new technology that doesn't constantly distract them through a barrage of notifications and updates. Remarkable's executives have said that its success has largely hinged on building a device that has largely avoided these distractions. By building a device that doesn't offer an App Store, users can largely avoid distractions, enabling them to focus on writing and enhancing productivity.

The company's deliberate concessions and aesthetics have enhanced the experience and made the device akin to a piece of paper rather than any comparable electronics. Unlike other E-Ink tablets like the Kobo or Sony, writing on Remarkable feels close to writing on a notepad due to the sound and feel of using the company's pen on its screen. The reduced latency of 21 ms and a pixel density of 221 PPI also enables the Tablet to keep up with the iPad Pro and Microsoft Surface in terms of smoothness and sharpness, unlike previous e-ink tablet displays. The tradeoffs have also enabled the company to build and design a tablet with superior ergonomics. The Remarkable two is incredibly thin and light for what is essentially a 10.3" tablet. The device weighs just 404 grams and has a width of 4.7". On the hand, the Tablet feels like holding a clipboard without a case, enhancing the user experience.

So, in Summary, The Remarkable has a few key advantages over the iPad and other similar tablet offerings, including-

1. Unlike most tablets, the Remarkable 2 offers an unmatched writing experience comparable to writing on real paper.

2. The device's ergonomics, including dimensions, thickness, and weight, make it a better experience compared to most full-sized tablets.

3. By offering a stripped-back experience lacking access to apps such as Netflix or Instagram, Remarkable enables users to avoid distractions, 'focus' on the task at hand, and maximize productivity.

Target Market

While the lack of access to an app store limits the broader appeal of the Remarkable Tablet, there are three growing markets where the company could have an advantage. This includes -

1. Business Market - The Tablet's ability to quickly jot down notes, meeting minutes, and to-dos mean that it can be an incredibly powerful tool in the corporate world. This can especially be true for the legal and finance markets, where users can quickly annotate documents, share meetings and other notes through emails, and keep up with ongoing project deadlines through to-dos and schedules.

2. Education Market - Apple and Google have both been targeting the education market through entry-level iPads and Chromebooks over the past few years. However, the appeal of a distraction-free note-taking device that promotes sustainability could be appealing.

3. Writers and Artists - The final market demographic that Remarkable could target is its original core target market, which is writers and artists. The distraction-free nature of the device, coupled with the paper-like feel and low latency of the e-ink screen, means that it could target niche markets, including authors and sketch artists.

The Limitations of a Minimalistic Approach

While the Remarkable has several key advantages over traditional tablets, there are some significant drawbacks holding it back from greatness. While the E-Ink screen used by Remarkable has several benefits, including a near-paper-like experience and sunlight visibility, it also has a few drawbacks compared to a traditional LCD or OLED display. Until very recently, E-Ink screens could only display black and white, limiting the reading and illustrative capabilities possible with a full-color screen. Thus, Remarkable's reader lacks the capability to display full-color images and illustrations (although users can export color illustrations). Another technical limitation is that, similar to the older kindle devices from Amazon, Remarkable's e-ink display doesn't have backlighting, making it challenging to read and write in dim places. E-Ink also struggles with displaying video and can be painfully slow in refreshing content. The final major criticism is geared toward the company rather than the product itself. While the Remarkable Tablet no doubt caters to a niche segment of the population looking to move away from electronic devices, there is nothing unique about the device. Most vendors offer a similar package, from software features like handwriting recognition to note-taking and hardware specs like display and latency.

The Elephant in the Room

One could argue that a larger company with access to a better supply chain and larger capital pool (like Sony or Huawei, which have similar products) could disrupt the company simply by offering a better product at a lower price point. And this is exactly what Amazon did with the launch of the Kindle Scribe in September 2022. The Kindle Scribe is a device with a 10.2-inch E Ink screen and a stylus that attaches to the side of the device, and available at a price starting at $339.99. Amazon has also partnered with Microsoft to put a button into Word that'll let the user export a document right to the Kindle. The device also has access to the world's biggest book catalog and has far more streamlined software compared to the Remarkable. All of this suggests that Remarkable will need to be more competitive and aggressive in its pricing and features when it launches the third version of its device.

Valuation

Remarkable has seen strong growth over the past three years and has now sold over 1 million devices since inception. Revenues have accelerated from $42 million in 2019 to $303 million in 2022. At the same time, the company has also become profitable, generating EBITDA of $31 million, compared to -$3 million in 2019. Remarkable will see a sales boost when it eventually decides to launch the next version of its Tablet, which is rumored to come with a better screen and increased productivity suite. Looking at the top vendors for the number of tablets shipped, it is clear that Apple, Samsung, Huawei, Amazon, and Lenovo make up 75% of the 158 million devices sold.

Assuming that Remarkable can reach one million devices in sales, the company could generate $300 million in tablet sales alone. Furthermore, add-ons such as the stylus and case accessories could further support revenue growth. However, the company could start seeing a large chunk of its revenue and profitability from its subscription offering. Remarkable's Connect subscription is essential for using the device and unlocks a range of functionality that isn't available through the Tablet alone. Assuming that 30% of the users, mainly professional consumers, buy the subscription, this in itself could generate an additional $28 million in annual recurring revenues.

Since the company's vision is to build devices that last for a decade and not compete with tablet makers focused on shipping volume, adding features through software updates and charging users through the connect subscription could be a long-term viable business model. One factor that could potentially impact the company (primarily the hardware business) is the recent supply chain constraints and inflation due to raw materials. The decline in consumer discretionary spending due to the macroeconomic slowdown could also lead to some questioning the $299 price point when they can easily opt for an iPad or comparable android tablet with significantly more functionality. While the pivot to subscriptions could enable the company to withstand the expected decline in hardware revenues, it could impact future growth if the user base doesn't continue to grow at a rapid pace.

Based on trailing revenues and the company's recent valuation, it is trading at close to 3.3x-4.x Price/Sales multiple. However, with hardware revenues expected to decline or stay flat over time, the real value driver will be the company's subscription revenues. If the company can continue to innovate and appeal to its niche user base, subscriptions could become the primary source of revenue, potentially increasing margins and revenue growth in the prices.

Bottom Line

Remarkable has achieved a 'Remarkable' milestone, breaking into an industry dominated by a handful of companies. By removing the distractions that are so prevalent with modern-day smart devices, the company has created the perfect blend of technology and consumer electronics. Remarkable has now sold over 1 million tablets, generating $300 million in annual revenues and having a loyal fan base. However, thoughts about the company's device and the future remain mixed. Feedback about the product drastically varies depending on which segment of the population you are asking. Critics may argue that the Remarkable Tablet is nothing more than an overpriced piece of technology dressed up as a solution to a non-existent problem. Believers in the company's vision, on the other hand, would suggest that technology has been rapidly taking over, and it is important to use devices such as Remarkable, which intentionally limit features in order to enhance focus and productivity. Time will tell if the company can execute its plans and create a new market.