Modulight Oyj (78W.F) Earnings Call Transcript & Summary

Good morning, good afternoon, good evening. My name is Seppo Orsila, and I'm here with my colleague, Mrs. Anca Guina, our CFO, to talk about Modulight's Q2. Let's go directly into the highlights. And before that, just to recap what we do. We fight cancer with science and technology as most of you probably know. And besides that, we use the same lasers for other high-value applications. Last quarter, we had many, many exciting things happening. The sales grew 100%, and we reached almost 0 EBITDA, i.e., progress according to our strategy for the financials. Our pipeline, our most important metric, increased by one project, and we made most importantly, steady progress across the pipeline in different projects towards more mature state. I was also extremely happy to see order intake, particularly from returning customers taking a majority of the stake and that reflecting also the progress in the pipeline. We're going to talk more also about overall customer activity and the amount of sign-ups that we reached during the spring and summer. Also about [indiscernible] the operational things, delays related to third-party regulatory things, which prevented certain customers from treating patients, but also certain delays in the customer projects we have now finally concluded that those were related to supplier quality issues and our technical team has done a fantastic job in fixing those things and working together with our suppliers to improve the quality whether in Japan or Europe or United States. Our revenue was a little shy of EUR 2 million, i.e., doubling from reference period as I said EBITDA close to 0 versus EUR 1.2 million on the negative side a year ago. Also cash flow continues to improve [indiscernible]. Anca, will you please take it away for the financials?

Thank you, Seppo. From a finance point of view, Q2 highlights are revenue grows and continued improvement in efficiency and profitability in line with our strategy. This summer was a bit typical for us as we have seen increased customer activity compared to the previous years. The growth of over 100% in revenue was driven by the backlog from [indiscernible] mainly by our existing customers. However, due to our superior technology, we also won new customers and some of them even for [indiscernible]. We had seen steadier PPT customer accounts, some of the indications still continue to be affected by the delays [indiscernible], but we were able to increase the number of the treatment sites by the end of the quarter. We have also made significant progress with the programs which we mentioned last quarter in the presentation with the prototype statements. The increased revenue combined with out actions to improve operational efficiency [indiscernible] of EBITDA by 96% [indiscernible] development activities as well as geographical expansion have increased. The U.S. continues to be our main market and our operations in the periphery are progressing well. We have continued to strengthen our local manufacturing capability in the U.S. The U.S. tariffs have not had a notable impact on our sales, although some customers are considering to be a little bit more cautious to future actions. Our exports to the U.S. have mostly been tariff-free so far, but recent news suggest that there could be changes which may have significant impact also on our customers. However, the details we have at the moment are currently sufficient for [indiscernible] assessment. The pipeline grew to 32 projects from 31 in Q1. And the goal of all these projects is to commercialize Modulight [indiscernible] for that's manufactured here in Tampere. For H1, revenue increased by 76% compared to the last year same period. Our customers are best characterized by diversity. For some of them, the business is developing faster than before, while others have slowed down the development and adoption of new technologies. Revenue was still influenced by ongoing strategic transition to the PPT business model, along with the delays caused by inconsistent quality of certain purchased materials. EBITDA was minus [indiscernible] for a year, which is 75% higher than last year. Our total operating expenses have decreased by 12% compared to reference period, despite of continuous increase in product development as well as in sales and marketing activities. We will continue improving long-term operational efficiency as we [indiscernible]. So growth of revenue along with improvements in profitability and cash can be seen both for quarter and half year period. We believe that by following our growth strategy and capitalizing on our strengths, our business will return to strong growth by the end of the strategy period, which is the end of 2025. Head count is full-time equivalent at the end of June is 70 compared to 79 [indiscernible].

Thank you, Anca. So a little bit about the pipeline. We are now at 32 projects versus 31 [indiscernible] end of Q1 and probably a year ago. And just to remind that aim of all the projects is to commercialize our own projects. PPT sites are now 60 from 50 at the beginning of the year. And while we still continue to have certain problems, which we mentioned earlier, we are quite fortunate that the ads were almost exclusively happening in our most profitable sites. This means that with the different sites, there was different profitability due to the indications. So certain more serious conditions are naturally more and more expensive and that's more profitable to us. But this time, we were a bit lucky that the mix trended very, very much towards the best sites we could possibly get. Earlier reported third-party induced delays, here I'm referring to this regulatory changes which expands the recruitment criteria for certain projects. They had kind of delays. Of course, that increases the market size as we explained in the winter time. But on the other hand, that prevents recruitment and expansion of the trials. But as I said towards the end of the quarter, we were able to solve some of those issues and get acceleration on the installations and also treat patients. Pilot production started with some customers. This is obviously one of the most important short-term revenue generation impact things and it is something that we are extremely pleased with. And [indiscernible] supplier quality problems that we finally discovered and our technical team was able to help suppliers with the quality of the respective raw material to the right level has been very significant plus even if the revenue impact of that during the quarter is very [indiscernible]. New projects are in the fields of biology and semiconductor applications and continue the kind of focus where we have the life science and high value added applications. I was particularly proud of our sales team's efforts in winning new customers. We've got three new multibillion dollar global customers and some of them even winning from multibillion global competitors. And these are future projects which have limited revenue impact today and in the quarter, but are basically ranging decisions for the long term. And thus, we view them as very interesting if we are able to meet the customers' requirements. But the fact that we were chosen for this kind of long-term projects over existing billion companies is a strong message about the technology our team is making. And yes, that's -- the mix of customer maturity continues to progress 3 years ago or almost 3 years ago, we set ourself our strategy to increase the amount of larger companies and public companies, and this continues to happen slowly and surely. And this does not mean that we would shy away from the start-ups, but we are more critical perhaps when we are focusing our work and tend to be more on the more stable institutions. And this is visible also in the, let's say, customer dimension of the project. Just the recap on where we are doing against our five strategic programs. First is the Geographical expansion, a lot is happening, obviously, in this domain. Anca already mentioned an exceptional number of customer visits, both June and July. But perhaps even more concretely, we can share that typically July has been almost dead to us that practically no commercial activity. But for some reason, the amount of purchase orders kept on flowing very steadily in July, which is kind of obviously up in that period, but we feel that is part of the Q2 dynamics as in most of the world still [indiscernible]. So this is something that we look very nicely and most of it is coming from the United States, but also we are seeing activity in other geographies namely Japan and some of the other markets. We continued to strengthen our presence in the United States and the activities we started in the winter time to create capabilities for local manufacturing have been taken forward. And this is more like a mitigative action to counter possible tariffs. As Anca said, we have not seen direct impact of the tariffs so far, but for example, certain prospective customers have said that they have to put their projects on hold because they need to rearrange their supply chains, et cetera, i.e., there is certain indirect impact and obviously, some overall nervousness on the market. But as such, we have not seen kind of revenue or margin in our business direct and that -- there is actually a question I see on the line, are your PPT income from the U.S. subject to the tariffs or exempt as a service? This is exactly correct. The PPT is considered a service and so far has been exempt from the taxes. But we have decided to note these tariffs as a part of the risks at list because as probably all of you know, it seems that the rules on the tariffs are changing if not daily, at least weekly. And for example, a couple of weeks ago, White House announced 100% tariff on semiconductors and a couple of 100% tariff on the pharmaceuticals. Yet again, at that time, they also mentioned that certain companies, some of even our customers are exempted specifically from the semiconductor tariffs. And as far as I know, yesterday, they even announced that semiconductors would be going with a 15% tariff with a long list of exception as well. So far, Modulight semiconductors have been excellent from the tariff, and we have been using the same export coals for 25 years and intend to continue to do so. But as said, clearly, the climate is turbulent and no direct impact so far. But definitely, the overall changes and uncertainty is not good for the global economy based on our observations. In the new business models, we made a lot of progress. We are now having 60 sites with the PPT installed and stability of the PPT revenue, even if still relatively small is already meaningful. And most importantly, it is quite steady. Even with these changes that we mentioned about certain segments having patient recruitment holds, et cetera, we are seeing a steady meaningful revenue. What is something that is quite also interesting to see is that so far, when we look at the first half of the year, the usage per site in terms of euro spending seems to be a little bit above our own predictions, why it takes more time to sign up new sites than we have anticipated in the past. And -- but that is progressing to regulatory issue related to third parties hindered progress, but we still have achieved sales growth, especially due to these activities at the end of the quarter where certain kind of new sites were activated. And as I said, they happen to be among the best possible sites from our commercial point of view, which, of course, makes us very happy. But overall, the key focus in increasing number of sites and number of patients treated per site remains our core focus here, and we have made a lot of work on this during the summer months as well and are pleased with the progress. Most clinical work is the focus with the new indications and applications. But as mentioned, we also won three new interesting customers, all multibillion dollar companies, globally major companies signed up and we expect to add all of them later [indiscernible] to the pipeline data. On the short-term and also already a little bit on the revenue side, we see recurring orders, our return on customer orders, but we also see a little bit impact that certain customers now move to pilot production, which obviously from the kind of pipeline and progress point of view, a very important step. And what is something interesting for us relates to both new indications as well as PPT, i.e., the business models is that several customers tend to make upfront commitments with PPT. And this means that some of them commit even to a few years in the future of buying certain amount of treatments even if our basic offering is that you can basically treat the patients and then based on your consumption we are making the payment. Nevertheless, the larger organizations, typically large hospitals, insurance companies frequently seem to quote that the rationale for making upfront commitments relates to their budgeting and other processes. [indiscernible] we can conclude. Commercial and operational excellence, we continue to work very hard with obviously our operation efficiency and are making clear steps that to improve margins as well as improve our cost structure and this work will definitely continue. We also did some changes in the operations during the summer to improve our productivity further, which is not yet visible in our numbers, but will have a slight positive impact in the future. We have not kind of done any reductions, further changes to the models that will impact little bit the growth factor. overall, good track with the ESG and other kind of related projects as reported earlier. On the area of technology development, I mentioned already that our technical team has done fantastic work both to develop the platform as well as work with the suppliers to improve quality issues, and this has set progress in several of the pipeline projects. While this is not visible in the revenue, this is very important for us going forward and will see certain projects forward later this year. Our own factory in Finland is increasing valued as competitive advantage by customers. And at least for that reason, we have probably seen a record number of visitors, particularly from the United States but elsewhere as well [indiscernible] and I think this is may be that -- we see movement of outlook. We're not issuing the outlook because of the before mentioned reasons. But in summary, we have sales and EBITDA continue to progress according to the strategy, doubling the sales and reaching nearly 0 EBITDA with progress from the reference period a year ago. Very important to keep growing the number of PPT sites. And the fact that growth is coming from the most important sites is obviously good for us. New customer sign-ups will mostly impact future revenue, but these are critical steps in both kind of leveraging the company's technology as well as kind of broadening the scope of the customers and thus making us more resistant to global economy or geopolitics or whatever. Well, almost all the customers are from the United States, so maybe not so much impact on the geopolitical side. Again, as the global companies, they are definitely good for stability. The pipeline now 32 projects versus 30 a year ago and 31 in the Q1. I would say that the main progress, the pipeline besides the PPT progress, our production started with a couple of customers or some customers, repeat orders from existing customers showing a high percentage of new orders is a great recognition for our product and progress within the projects, namely unlocking certain third-party things and so forth earlier are, in my mind, the key things that show the changes very concretely in the pipeline. And revenue, EBITDA, and free cash flow all projects even better than the strategy. And yes, on the right side, we have a bladder cancer patient, but for obvious reasons, we have to do some steering of the picture. But this one is from the south of the United States. Thank you. And any questions?

Maybe we start with according to usual practice with our analysts. Daniel, do you want to go first?

Yes. It's Daniel Lepisto from Danske Bank. Can you hear me all right?

Yes.

Right. I have a couple of questions, maybe starting once again with the order intake. So you still don't give us the numerical figure anywhere, but I guess the commentary in the release that the summer was exceptional for the orders received. So it speaks quite well on this topic. But are we still on this same ballpark that we have been in the past quarters, meaning, I mean, several millions worth of orders quarterly? Or can you comment on this topic at all?

I wouldn't say that we have been in the several millions quarterly, if you, for example, look at our Q1. But yes, we are on a similar level. And what I think made this summer particularly special regarding the order intake is the kind of mix of orders coming. Obviously, no very large orders as they would have been announced, but they are from, first of all, from customers with whom we have been working for a longer period of time, and they were very widely mixed across the range of customers and that is making the goal. And secondly, as Anca mentioned, the July side tends to be -- or basically after mid-summer, the order intake with some customer activity very often is limited. But now for some reason, which is not fully clear to us, many customers kept coming and kept placing orders and this is something that I don't believe we saw during the history of the company or Anca, you remember anything like that in the 25 years?

I may have a poor memory, but I don't remember.

Okay. So the momentum is looking bright. But obviously, as you said, there is no like very large orders, but the order there is like stable income of reasonable ones coming in.

Yes.

All right. Then the second question, I mean, you don't report directly on gross margin, but I mean, looking at the materials and services. It's been quite high during this year, around 70% to 80% even. And it has been trending clearly upwards for the past few years. So how should we see and forecast this going forward? So is this sort of a new normal level for you? And has the PPT model contributing into this to what extent?

Yes. I mean, definitely, the PPT model is kind of purely immaterial and that has a high gross margin. From my point of view, we are now more like returning to the normal levels, which we saw for almost 10 years in the previous decade. So I don't see here a big change, maybe or obviously a good progress versus the recent years, but I think that this should be viewed more like return to normal rather than some big increase versus the history. Anca, maybe you comment more from the type of [indiscernible].

Yes. Of course, I mean we kept announcing that we take actions across all operations to improve efficiency. So this obviously [indiscernible] as well.

Maybe one, let's say, more kind of business and product-oriented comment that you may have noticed that we have been working quite a lot with the prototypes in the past. And those who are familiar with the technology know that it costs sometimes even more to make 1 or 2 units than it costs to make 10 in terms of absolute euros. And thus, definitely, the material expenses have been kind of overburdened by the sheer number of projects where we are doing various stages of prototypes and development with the customers. But as the projects mature, the share of the prototypes is reducing and you are enjoying the economies of scale even if the scale is still very limited.

All right. That is very clear. Final question is on the capital expenditure. So it was up EUR 300,000 from Q1. Can you remind on the -- exactly what contributed here? And was it more R&D activities or perhaps maintenance CapEx? And how do you see this CapEx for the rest of the year, mining, of course, the current cash burn of the business?

Actually, these have been equipment, which was ordered a very long time ago but only after we finalized this year announced also before the testing and the protocol for having it in production, then the equipment is fully approved. So then only -- at that time, becomes like capital expenditure before -- it is just before the equipment is approved, it's just at advanced state.