Aiforia Technologies Oyj (AIFORIA) Earnings Call Transcript & Summary

Good afternoon. My name is Jukka Tapaninen and Aiforia CEO, and welcome, everybody, to first half earnings announcement. Today, so, I'm going to give some highlights what happened in the first 6 months and Veli-Matti, our CFO, will go through the numbers, and then I will highlight a little bit our strategy going forward. But let's get started. The first half of the year. So it was, in many ways, I think, really, really good. So we have some new closings on the customer side, and I will cover this in a later part of the presentation. So our order book grew 58% comparing to last year's situation. And on the revenue side, we were flat, but there are some good reasons why that happened. But all in all, on the sales side, we got a good success, and we were progressing as planned on getting those kind of first clinical customers so that we can use as a reference and we can scale with those customers and then as a showcase for the others. So significant amount of those clinical agreements done. But what was, I think, even more important than winning those customers. So was the regulation part because as we are dealing mainly now on clinical side, of course, we have research customers, but the focus where we think that, okay, commercial perspective, the business is growing is the clinical and there you need a lot of different kind of certifications related to security. And then we have this medical device category where we have our solutions. So we got the IVDR. That's the new regulation for Europe. So it used to be CE-IVD, and it's still CE-IVD, but under the IVDR regulation. So we got a significant progress on that side because that's actually the important part so that we've been able to build the biggest portfolio of CE-IVD marked solutions in this marketplace, and that gives us a good opportunity to move forward. And of course, so we are not alone. So this is kind of an interesting marketplace. So you have scanner vendors, you have the Laboratory Information System vendors, image management vendors, AI vendors, and then you have kind of a reselling partner. So we've been moving forward on all of these fronts and strengthening the partnerships and trying to find new ways to the market with those companies. Just wanted to show this because if we look at the history and not going back to the 10 years when the company was set up, but -- and building the core of the technology, getting the research customers. But then 2020, so we decided to go on a clinical side because of the commercial reasons and multiple other reasons. So there's a huge need for kind of additional resources and quality improvements. And of course, all of those things that AI can provide on kind of providing things that the human eye cannot do. But anyhow, so 2020, we decided to go to on a clinical market. '21, we won the first major deal, which was a Mayo Clinic, #1 hospital in the world. So that's the best reference you can get in this industry. '22, we introduced the first 5 CE-IVD marked solutions. And going forward from them, so we've been kind of growing the number of clinical closings every year. So '23, it was 3 -- last year, it was 5 closings in the first half of the year, this year, we closed 5. So we are in a good track on kind of achieving our targets on that side. But just to name a few. So the NHS was, of course, a nice deal. So then the Memorial group in Turkey. So that's important as well. So they took 5 AI models from our portfolio. So -- and it's the biggest private hospital in Turkey. So that's really important one. And then we have a lot of deals from Italy. So that was kind of -- yes, there was kind of some acceleration coming from European Union because there's this COVID recovery fund. So far, there's 15 hospital regions in Italy. So we have closed actually 7 to date and a couple of really meaningful ones. So Veneto region, 5.5 million people. So on that particular opportunity. So now we are going to go to the next phase because solutions are implemented and now they continue to use it. So that's probably the first real case as this business should be kind of evolving going forward. But then the Lombardy region that we closed earlier this year, really significant. So if Veneto was size of Finland, Lombardy is size of Sweden. So it's about 10 million people in that region, 31 hospitals. And we could use the Veneto as a reference for Lombardy. So actually, the customer said quote that, okay, so we want to have exactly the same system as Veneto has because they wanted to get the best practice and guarantee so that somebody has been actually implementing this successfully. But multiple others. And I think Fimlab in Finland is a really important deal for us as well. So there was multiple lots that they chose Aiforia. So they chose solutions for 9 different areas, and Aiforia is part of all of those. And in a couple of areas, there are competitors offering. But as far as I know, the Aiforia is the only company that has got actual orders from that public tender and obviously, we try to serve our kind of a key customer in Finland as best as we can and make the customer happy in that way. But my point is that there are multiple good closings. And the Paris region, for example, so that's the biggest hospital group in Europe, so 38 hospitals. Now we have delivered one AI model to a couple of hospitals, but there's a huge upsell opportunity. And even more important than that is that now we are in France. So we have delivered something. We are considered as a French company and the French government is now supporting the adaptation of AI to a hospital. So they are giving grants so that the hospitals can do the initial investment on this area. And we are all of those kind of public sector buying portals and all that kind of a bureaucracy related to French market is sorted out. We also kind of set up a legal entity so that we see that, that market is the next big thing after the Italy, but all in all, I think the Europe is doing quite strong on this AI side. What else? So, of course, we are kind of a technology company in a new market, and we keep on going, investing so that we stay ahead in the technology. And currently, our offering is the widest and deepest in that sense so that we can really provide the information that pathologists are needing for their decision-making and provide efficiencies and accuracies doing that and readiness to go to a next level as well. We've been investing on integration with the multiple image management companies and LIS vendors so that, okay, it's easier to scale, but that's something that you need to do, and it doesn't show as a kind of a -- it's not really visible, but you need to make your solution to work with all the leading vendors in the market. And from this slide, I think the biggest point is the last bullet point, so which is the Aiforia Create. So that's our development platform. And we've been renewing that technology. So we've been heavily kind of invested on our foundation models. And we are using the transformers. So we are connecting with the third-party foundation models and getting ahead on that technology. So it means basically so that we have the current version, the older version, which is a CNN, convolutional neural networks based kind of AI engines. And now we are bringing alongside this foundation model technology. And I think what is meaningful here is that, okay, so what does it actually bring? What are the things, nice words, buzzwords, what's happening in the industry. But the important thing is that, okay, so we can develop models faster and cheaper and with a better quality. I think those are kind of 3 things that comes out on our foundation models. And obviously, so we are kind of keeping a tight look on what's happening in the market from a technology perspective so that we can leverage all the latest ones in the market. This is what I already mentioned. So really, really a big thing. So because May '22, Europe changed the regulation. Before that, it was a CE-IVD. And then May '22, they introduced this new enhanced regulation, IVDR. And we started to kind of build our processes, document our processes, doing those audits. It took some time because there was no notified bodies in the beginning, so on and so on. But all in all, the good thing is that we have done this kind of a groundwork for this regulation. We have been accepted. So we have that in place. And under the new regulation, so we can bring AI models. So we don't need to do all the kind of first steps again, but now we can focus on bringing new AI models in the market. And this is the main thing if you think about it. So as I said, medical device and CE-IVD. And if you want to sell a clinical market, there are only a few companies who can actually do that. You can have always those discussions so that, yes, yes, somebody can build an algorithm, but that's not the solution that you can deliver. No regulation, no kind of maintenance cycles, user experiences, all of those things that software company needs to have in place. So we have that. And I think we are ready to scale on that side. But I give now word to Veli-Matti continue with the numbers. And I come back with the strategy update at the end.

Thanks, Jukka. And good afternoon from my side as well. In the following, I would go through some of the key financials from our first half '25 report. So as mentioned, our revenue growth was 2% to EUR 1.4 million, and most of that came from Europe. Finland represented 14% and North America, 25%. The order book growth was 58% to EUR 5.1 million. And we invested actually EUR 3.7 million for total product development was a main part of that, EUR 3.6 million. That's about EUR 1 million more than last year. And as Jukka mentioned, there were successful progress in our product development in AI models and also this new AI engine, which is great news for me as well because, I mean, I have to check out the costs. EBITDA improved by EUR 1.2 million to negative EUR 3 million and EBIT improved by EUR 700,000 to negative EUR 5.4 million. We had, on average, 69 employees during the quarter. That's pretty big drop from last year. But on the other side, we have enjoyed new colleagues already this month that has started, and we're going to wait a couple of more to start within a month or 2. We had EUR 11.9 million cash at the end of the period. The revenue growth was flattish, so pretty much the same levels as year before. But if you look at the figures, you could see that the clinical business growth was approximately 60%. And if you add on that, the delivery that Jukka mentioned would have happened, let's say, first half. So the growth would have been something -- overall growth would have been something like 35% and the clinical growth would have been over 100%. The order book growth, as said, 58%, and that came from the clinical business. So the growth was EUR 2 million or 90% from year before. And costs, we are pretty tight on costs. Although the employee cost went down to EUR 3.7 million, the other operating costs went up to EUR 4 million. And that's due to the fact that we invested pretty much on the computer power, the cloud costs were up. And also we purchased quite a bit of samples to enable the model creation, which also increased the other operating costs compared last year. But going forward, I'm sure that we can keep cost control in place. But obviously, I mean, we are in a growth phase in that sense that we still maintain and have a strong mandate from our investors a couple of months back that we should keep up the progress on the product development that the market requires. But this is pretty much from my side. And thank you and Jukka.

Yes. Just wanted to point out on the numbers. As Veli-Matti said, on the clinical side, we grew 60%. So overall growth was 2%, but David here is in the details as well, so that we decided to go to a clinical market. We decided to build the portfolio for that market and also capture the first big customers. And on that road map, so we've been moving forward very well. Because if we look at the profitability on the research side and the clinical side, obviously, we see that the profitability, profit will come from a clinic. And now we have kind of first steps on that side of the business, and it seems to be growing quite nicely. But this strategy, so I've been showing this slide a few times, but still very valid. So there's an active problem recognition. So our customers, they know that they need something. So they're actively looking for solutions. That's why the large flagship hospitals are really important and the reference value, what they gave it is really, really important in this phase so that somebody can show what is the best practice, how it will be delivered, what type of components, what type of solutions you need to build a kind of a working model. And demand is going up. So the cancer rates are going up, aging population, all of those same basic things are existing. And also the capacity in the different continents and countries, there are no country that, okay, so there would be an overcapacity of pathologist. So there's a need, and that need is growing. So our kind of a play or plays in this workflow. So we are talking about the physical samples that if there's a prediction so that you might have a cancer. So leads to a tissue sample, tissue sample will be prepared, scanned. And then it comes to a software piece, which is kind of uploading those images, sharing those images to pathologists, storing. And what currently drives the market forward is the AI. And that's the area where we are. So we are the ones who understands what's on those samples. So we can take the information from those huge files because physically small, but we are talking about 2 gigabyte size of images and then you are looking for really, really tiny details. But what Aiforia can do here, so we do it much better than, yes, any of our competition so that they're not just the heat maps, we go deeper. So we do a quantitative analysis. We populate the report. We actually give the information that the pathologist needs for their decision-making. And that is in a hot demand at the moment and that drives the demand for the image management vendors, the software vendors, and that drives the demand for the scanner vendors as well. Of course, if you turn it around, so the scanner penetration is important piece as well so that they have the devices so that they can actually have the digital images and then it used in AI. So all in all, [indiscernible] connected to each other. So what we have, we have the technology leadership. So we use the foundation models, transformers. We use the CNN, which is the latest kind of technology as well, which is actually working and deployed. So we are recognized as a leader on this side. So we have a scalable business model. Now we have a couple of customers moving from a first phase to the phase that they are actually using the software and paying for the usage and that's a profitable part for us because in the first phase, you need to invest on a selling, you need to invest on kind of delivering the solution. But once it's there, and customer is ready. So you can add more AI models and you can scale up the usage and that's good for the software company. Interoperability, as I said, we are connecting with multiple systems, and we have an interoperability agreements and testing done with the multiple scanners and multiple image management systems. And the last point, this is something that, okay, so I would like to kind of everybody focus on as well. So it's the certified quality. To be able to operate in the U.S., hosting a patient data, you need to have a HIPAA compliance. So you need to have multiple different kind of security regulations and certifications in place. You need to have some patents. And now you need to have the IVDR regulated products and CE-IVD products under that, meaning that, okay, so it's a heavy investment. So -- but this is -- it's a barrier of entry for this industry for sure, because whoever wants to come into this industry, it takes time to get all of those certifications in place. Then we have it, and we can now start selling in a volume on that side. Just the visualization of different, but we've been looking at kind of the main kind of areas where we want to parter with. So -- and I have to say we have a pretty good offering at the moment, and that's the most kind of widest in the market at the moment and then, of course, we have a pipeline of new coming products as well. And this is interesting picture because 4 years ago, when we did the IPO, we said, okay, we didn't have any CE-IVD in those days. And we said, okay, our strategy is that, okay, we built a portfolio of solutions that the users, they can cover 80% of the workflow with this because it's not really convenient, maybe not even possible that, okay, so you kind of pick and choose vendors, [ 53 ] vendors with a different user experience, different maintenance cycles and so on and try to manage that as a solution. So we decided that, okay, we bring all the relevant solutions with the high quality, and we aim to 80% coverage by the end of a decade. Currently, we have a 60% coverage. We cover all the kind of major kind of disease areas on pathology. This is something that, okay, we, as a company, we are really, really proud of. And of course, now working with kind of increasing the number closer to 80%, but we are well on track on that target. And then coming back to the growth rate, 2% versus 60%. So I pick up the 60% because we've been focusing on getting these flagship customers in place and growing the clinical business because that gives us the opportunity to scale up a big time. So '21, we got the Mayo and then we built those solutions. So 3 closings on a '23. This is, by the way, not all the closings, but these are the ones that we've been focusing on because we also gave one target out that we want to have 15 kind of customers where there's a potential ARR over EUR 0.5 million, so annual recurring revenue over EUR 0.5 million. So that it doesn't happen in the first year, but there's an opportunity to build up those customer relations in that level. And last year, 5 closings, really interesting one, Fimlab, I mentioned, Castile and León, interesting one. And that's something that fantastic deal. It's a big region in Spain, first good referenceable customers, together with the Swedish image management vendor, Sectra. It's a fantastic deal. The challenge there was that they wanted to have a local implementation. Now we are delivering that. It will happen in Q3. But also that was impacting a little bit on the revenue that we could book in the first half of the year. We could have actually kind of do a little bit better on rev rec, but the main point is that, okay, so it will be now delivered and we provide a fantastic solution to the end customer. But those are the closings from last year. This year, so 5 meaningful closings in the first half of the year. And you can see that, okay, the France is really picking up. So a couple of hospitals from a Paris hospital group. So we won the Nantes region. Curie Institute is interesting. So really good reference. And they have already kind of announced that they are using Aiforia and we got the deal. So that's why it's in a list. But really kind of nice closings and Lombardia is, of course, commercially also a big one. Moving forward and so far, every tender that we've been participating, we have been winning. In some cases, they've been choosing 1 or 2 other vendors on the same tender, but we haven't lost any. That's good to keep in mind as well. And going forward, I know that there are questions coming so that, okay, how do we accelerate? So when do we actually see the revenue growth happening. And we had a big strategy exercise a couple of months ago. And the outcome is that, okay, we see the opportunity in Europe. So the scanner penetration is 30% in Europe. So sounds slow, but small, but okay, so it's actually much better than elsewhere in the world. And then we see these public fundings speeding up the adoption. And that's why as a European company, it's natural so that we want to capture that opportunity and accelerate the business in Europe. We will grow the clinical offering. So there will be more CE-IVD Mark solutions coming up. And we look at the other kind of opportunities, how we can improve the user experience close to our core and domain. But we've been obviously planning all of these different areas, so how much revenue and what type of a growth will come from those areas. But this is in a high level, short term. Long term, this is obviously truly a global business. We have a good presence in the U.S. So we want to capitalize that and start investing again in the U.S. going forward. Then we have some interesting ones. So I mentioned that when you talk about the AI, currently, what we offer is the efficiency, you can do much more with the same resources. You can do it with a better quality, you avoid mistakes. But the other thing is that now the prognostic models, so what we built with the Mayo Clinic so that you can start kind of predicting the patient outcome, combining the patient data, combining the AI-driven data. This is something that builds up the value of AI. First, the efficiency piece, but now the additional value are coming from things that you can't do really with the human eye. So then we have also kind of been talking with a couple of pharma customers. And by the way, I didn't mention that the Orion was a nice win from Finland on that side, where we sell Aiforia study solution. So that's in a good shape. But pharma here means that you talk about the companion diagnostics. And we've been approached by -- proactively by a couple of very large pharma companies that are thinking that, okay, so when they are building a kind of a medicine or kind of -- that you need to kind of combine the AI. So AI need to kind of drive certain results. And based on that result, so you can then give certain treatment or certain medicine to the patients. So companion diagnostic type of things. But those are long term. So that's why I put it in 2030, even though some of those discussions already started. But this is a really interesting marketplace, and there's a good opportunity to make it really nice business. That's it from my side. And now there's room for some questions. I know that Antti is already ready.

Antti Luiro from Inderes. Let's start from the top line and then go a bit further into the financials. But first of all, on the revenue, of course, it's been on a relatively flat level for the last 2 years. And we've seen that the preclinical revenue has shrunk underneath and the clinical side has been taking over. Do you think this will be a recurring trend that the preclinical will be going sort of down? Or do you think there's room to bring that up again?

Yes. Relative terms, it will go down for sure. But in absolute terms, I think it will stay more or less in the same level, but our focus is really on building up the clinical business. And I have to say one thing so that we have an offering, Aiforia Create, which is the fantastic development tool, mostly used in the research, but the same customers who are buying on a clinical side, they want to also buy the kind of research tools. So it's something that makes us really strong on a clinical sales situation, so because we can combine the offering. But the focus is clearly on the clinical side.

Right. And when you say the preclinical, you expect it to be roughly on the same level in absolute terms. Is there sort of a cyclical element that drives that up and down between?

Not really. I mean I think it's quite stable going forward. So it's kind of easy to predict because it's type of a license play or SaaS play in that sense. So you pocket the license fees upfront and then you recognize them throughout the license period. So it's pretty stable. But say that. So once or previously, when we kind of like try to find business anywhere. So obviously, let's say, like in U.S., it was easier to get those research preclinical type of clients. And then you were capable of attracting some of those, which did some projects going forward. But now since we are more concentrating on the clinical side, that kind of like dropped out from the baseline revenue base. So it's stable. And going forward, as Jukka mentioned, the research part includes the pharma companies, I think we have a great chance to take that business as well going forward.

But everything what we have done so has some meaning. So if you think about 10 years ago when we started, so we started to build a platform so that you can build these AI models. we brought the first kind of version of Create out in 2017. So we started to get the research customers because it's a fantastic tool for them and the outcome is that we got the 5,000 users from all the major universities and the research groups. We got a lot of scientific documents out of that, so proof points that the technology works. And then we go to 2020, so when we start using that technology to build the offering to a clinical side. And we don't want to kind of give away the research business, but we are not -- it will go there, but it's not something that you can scale it up big time, but the clinical side, yes.

And then on the clinical side, were there any projects or customers where there were some timing effects, some deals and revenue getting booked to, let's say, H2, for example, instead of H1?

Well, I think we are quite positive on an annual level. I mentioned the Spanish deal that the customer wanted to have because the tender rules was clearly saying so that you need to deliver on-premise, and that was the first on-premise delivery for us because we are cloud native and everything is in the cloud. But this case, so we, of course, wanted to do what the customer asked, and it took a couple of months longer. So it should be now kind of delivered in the Q3. But that was roughly about EUR 0.5 million deal and a big part of that money, so we could have actually recognized in the first half.

Okay. That's helpful. And then on the order book, of course, it has risen from the last year levels, but then compared to year-end last year, it actually has come down slightly. It was roughly 5.2 million, now 5.1 million. Can you explain this dynamic a little bit? Is there some sort of contract rotation getting booked into revenue and not rebooked in the order book? What's the dynamic there?

That's pretty much as you explained. So the big drop, I would say, a couple of hundred thousand comes from the order book from the research side. So the clinical side has been flat or growing a bit, not as much as we wished, but there were some negotiations going on like which hopefully would close up this half. So it's a bit tricky to kind of forecast how they will be seen, but the pipeline is quite nice.

Yes. Yes, I know that there's a little bit of a disconnect so that you see 2% number. And you asked before so that if I'm happy with the results on the first half, absolutely, I'm happy. And if you think about the kind of a clinical growth, 60%, then a couple of deals kind of moving to a second half rev rec. So we could have had quite a nice numbers. And I think the clinical side, absolutely kind of on target on that perspective.

And then on the cost and overall, where are you investing as a company. I saw your employee count was coming down a little bit in the spring and now you recruited back again. Have you done some shifts in priorities on where you have...

Yes, that's correct. And obviously, I mean, there's going to be a rotation going forward. So we'll be increasing the number of sales and number, support type of personnel. But on the other hand, we maintain the high level of investment in product development. So that's kind of the change. So there has been a rotation on the personnel. But obviously, you want to guarantee that you get the best possible people back. So whenever you recruit, it's not happening like that. It's kind of like a McDonald's type of recruitment going forward.

But also that as we are using the latest technologies, then in a software development, if you use all of those tools, you don't necessarily need so much more resources, and you can allocate those a little bit differently now because the AI is helping to take out certain things.

Okay. That's helpful. And then also on the cost side, you mentioned that you've been buying some samples for the R&D purposes, and that was one cost item in H1. How do you see that area going forward? Of course, you are already, if you said, around 60% of coverage in the pathology workflow end of this year. How do you see that area moving forward? Do you still have needs?

Yes, definitely, there's going to be needs. So going forward, you need to have a certain level of investments on those samples. And we are a data company. So obviously, we have to have certain type of approach to acquiring data, whether it's samples, whether it's some other type of resources, but data is kind of like our core. It's like the Tempus Page deal. So one of the arguments why they did that was the data acquiring. So definitely, we're going to -- but we have to justify what's the right level for us compared to the top line growth.

Sounds good. And then on the U.S. market, of course, on your strategy now, you said that the focus would more be on Europe in the coming years and then U.S. more 2030 and onwards. Of course, you've been thinking of the FDA application as one element, but should I not read into this too much and say that has moved forward several years? Or are you still thinking actively about the FDA?

Yes. So we've been dealing with the FDA. So we did the first application and we got the feedback. We have a clear idea of how we are going to do it. Whether it's happening this year or next year, I'm not going to share that information. It could take some time but it's definitely on our strategy to do it.

Thank you, audience here in Helsinki. And now we will take a couple of questions from our online audience. So there are a couple of questions regarding the order book. And it was roughly the same level as it was at the end of last year. So is it a fair assumption to do that the latter half of the year will be stronger in regards to order book development?

I can't give you any forecast for that. But obviously, I mean, that's the target and aim for us that it's going to grow.

Yes. What I can say that, okay, we have a healthy pipeline of business. So it seems that the market is really opening up. Whether we capture all of those opportunities, so we'll see that -- but currently it looks really, really promising.

Then further with the order book. Revenue grew by 2%. Why didn't the order book turn as a revenue during the first half?

Yes, there's 2 things. And Veli-Matti, you may comment more. But from my perspective, 2 big things are Lombardia region. So we closed that in January and the delivery hasn't started. So as we are kind of moving forward with the IFRS kind of -- and so we cannot book the revenue until we start kind of delivering something. And we expect that the deliveries for that particular deal will start in the second half of the year. And I already mentioned a couple of times about the Castile and León case in Spain. That's the same thing. That's happening right now as we speak. But okay, that will be kind of a revenue for the second half of the year. And what comes to rev rec, so I think we pretty much know all the deals that we are going to recognize because those have been already sold, and now it's in a delivery phase. So there are a couple of bigger customers so that the case, so we need to deliver and the customer accepts the solution, and then we can book it as a revenue. And going forward, then it's a pipeline and all of those open cases because it's not likely that we close something now and we deliver before end of the year, and recognize as revenue. But we have a good visibility on the second half.

And still further regarding the order book. So how do you recognize the orders in the order book? So is that the total value of the contracts throughout the whole contract length?

That's correct. That's the right interpretation.

That was all today from our online audience. And any further questions from audience here in Helsinki?

I would comment on the last question also that, obviously, the person is interested what's the duration of our order book. It's a bit less than 2 years as on average. That might clear up the understanding how we could approximately recognize those orders.

And my closing words are 3 points. It's kind of a fashion to say 3 points. But first of all, that keep in mind that, we started the journey in the clinical side in 2020. We have been able to build the biggest and best portfolio in that market with the regulatory approvals. That's the first thing. The second thing is that, okay, we have actually won real customers, really kind of leading hospitals from the U.S., from Europe, from the main markets, and we've been starting and some delivered already and started to be delivered. That's going strong. And then the next phase, the third point that, okay, now it's time to kind of scale up, and that happens with the different partnership and kind of strengthening our own sales efforts, but also kind of finding a nice new ways to the market through the partnership and the channel as well but I think we are in a good position. And the last point, keep in mind, the 60% growth on the clinical because don't mix up with the 2% overall because that's the kind of a piece of the kind of preclinical, which is not growing so fast. But where we are focusing also that's growing really nicely.

Thank you.

Thank you.