Modulight Oyj (MODU) Earnings Call Transcript & Summary

Good afternoon, everyone. My name is Seppo Orsila, I'm Founder and CEO of Modulight. I'm here with Mrs. Anca Guina, our CFO, to talk to you about our fourth quarter progress and how we see the things going forward. Okay. So today, we'll discuss about the updated strategy, talk about the FDA approval we recently got, recap the Q4 and full year performance. We will talk about the project pipeline and its progress, and then we'll talk about progress with investments and recap with the strategy. And obviously, we'll take all your questions at the end. So the strategy that we updated on the 29th of November is clearly happening. We are seeing more vibrant action on the market. And we, as said earlier, decided to focus even more on the United States, create local operations and focus on the go-to-market execution. Our R&D pipeline has grown to 27 projects, and the ambition in the Q4 was one project with one of the largest pharmaceutical companies in the world. This is a company with whom we already had earlier activity announced earlier last year. There was significant progress in different projects within the R&D pipeline. We're going to discuss about those a bit later. But particularly, I would like to highlight the acceleration for the pay-per treatment as a part of our cloud strategy, which we already touched upon briefly during our Q3 update. Customer activity is still affected by coronavirus pandemic-related delays, but we are clearly seeing improvement in the business environment. And after the period, i.e., in January 2020, we got FDA PMA approval for our long-awaited collaboration with a major North American pharmaceutical company. So here are some more details. So as expected, we have been waiting for quite some time for the FDA approval and now are very happy to finally announce it. And we are now kind of able to take forward the phase start. And we announced together with Bausch + Lomb that we expect to do the phase start during the first half of 2023. And I think this is also very important from the point of view that this really validates our cloud strategy. It validates our technology and its uniqueness. And there were actually quite a few companies in our industry who gave us praise for this and talked about how this demonstrates our leadership and novelty in digitalization. It is obviously something that we are all very proud of. So then I'll let Mrs. Guina walk you through the numbers.

Hello, everybody. A few highlights for Modulight financial figures. Global revenue in the last quarter of 2022 was EUR 1.3 million compared to EUR 2.4 million in Q4 2021. The decrease in revenue was especially due to the company's long sales cycle and also delays the customers see in such projects. EBITDA was minus EUR 2 million, representing minus 158% of revenue. Operating result was minus EUR 2.5 million and minus 197% of revenue. Modulight's costs have been at a significant higher [indiscernible] in 2022 than in 2021 as the company has continued to follow its growth strategy. For the year, our revenues decreased to EUR 4.6 million from EUR 9.1 million in 2021, especially because of continued pandemic restrictions in key markets and the challenges in component availability as well as general macroeconomic and geopolitical uncertainty. In the implementation of our growth strategy, EBITDA was minus EUR 5.9 million versus EUR 500,000 in 2021. As we already mentioned previously, this was disappointing -- disappointment to have the interruption of our 10-year profitable growth history. The year-over-year loan profitability was at somewhat of a lower level of revenue and also increased cost of operations. With our strong balance sheet, we have been able to accelerate the implementation of our strategy and investments in R&D, people and equipment. Despite the sales decline, we believe that accelerating investments is justified [indiscernible] competitive advantages [indiscernible] by our competitors, along with capabilities for [indiscernible] potential markets. This was carefully evaluated in the extensive strategy work we carried out [indiscernible]. We have not suffered from a shortage of personnel. On the contrary, we had constantly received excellent applications for all positions, and we have been increasing our FTE from 52 in 2021 to 62 in 2022. We believe that our image as a good employer contributed to that. Despite the challenging year, the result of our employee satisfaction survey was very positive.

Yes. So in a nutshell, the year was clearly a disappointment in financial terms, yet there is sunlight at the end of the tunnel. And I think that this is best kind of described by the progress with R&D pipeline. The pipeline keeps growing. And I would say, more importantly, there is progress within the pipeline. Yes. As Anca said, all this progress is somewhat shadowed by the stoppage of the long profitable growth, for which there is no other way to say except that we are very disappointed. Anyway, we look forward, and we are particularly happy that our existing projects in the pipeline are progressing. Yes, there are delays with some customers due to various reasons also mentioned by Anca, but I would say that the fact that we are getting more boost behind the new business models, for example, our pay-per treatment implementation and the fact that the larger share of the customers continues to be big companies and public companies, even blue-chip companies, like the one new project started during the Q4. And perhaps very concretely, the FDA PMA approval received in January is [indiscernible] except litigation of the progress of the pipeline as well as the solidity of the technology. As the pipeline progresses, we expect revenue to be more predictable. But while there are small steps forward, we still are seeing that in the near term, there is a fluctuation and can be due to both directions. The customer base is relatively stable. There are no discontinued customers. As said, the share of the mature companies continues to increase, which is in accordance to our strategy and in accordance to our operational objectives. If we talk about some examples of the progress within the pipeline, first, I'd like to mention the one blue-chip company with whom we've already been working earlier, but now we started another project in fluorescence imaging. This is something that we have been developing earlier with another major company and continue to do so even still. But we feel that this is quite remarkable, first of all, expanding the relationship even if this is early-stage development. But yes, again, it validates our unique platform technology, and it validates its applicability across multiple customers, which is not [indiscernible] item that these are extremely large companies. Secondly, we progressed with a New York Stock Exchange-listed company we published earlier, and we announced together with Bausch + Lomb the FDA PMA approval as mentioned earlier. And then thirdly, I want to highlight this progress with the SaaS business models and how we are expanding and accelerating the implementation across multiple indications and across multiple customers. And this has clearly been one of the very positive elements versus our expectation even a year ago. Then I want to kind of note our investment program, which we'll be talking quite many times. While we continue to invest, we can now say that we are pretty much complete with the investment program. By and large, all the equipments are with us, and there is still some new ones coming, but the majority and the bulk of the investments have been done. And we, as explained last time, are already seeing ability to do further differentiation to our products, expand our offering, increase productivity and higher capacity. All these 4 are seen in multiple operational examples. And yes, we did suffer during the 2022 about component shortages, both for our own production as well as complaints from our equipment suppliers. Towards the end of the year, those disturbances started to become less and less. We truly believe that our fab is now state-of-the-art and is in good position to support our growth strategy implementation. So as summary, we are kind of focusing very much on the geographical expansion. The local operations is at the heart of what we are trying to improve in United States. We have established local operations to provide clinical support to our customers and pharmaceutical companies. We support their clinical trials. We have a person based in New York. He's actively supporting different sites, and different people are supporting different sites. We have established a partnership in Europe with Laser 2000 to support and particularly kind of leverage our technology in Europe, particularly in Germany, France, Switzerland and elsewhere in Central Europe. Laser 2000 is a leading company in the domain of lasers and their distribution for almost 30 years. We continue to drive for the commercial rollouts as describing our strategy based on the existing projects in the R&D pipeline. We continue to focus very much on expanding to other applications and new indications by productizing our existing platform products for new and existing indications with both existing and new customers. And we are particularly happy to see existing customers expand new indications. And as described in earlier calls during the last year, we saw some customers starting, for example, a new indication with our technology. The improvement of treatment efficacy and accessibility remains at the core of the cloud strategy and its implementation. We are now seeing more traction and faster-than-anticipated traction for implementation of the new business models and the pay-per treatment and other SaaS-based business models. Commercial and operational excellence is something where we are investing, and we are seeing a number of smaller and larger projects where we are improving the way the company works. We also will kind of reach carbon neutrality by 2025. And we have set a separate strategic program, the development of ESG, governance and reporting. And the fact that we have now more analysts covering Modulight is one step in the improved reporting. State-of-the-art laser technology. We continue to invest into the technology development at a record rate, and this has been enabled to us by our strong balance sheet. And for this, we are obviously very grateful for the investors who have enabled the company to accelerate its technology development. And as said, in the strategy work where we have kind of made a very thorough analysis of not just about the go-to-market, but about the validity, competitiveness and the market need for our product. We validated through careful analysis that there is more need than ever for our product. And we feel that we are more competitive, not only thanks to all the investments that we have done, but all the development done with the customers than ever. And thus, we continue to accelerate the development, and continuous focus on kind of leveraging the company's technology is continuing. And this is very much thanks to the highly skilled and very talented team that I am pleased to have as a part of the company and what we call a laser family. So we are not issuing outlook as noted before. So in summary, we have updated the strategy with additional focus on the local operations and go-to-market, United States. Product pipeline grew to 27% -- 27 projects during 2022. There are some significant progress that is in the pipeline, including the FDA approval finally received early this year. We see opportunities to accelerate pay-per treatment on the short term. Customer development projects have been affected still by the pandemic and geopolitical uncertainty. But overall, our business environment has clearly been improving. And here, we are meaning the feeling and the ratios, number of customer visits and all the touch-points in [indiscernible] digital channels. So this is something that we have observed during the Q4 and continued this year. And as said by Anca, thank you -- thanks to the strong balance sheet, unique technology and supporting megatrends, we are [indiscernible] to continue execution of our growth strategy. So thank you. I'm happy to take any questions that you might have.

All right. We have online our analysts from Danske and OP. And I'd like to first [indiscernible] Mr. Lars Hevreng from Danske.

Yes. Can you hear me?

Perfectly.

Great. First, on the -- I mean on the rollout now with the 6710 product then through Bausch + Lomb, what can you say about -- or can you say anything about installed base of equipment that you aim to replace any purchasing patterns from Bausch + Lomb, how that's going to pan out? And what's the equipment base in total that you're going to replace over time? What can you say about that?

Thanks, Lars. A great question. As we announced together with Bausch, we will be informing about the market availability later. And I believe that the press release noted that they expect the product to be available to the eye care professionals during the first half of '23, i.e., this half. But I think it's now still too early to comment further. We've agreed together with the customer that we'll be closely coordinating the market launch activities and have been obviously doing so well in advance, but this is what we have been able to say at this time.

But you will be paid by Bausch + Lomb at the time of their ordering? Or how is that going to play out?

So we will be serving the end users directly. There are certain commercial agreements and legal agreements between the 2 companies, but those are not public at the moment.

All right. Then in terms of the guidance, you've said strong growth from '23 to '25, but that -- should we assume any growth in -- I know that you haven't provided the guidance of '23, but what -- should we assume that, that growth wording, so to say, that that's also going to relate to '23?

I believe we said in our statements that we are targeting a return to strong profitability during the strategy period, i.e., this year and the next 2 years, but we are targeting strong growth every single year during the strategy period.

I got it. Then just on the fourth quarter in isolation, the other operating cost line, I'd say, what -- that was up quite a bit relative to previous quarter. What was included there, please?

Basically, the costs of the operations, except in manufacturing costs and sales.

Sorry, I missed that.

Sorry?

I missed what you said, sorry.

So all the other costs, except in depreciation, sales and manufacturing...

I believe Lars was asking the main reason of the increase.

What is the question, Lars? Was it what is included in the...

No. My question was, what -- why was it so high relative to previous quarters?

Due to increase of operations and our growth strategy implementation.

So we have continued to accelerate reinvestment into the development activities as well as if you look at the amount of trade shows and marketing activities that we have been implementing, those have gone up quite substantially, especially during the second half of last year.

All right. And in terms of the cost base, it seems, overall, your total cost has -- broadly speaking, these costs, they have doubled in 2022 compared to '21. What -- can you say anything about that? What kind of development we should forecast for '23?

I guess -- I mean we're not issuing an outlook or forecast for this either. But yes, so we are kind of -- we continue to invest into the marketing and R&D. But maybe if you research the road maps, you might also conclude that there are some operational efficiencies to be expected.

All right. And just finally, you said that the expansion CapEx program, that's coming to an end, right? That was your comment, wasn't it?

Yes.

Okay. So CapEx in the year ahead relative to '22, that will probably decrease?

Yes. [indiscernible].

Thank you, Lars. And may we have the next questions from Kimmo Stenvall from OP.

Yes. So I will touch a little bit on the OpEx side as also Lars did, maybe a little bit more of this kind of housekeeping question as a new analyst in Modulight. But first of all, the materials and services were -- they were extremely high in Q4. Is there any one-time costs were affecting this cost base? Or what was behind this EUR 1.5 million that you reported in materials and services?

Yes. So obviously, Kimmo, as you said, you've not been part of the -- some of the earlier calls, but ramping up the new tools, particularly new epitaxial reactors, consumes relatively large amounts of material. And if you combine the fact that we have had a record number of equipment installations during the second half, and if you have [indiscernible] IPO that are kind of calibrating and taking into the process, new tools consumes a fair amount of materials, this, I think, creates a logical rationale for significant use of materials. But what we can say is that there is no change in our kind of product profitability. Obviously, if there were material changes, we would highlight that.

Okay. So that will come down a little bit on the coming quarters, I guess?

[indiscernible].

Yes. Or what is your thinking on because of -- now it's -- this cost item is more than revenue. So I would expect it to come below EUR 1 million per quarter. Or what is the reasonable level do we expect from this cost item?

I guess -- I mean we have to follow that and [indiscernible] to the fact that, yes, probably we'll have -- we will be discussing the product profitability when it changes. We do -- as we have said, we have maintained the high level of investment. We also said that the company has validated its growth strategy and decided to keep investing heavily into both kind of R&D and equipment despite the revenue decline. So I believe that this is the maybe best commentary that we gave related to this topic.

Okay. Okay. Then Lars was asking about the CapEx. I guess, also, it's coming down quite significantly this year. And is there anything that you want to tell about the cash runway? It's now -- net cash is like EUR 35.6 million. So what are your long-term thoughts on the net cash position? I think it's going to roll out at the moment, but any thoughts on this cash flow development? What do you have?

So I believe that this kind of release has obviously the material that you are seeing, but there will be more line items related to the cash flow in the 15th of March, March release, which will give you further details. But I believe that we cannot disclose those details at this call because they have not been made public yet. But I think it is very clear already to what we said that the CapEx spending has been very significant. And we said that, that program is now, by and large, completed. Thanks, Kimmo. By the way, Daniel, do you have something you want to ask?

No. I guess, guys, most of the questions were asked already. [indiscernible].

All right. Thank you, Kimmo, Lars and Daniel. So we'll move on to the questions that we received through the chat. So first, we have a question about the PMA. So what do you mean by this PMA?

PMA is an official acronym by the U.S. Food and Drug Administration. The letters stand for Premarket Approval. There are different types of FDA approvals. Most of the medical devices that people are talking about, 510(k) devices, and then there is the more stringently regulated devices such as ours, which is the PMA. I actually made a call to Finnish health tech industry and asked who else is having these PMA approvals in Finland besides us, and they did not know anybody else except this one company, [indiscernible], which is making this [Foreign Language], whatever that is in English. So a relatively major company who actually sponsor our public reference of buyer. But -- so the PMA differentiates from the technical point of view from many other FDA approvals in that sense that they always require advanced on-site assessment by the FDA, whereas 510(k) can be granted based on purely document submission, and those documents are just checked against themselves, but don't validate against real records, which is the case in the case of PMA. So we are extremely proud of this PMA particularly for this reason.

Thank you for the clarification. Then we have questions regarding the ML6710i. Like what are expectations for sales during 2023 and also in monetary terms or colors or potential? And even if we're not giving outlook, maybe there's something that we can say about this.

Yes, we are quite excited about this. As I said earlier, the fact that we now have an official approval from the most respected authority in the world probably by the FDA. That is obviously a subjective opinion. But I have received kind of congratulation from several industry leaders about the advancement in digitalization, usability and novelty of this device. So we are extremely proud about the feedback and the feedback obviously that the device received the approval. That opens us many of the opportunities that we have articulated in our strategy for monetization of the cloud. But obviously, there is a lot of work to be done. But we are extremely happy about this interim step. And as announced, together with Bausch, we will communicate further the market when this device is available to the eye care professionals.

All right. Thank you. And then we have a question about pay-per treatment business model, asking if there are any initial system fees for customers and what level of treatment prices are per treatment? And so what is the expected average payback time for laser treatment before they start to generate profit?

I will -- I believe that we need to come back with the question about profitability once we have enough realized transactions so that we can give investors a proper rate or representative kind of sample. As we have said, we are now in the process of bringing the device to the market. We have the regulatory authorization to do that together with our partner. But we do not have yet the date that we released, and thus it would be difficult to give proper figures as we have not had those transactions yet.

All right. Thank you. Then we've got still a couple of questions. Like somebody is asking if we could comment the effects on the current high inflation rate of Modulight?

Modulight is in a fortunate position to have very, very high -- or high gross margin products. Thus, our production costs are not very highly impacted. Obviously, we are impacted by -- in the OpEx side like our competition. The costs for the trade shows, costs for [indiscernible] digital channels and everything continues to increase, as it does for everybody. But I will say that we have any particular concerns about the inflation unless [indiscernible].

And of course, the salaries [indiscernible].

But our salaries overall for quite a few years increased way above the inflation rate in the past. And yet, we were, at least in the past, able to maintain high profitability. So based on the historical data, actually, some of the real cost increases are now actually less than what we implemented in the past where we were highly profitable. So I'm not that concerned about the inflation.

Thank you for your answer for that. And then we got still a couple of questions. Somebody is asking, like given our recent negative history, meaning the write-off in last March, what is our view in relation to the macroeconomic situation, like interest rates, access to funding? And do we foresee that our customers will have issues with the credit ratings, et cetera? Or do we see payments being overdue or be late?

Maybe the last one can be covered by Anca.

We already announced last year in the same time, we carefully -- we changed our report of the recognition of the revenue with selected customers. So basically, this is our controlled measure over increased receivables.

Yes. I think overall, the fact, which I mentioned at the beginning of the presentation, that customer portfolio continues to be transitioning towards bigger companies. Those are typically less prone for fluctuations in the availability of financing. And then the overall macroeconomic trend, as we said in our release, also continues to go to a favorable direction, in that sense that the business environment seems to be much more vibrant. There are more customer visits. There are more people at the trade shows, et cetera. And I will say that while the geopolitical uncertainty remains high, there is a certain positive [indiscernible], especially towards the end of last year and early this year. We definitely do not hear similar concerns that we were hearing during the last spring from customers and the fact that Finland is in a positive move towards [indiscernible] several customers. It's a very positive thing. Remember that many of these challenges came from the fact that we are sole-source technology supplier to some of our customers who are easily 5,000 miles away, and they were very concerned about the geopolitical risks, increases in close proximity, but these concerns have clearly reduced when we listened to the customers.

All right. Thank you. And then one more question from somebody asking, will you book any milestone on-time profits when the FDA approves laser sales starting in 2023?

As we have said earlier, we are booking revenue only based on deliveries and achieved milestones. So there is nothing special for us to announce. Obviously, if there was, we would have included that into our releases. So there is -- we continue to have this same principle as before on the revenue recognition, that there are no advances or any kind of revenue based on bookings, et cetera. So the very normal way, I would say, old-fashioned, normal way of recognizing revenue based on real deliveries and the actual milestones.

All right. Thank you. It seems that there are no further questions that haven't been answered yet.

Thank you very much all. Bye-bye.