Nanosonics Limited (NAN) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Nanosonics Limited 2022 Half Year Results and Investor Call. [Operator Instructions] Your speakers today are Michael Kavanagh, Managing Director and CEO; and McGregor Grant, CFO and Company Secretary. I would now like to hand the conference over to Mr. Kavanagh. Please go ahead.

Thank you very much, and a very good morning, everybody, and thank you all for joining the call this morning. I'm joined here by McGregor Grant, our CFO. Well, earlier this month, as part of the announcement on the revised sales model in North America, we did provide our revenue number for the first half being $60.6 million, which was up 41% on prior corresponding period. And in today's half year results announcement and the corresponding investor presentation, we provide more granular details regarding the performance over the first half. There is a lot of information provided, especially in the investor presentation that I encourage you to have a look at. However, if I distill it down, there are really 3 key takeaway messages, I believe, from the first half results, and the first is despite the disruption in the markets associated with the Delta variant and, most recently, the Omicron variant that saw record-high COVID case numbers, the business still maintained the positive momentum that we had achieved in the second half of the last financial year. So that -- we were very pleased with that result. The second insight, I think, is that the COVID impacts themselves, they certainly varied in timing and severity across the different markets, and indeed, there wasn't a predictable universal response to the situation. However, in general, what we saw and experienced was the market conditions improving between the first quarter where the Delta variant was the predominant variant and then the second quarter, which saw the emergence of the Omicron variant, even though there were spikes in case numbers associated with Omicron. So we saw an improving situation across the quarters. And there did seem to be an acceptance that while Omicron was more transmittable, it was clinically less severe, and it also coincided , of course, with vaccination numbers that were a lot higher and, indeed, booster vaccination rolling out. So that's perhaps why we did start seeing some good recoveries between the first and the second quarter as well. So partly, those improvements that we saw between the 2 quarters, and they have continued into the start of the second half where the markets seem to be moving to a more endemic management versus pandemic management system with restrictions definitely easing significantly. Of course, we do have to remain cognizant of the general pressures that high caseloads of COVID have on hospital systems and on staff shortages within hospitals as well, but hopefully, we see that continue to improve. The third message, really, is that our forward-looking growth agenda, it has not changed. We continue to invest in the growth opportunities for the trophon franchise globally, which we believe is significant, as well as our product expansion plans, in particular, AuditPro, which was recently launched in North America; as well, of course, our next product platform, our Coris product platform for endoscopy reprocessing where development activities continue to progress well. So I'll provide a bit more detail on each of these and then hand over for questions. And combining the first 2 messages together, I guess, the global installed base, it increased by 1,410 units to what is now 28,160 units globally, and that represented an increase of 12% over the last 12 months and 5% in the last 6 months. And while the number of new installed base units in the half was down by approximately 200 units or so over the last half, this was mainly attributable to the first quarter installations, which I've mentioned, that was the quarter most impacted due to the Delta variant. There was then a recovery in the second quarter. We saw a new installed base grow by 14% quarter-on-quarter. So -- and as I mentioned, that positive growth between the quarters has continued so far into the second half. Looking at that -- the overall installed base by region. In North America, the installed base there in the half increased by 1,200 units where there's now 24,680 units in the market That represents a 12% increase in the last 12 months and 5% in the last 6 months, and that's a North American installed base. It now represents approximately just over 40% of the estimated total addressable market of 60,000 units. So that's about 24 -- over 24,500 units spread across 5,000 facilities. So it certainly is establishing itself, if not considered the standard of care and continuing to grow quite nicely over there. In the Europe and Middle East regions, the installed base increased 140 units in the half where there's now 1,650 units, and that, in total, installed base has grown 25% now in the last 12 months and just under 10% in the last 6 months. And the first quarter, in particular, was significantly impacted where lockdowns and hospital restrictions were in place in the majority of the key markets, but interestingly, we did see quite a significant recovery in the second quarter as those market restrictions eased, and almost 80% actually of the total new installed base in the first half was achieved in the second quarter. And again, like in America, we are seeing continued progress, positive progress in terms of installed base in Europe as we're now into the second half. In Asia Pacific, the installed base grew 70 units in the half to where there's now 1,830 units in the region, where the total installed base has now grown 10% in the last 12 months and 4% in the last 6 months. I guess we were all living through the restrictions that we all faced over the 6 months in the first half here in Australia and New Zealand. We also had a good uptake of upgrades in North America in the first half and where, as you know, there is a significant opportunity exists for upgrades. There's now approximately 7,000 units of the older trophon EPR have reached 7 years of age, so they're certainly a high target for upgrades. And in total, just under 400 upgrades were sold, which was up over 125% or so on the last half. So certainly, the upgrade opportunity and upgrade sales are beginning to generate some momentum behind them. Moving on to revenue. Total revenue for the half, as you know, was at $60.6 million. That was up 41% on PCP, and we were able to maintain that revenue level the same as the last half despite the adverse conditions with COVID, where it was just slightly up on the last half. Breaking the $60.6 million in total revenue down. Capital revenue for the half was $19 million, and that was up over -- just over 100% on prior corresponding period and 10% compared with the prior half. And that capital revenue, of course, includes revenue associated with new installed base as well as upgrade sales. Total revenue for consumables and service for the half was $41.6 million, and that was up 23% on the prior corresponding period but slightly down 3% compared with the prior half. And that 3% reduction, it does reflect, obviously, some disruption on ultrasound procedure volumes associated with the increasing infection rates from the Delta and Omicron variants, but also this time around, we saw the impact of the Delta and Omicron variants impacting hospital staff availability, which I think has been in the commentary for most organizations. And this was experienced, in particular, in North America. Looking at North America itself, the total revenue for the half was $54.4 million. That was up 47% on PCP and just at 4% compared to the prior half. Capital revenue for the half in North America was $17.4 million, and that was up just over 140% on PCP and up 20% or 23% compared with the prior half, and again, that increase in capital revenue includes the ongoing increase in new installed base and the growth in the sale of upgrades, which demonstrates the importance and the opportunity that exists for upgrades, which are now gaining momentum. Revenue associated with consumables and service for the half was $37.0 million, which was up 25% on PCP, but as mentioned, it was 3% down on the prior half for the reasons I've already mentioned. In Europe and Middle East, the total revenue for the half was just under $3.5 million. That was down 6% on PCP, and that reduction was primarily associated with a reduction in capital revenue as consumables was actually up slightly. And that reduction in capital revenue was due to the impact, again, of the restrictions associated with, in particular, the Delta variant and hit mostly in the first quarter. And despite the Omicron variant coming in the second quarter, the restrictions did ease and that the new installed base numbers recovered significantly in the second quarter and almost 80% of the first half new installed base was actually recorded in the second quarter. And as mentioned again, we're seeing good momentum continuing in Europe as we're now into the second half. Consumables and service revenue was $2.6 million for the half, and that was up 24% on the prior corresponding period and just up under 10% compared with the prior half. It's where -- it doesn't seem that the ultrasound procedure volumes, they don't seem to have been significantly impacted throughout the half despite the actual restrictions that existed in the market. In Asia Pacific, the total revenue for the half was $2.8 million (sic) [ $2.9 million ]. That was up 8% from prior corresponding period, but it was actually down 32% with the prior half. To explain that, the primary driver of the revenue being down in Asia Pacific was the one-off sale of the 200 trophon2 upgrade units that took place in the last half, and if we exclude upgrades, capital revenue in H1 of FY '22 was actually flat compared to the prior half, which wasn't too bad considering, again, the restrictions as everybody on the call would have experienced here in Australia in particular. Revenue from consumables and service was $2 million, which was up 5% on the prior corresponding period and just down about 5% as well compared with the prior half, again, associated with the restrictions and the impact of those on the ultrasound procedures, but overall, it remained pretty flat compared to last half when you exclude the upgrades. And the third message was really our forward-looking growth agenda. It certainly continues, and we continue to invest in the growth opportunities for trophon franchise globally, which we believe are quite significant as well, of course, as our product expansion plans. And in the first half, our operating expenditure was $42.7 million, which was up 29% versus prior corresponding period and 13% on last half. But as you'll all be aware, the -- when you look at the OpEx in the last half of last year, particularly the last quarter, OpEx then was just over $20 million. So we were on the run rate that we exited the last half on. Included in that $42.7 million was $10.7 million in R&D, and that was up just over 40% versus PCP and 11% versus prior half. As you're aware, the company, we announced the launch of AuditPro in the last half, which is a new infection prevention digital product platform that's used for traceability, reporting and compliance, and that was launched at the APIC Conference at the end of June in 2021 with subsequent customer introductions to the product commencing around the September time frame. The first sales of that product have commenced with the interest for the product and the pipeline for sales actually continuing to grow quite strongly. There are a number of new stakeholders in the sales process for AuditPro and particularly the IT departments being a digital solution within the hospitals and which all require customer security reviews. So when we're -- when customers are looking to order, we have to do some detailed customer securities reviews. And while we have the necessary security measures in place from a data protection perspective to streamline the process of responding to all the individual requests, we are now also working towards ISO27001 accreditation, which is the internationally accepted standard for the management of information security, which will streamline the turnaround of the customer security assessment request as well as set the organization up for future developments in the data space of infection prevention, of course. And progress certainly does continue in our activities associated with the company's new endoscope reprocessing product platform, the Nanosonics Coris, and our continued performance with that technology continues to demonstrate the product exceeding all the standards for cleaning outcomes, including the most difficult soils and, importantly, across all the complex channels of an endoscope. So that product is progressing quite nicely. We will continue our investments for growth in the second half across R&D as well as the broader operations in the business, where the overall OpEx expected now for the year to be approximately $93 million or so, including -- and that does include the extra investments we are making as a result of the revised sales model in North America. A few comments on some of the other key financial metrics. Gross margin for the half was 77%, which was a good outcome. The profit before tax was $3.3 million for the half. That was up from $0.2 million in the prior corresponding period. And at the end of December, the company had $92 million in cash and cash equivalents, and the company has no debt. A few other quick updates, then I'll hand over for any questions. First of all, our new corporate headquarters, which we are moving to and preparing to move to a new headquarters in the Macquarie Park precinct in Sydney, this will take place in the fourth quarter of this year, and all the preparations for this move all progressing well. Then move itself is into 2 adjacent buildings, one that will accommodate our headquarter offices and administrative functions and the other, our R&D and manufacturing facility. And what this move will result in is a significant expansion of our R&D capability with the establishment of new state-of-the-art laboratories in microbiology, chemistry and engineering, and it's actually going to deliver a threefold increase in capacity for ongoing research and development. A significant expansion of the manufacturing capacity is also underway to support the growing global demand for trophon, and of course, the company is expanding product portfolio plans. And we're very pleased that the growth of the organization has been recognized by the New South Wales government, and the move and expansion of our facility is being supported by a government grant through the New South Wales government Jobs Plus Program, which is facilitated by an investment in New South Wales. A brief update on the transition to the revised sales model in North America that we announced 2 weeks ago. And as a reminder, Nanosonics and GE, we have revised the current North American sales model, and that's effective now from February through to the end of the current distribution agreement with GE that ends in June this year, and discussions are underway for a new reseller agreement that would come into effect from the 1st of July 2022 and be based on this new revised sales model. And under this revised sales model, what GE are doing now, they will consume all their inventory and transition to what's called a pass-through sales model for its ongoing sales of trophon, and the revised sales model will see Nanosonics then manage all inventory. We'll ship, install and train the new GE trophon customers, which will then become Nanosonics customers for the ongoing provision of all consumables. And GE were also -- they are currently now -- have commenced the transition of all existing GE trophon customers to Nanosonics for the ongoing provision of consumables. So what this means is from FY '23, in addition to 100% of the sales of consumables to be made by Nanosonics direct operations and increase in the proportion of new installed base and upgrades is expected to be made through the direct channel, and over time, this is expected to result in a corresponding increase in revenue and margin for the company. The transition plans are now well underway and progressing well. Nanosonics, we already have an extensive sales capability with 21 sales territories already established across the United States, over 50 salespeople and clinical people across those territories, and we will add some new salespeople in clinical headcount into a number of those territories. Recruitment is already underway for those and offers made, in many cases, to those roles. So we feel confident of having the necessary sales infrastructure in place and in full. The company, we also have a very well-established and experienced logistics operation based in Indianapolis, which will ensure continuity of supply to customers. And the current logistics facility in Indianapolis is over 20,000 square feet and increased warehouse capacity through new racking, et cetera, has already been implemented with the opportunity to expand capacity further if that is required. At this moment, we don't believe it is required. So finally, in terms of some updates to some of the guidance for the year, and despite the inherent risks and uncertainties associated with COVID-19, we remain optimistic that what seems to be a shift from pandemic to endemic management measures coming through now that, that will continue to improve the market conditions and further enable increased capital and consumables growth to end customers. And as announced 2 weeks ago, there will be a revenue impact of between $13 million and $16 million associated with this transition to the revised North American model, and that is primarily associated with GE transitioning to a nonstocking distributor. As I mentioned, they are currently consuming inventory and then move to a pass-through. We do, however, expect installed base to continue to grow, procedural volumes to continue to improve, leading to further growth in consumable sales to customers and further growth in upgrades. We had a strong first half, and we expect to continue to see good upgrade growth again in the second half, albeit there's some of the anticipated growth that we had for the second half, we'll probably defer to FY '23 due to the transitioning sales model in North America, but we still expect to see good upgrade volumes coming through in the second half. The gross profit margin should be approximately 75%, and that takes the product mix and certain component costs and freight costs being absorbed due to ongoing supply chain challenges that the company is managing well. And we're still able to manufacture and deliver in full on time to customer demand, but we still have to manage, like all companies, the freight, and there are certain components where COGS have gone up at this stage. And operating expenses, as I mentioned, they are expected to be approximately $93 million for the year, which does include the incremental costs associated with the transition to the revised sales model in North America. So I'll pause there, and with that, I'll hand over for any questions.

[Operator Instructions] Your first question comes from Josh Kannourakis from Barrenjoey.

First question, just with regard to the OpEx outlook. Could you give us a little bit of a feeling for the medium-term outlook for OpEx? And just maybe some extra context around, within those numbers, how it's sort of broken up between maybe the core business and some new products and the transition costs as well.

Okay. Josh, thanks. So the OpEx, the $93 million or so or the first half OpEx, about $10 million of that's R&D. And so if you annualize that, you've got sort of the proportion of the OpEx between R&D and OpEx and not R&D, OpEx. And so the -- a significant proportion of our cost is related to head count, at least 2/3 of that. And whilst we're seeing a significant growth in OpEx between FY '21 to FY '22, which is really associated with growth in investment in our sales capability in Europe and, of course, now some further expansion in North America, together with investments into supporting developing the markets in China and Japan and so on. So we're seeing a significant growth through FY '22. I don't expect that we will see the same level of growth into FY '23. [indiscernible] we've made a significant investment during this period. So I think the growth will be more modest than what we've seen in -- what would be seen this year. And as I said, the majority of that increase is in the front end of the business within the regions, but there is some, of course, some incremental costs in the back end as well [indiscernible].

Got it. And just on that, McGregor, in terms of, I guess, Coris and some of the new product initiatives around AuditPro. Is there any extra context you can give us around that in terms of whether or not the cost base is rightsized to facilitate those products in market and how we should be thinking about the timing of potential other costs coming in, in relation to products like Coris?

Yes. I think when we get to bring Coris to the market, the -- obviously, there'll be incremental marketing costs that will go with introducing and launch costs that will go with introducing a product to market at that point in time. The channel model or how we go to market is -- hasn't been disclosed at this stage. But you can imagine, you've seen what we do around the world globally with trophon. So it's presumably may not be too dissimilar of having a hybrid model between direct and potentially distributor partners in different parts of the world. So there will be an incremental but not a wholesale let's replicate what we're doing with trophon now for the introduction of a new product.

Fantastic. And just a final question for me, just around the cash flow. I imagine some of the increase in inventories and the like was related potentially to GE and stocking coming up for this half. Could you give a little bit more context and just how, I guess, you're thinking about into the second half sort of cash flows into the second half in light of the change in revised GE agreement?

Yes. Thanks, Josh. So first of all, the -- as you would have seen if you've seen the balance sheet, our inventory holdings have increased somewhat since June, and that has been a deliberate decision on our part to carry more inventory, particularly in the field as a contingency for the sort of interruptions in freight and so on. In terms of the inventories that we have in the supply chain to support the transition from GE to the direct team, we don't see a significant impact to that because the expectation is that the sales of new installed base and upgrades will continue to grow, and we'll need to carry inventory for that. So we may carry a little bit more ourselves, but I don't think it will be hugely significant, given that we are carrying quite a bit more inventory already in the field. So I think that's probably how that one's going to play out. You asked a question about cash flow as well. I'll just touch on that. So clearly, that growth in inventory has had an impact on cash flow and the other impact on cash flow in the half has been a bit of a CapEx that we've been spending on the fit-out of the new headquarters.

Your next question comes from Joshua Ting from Bank of America Securities.

I was hoping you could just speak a little about the new agreement and with the Nanosonics [ extension ] of your customer relationship. If you could give us a little bit of color on how the strategy might change in relation to upgrades and how bringing that in-house Nanosonics might be able to look to increase the upgrade rates.

Yes. Thanks for the question. The majority of the upgrade opportunity that exists in North America are actually associated with existing GE trophon customers, and the reason for that is we only went direct in North America about 5, 6 years ago. So what's happening is one of the benefits of GE transitioning all the existing GE customers across Nanosonics for the ongoing provision of consumables is we'll be setting up the accounts, we will be servicing those accounts, and we'll certainly be able to go in and drive the upgrade cycle and hopefully rate of adoption of upgrades amongst the customer group. And what comes then for the company with that, obviously, is an improvement in margin as there won't be a distributor margin associated. I mean GE can still sell upgrades, but we just imagine that the focus won't be on that. It will be more on new installed base associated with the sale of ultrasound. So we expect to see the lion's share of upgrades coming through the Nanosonics direct channel.

Okay. Great. And could you maybe, just following on from that, give a bit of an idea of what the average age of the devices that have been upgraded so far is? So I know you sort of referenced that 7-year mark. Is that the age that you are seeing in the last half or a little bit older?

Yes, it would be -- no. probably around that and some actually a few younger and some of it older, but it probably does average around that 7 years. And what's happening and why it's important for us to -- and having the direct access to all the GE customers is that quite a decent percentage of new ID sales that have been made now are into hospitals are going deep into all the different departments within existing hospitals where trophon may be in 1 or 2 departments, but they've got 4 or 5 departments that should have trophon. So we'll be going in and going deep within those accounts. And then, of course, when we're selling deep into those accounts with trophon2, we go through all the other departments that have the old trophon EPRs to look to upgrade those and if they're at 5 years plus, they will be considered for upgrade. But on average, I believe, at the moment, it is probably around that 7 years.

Your next question comes from Bosco Feng from Goldman Sachs.

Can you hear me?

Yes.

Michael and McGregor, can you hear me? Am I coming through clear?

Yes, we can hear you. Yes, we can hear you.

Perfect. Awesome. Can I just ask 3 today? The first one is you previously guided to no disruption in consumables as a result of the revised sales model with GE in the U.S. Are you still maintaining that guidance today, considering the contract negotiations that might have taken place in the last 2 weeks or so?

Yes. What's really important here is that both GE -- when we say no disruption in consumables, that's no disruption in sales of consumables to end customers. We need to -- both companies need to ensure continuity of supply so that they can continue their clinical practice and their high-level disinfection requirements. So both companies are diligently working together to ensure that, that does happen. We don't see -- foresee any disruption in the ability to be able to supply either through us or either through GE. It's a transition process. It's not like it just sold switches overnight. GE have inventory of consumables, probably enough consumables to keep them going through a period of this half. And indeed, if the full transition isn't complete, after they've consumed those, they may need to purchase more if everything has been transitioned. But the general principle is really from a customer experience perspective to make sure both companies ensure the continuity of supply, and we're confident with that. them going through a period of this half. And indeed, if the full transition isn't complete, after they've consumed those, they may need to purchase more if everything has been transitioned. But the general principle is really from a customer experience perspective to make sure both companies ensure the continuity of supply, and we're confident with that.

Can I just follow up on that? In terms of the stock that GE is currently holding, can you give us a sense of how much stock they currently have, which is yet to be sold? Because on the previous call, you stressed a lot of confidence that destocking with GE won't impact FY '23 sales, given the revision in the sales model. But do you still hold that view today, particularly given how strong capital sales has been over the period with GE, again, accounting for 53% of that?

Yes. No. What I said on the last call when we announced the revised is there is an impact, that there's a $13 million to $16 million impact that will come through in this half, and that is really associated with that destocking and where they're consuming their inventory of consumables, but they're not replenishing. So normally, they will just be continually replenishing their inventory, keeping their safety stock at a high -- at the proper levels. So there is going to be an impact on revenue, to be clear, associated with that destocking.

Got it. But no impact, no carryover impact into '23. Is that right?

Correct. Correct. Then from '23, one thing that's going to be quite good about this is the revenue that is recognized then will be almost one-to-one equivalent to the revenue, the sales that are to end customers. So there won't be that sort of inventory, those inventory impacts that have always been there in the past.

Your next question comes from John Copley from E&P.

First off, I just wanted to follow on from the last set and just to round off my understanding on one of the key issues here. So are we to understand then that from FY '23, GE -- sorry, Nanosonics will be able to meet all of the demand previously serviced by GEIs that the upshot of what has been discussed today or weeks ago?

Correct. All the customer demand, yes.

All right. Excellent. Then the other question was still on the GE side of things. You said, over time, you expect NAN will see an uplift in the installed base. So in other words, growth in revenue, growth in the installed base and also an increase in margin. So is that expectation impacted, and how is it impacted, by whether or not a pass-through sale agreement can be struck with GE?

I don't -- it's not overly impacted as to whether or not the pass-through sales will go through GE or not. Our intention by increasing the sales infrastructure that we have is we'll be able to return to that pre-COVID 2,800 to 3,000 new installed base number per annum, and we're comfortable and confident that based on the market demand and the infrastructure that we'll have in place, we'll be able to achieve that. Just to go back to your first point with respect to the increase in revenue. Because -- where that's coming from is because more of the capital units now, both for new installed base as well as for upgrades, are expected to come through the Nanosonics direct channel, then we get the corresponding margin improvement on that as well because GE won't be selling it, and we'll be selling it at a higher ASP than what we had been selling it to GE at.

Okay. And are you able to quantify any of that margin benefit?

So on an upgrade, you can imagine it could be somewhere in the order of $1,500 to $2,000 and similarly on a new installed base. So there's probably almost a $2,000 uplift per unit, whether it's new IB or upgrades that will be coming towards NAN.

Okay. And sorry, perhaps I should just clarify. What about in terms of gross margin in percentage terms?

Well, the gross margin percentage will increase as a result of the increase in price. The gross margins, we've always talked about capital sales being a gross margin of around about sort of mid-60s percent. So that will most likely increase to something slightly over 70%.

Okay. And look, final one for me, just on your OpEx and gross margin guidance. So probably a 2-part question here. In terms of gross margin, you're guiding now to 75% for the year. Previously, I think that was greater than 75%. Can you just confirm whether I'm correct there in that thinking and whether that implies then a gross margin second half, obviously, under 75%? Is that the expectation? And the other side to that is on the OpEx front. The previous guidance was $90 million. Then it was stated 2 weeks ago that there was an additional $1 million expected. So that brought us to $90 million. But now this has increased again to $93 million. So can you just let us know where that additional $2 million has come from and whether it will be one-off or we should capitalize that going forward?

Yes. Sure. Just on the OpEx question. Yes, there's a couple of things there. So FX is having a bit of an impact on our OpEx numbers that's working against us. And we have previously guided around the sort of $90 million, $91 million. So when you take into account the extra million we've talked about and the effect of FX in that, there really isn't anything else that's increasing OpEx. And the first part of your question, just remind me again, John.

Gross margin.

Gross margin. Yes. Yes, we did talk about it being over 75%. We weren't talking about it being 78%. We were talking just over 75%. So 75% is where the number will land on a full year basis. The impact of margin, the impact -- the things that are impacting margin will be in the second half is to do with the reduced sales we've talked about. It's also to do with the ongoing increased costs around freight, and our production volumes will be slightly impacted, and so we'll see slightly different recovery outcomes, and component costs have increased a little bit as well. So a combination of all of those factors are having a sort of around about 75% for the full year.

Your next question comes from Josh Kannourakis from Barrenjoey.

Sorry. I just wanted to have a quick follow-up. Just with regard to the GE arrangement. So in terms of the customers, one -- I guess one key concern from people has been around you getting access to the individual customers. In terms of looking at the upgrades. If the service agreements are there in place, and there's a number of these units for the past 7 years, will you then take over some of the service arrangements? And does that point of communication, I guess, enable you guys to sort of force or at least bring forward some of those upgrades in the market?

No. I think the service continues. Currently, it will continue with GE, so they'll continue to provide service, and we'll still be able to provide the necessary service parts to see out those contracts. As is customary, what generally happens is as units age and then as they come up towards the end of a service contract, well, then that's when there really a big opportunity to upgrade. Obviously, when we are in direct talking to these customers, we'll understand where they are, if they do have a service contract, where they are in that cycle of that service contract, and then we can be able to push the upgrades at that stage.

Got it. And just a bit point of clarification in terms of the unit pricing that you mentioned. The uplift on the 1,500 to 2,000, that's U.S. dollars, I think, is it not Aussie?

Correct. Correct.

Your next question comes from John Hester from Bell Potter.

Michael, just a quick update, if you would, please, on Japan. You normally talk about that extensively. Where is that market development at?

Yes, John. We are continuing to work with the various societies. Unfortunately, the last 6 months, Japan has been in a state of emergency, so most things have been in lockdown. Pretty much every conference that was scheduled after has been canceled, but we are still being able to continue to engage with key opinion leaders. There are some guidelines that are coming out now where high-level different sections beginning to be mentioned. But we're very much looking forward to the markets opening up now in Japan and being able to get in there a lot more actively than we've been able to over the last 6 months. But we have built up our infrastructure up there as well in the last 6 months. We have put on some new head count to give us the reach both in sales and in clinical because education is critical up there. And so we're still confident in the opportunity in that market.

Okay. And just moving on, just talking about [ order piece ]. You sort of mentioned it briefly earlier in the call, and you said that various IT departments are getting involved and customer security assessment requests have been forthcoming. Can you just elaborate on those comments? But how many clients are you talking to about AuditPro at the moment? I'm just sort of trying to get a sense of whether we should be sort of building in a revenue expectation for FY '23 here.

Yes. Look, we'd like to see revenue certainly coming in, in FY '23. As far as the pipeline for the product is certainly in the hundreds and every day they're out of... [Audio Gap]

This is the operator. We have temporarily lost our speakers. Please hold, and we will get them back on the line. [Technical Difficulty] We now have your speakers back on the line. Your question is from John Hester from Bell Potter.

John, are you still there?

Your next question is from Mathieu Chevrier from Citi.

Just had a quick one with regards to upgrades. Have you encountered customers who've decided not to upgrade or to no longer use trophon for any reason?

Not no longer use trophon. Some of the ones that we talk about upgrades, it's more about -- another situation of not wanting to upgrade is about getting into the budget cycle. So we're confident that we can ultimately continue to grow the upgrade pool. It's just a matter of those customers ensuring that they've got the necessary funds built into their budget.

Yes. Understood. And just whilst we're on that topic, what are you seeing from competitors? Are you seeing anything new? I mean it's already been a few years now that this product has been launched, as you said, and you're going through an upgrade cycle now. Have you seen new competitors come along or anything to...

The competitive landscape really hasn't changed for many, many years across the different markets. So there's no new products per se that exist, that have not existed for many years. So that environment really hasn't changed.

Yes. Okay. And just finally, in terms of AuditPro, I guess John was trying to ask a question earlier. Perhaps what proportion of upgrade sales do you expect will include AuditPro? Is that something you're trying to tag along the upgrades? And in terms of dollars, what could it look like relative to consumers?

Yes. We're not directly linking AuditPro with the upgrade. It's sort of a stand-alone product, in and of itself, that certainly you require trophon2. When we're talking to customers about AuditPro, and they -- once they understand the benefits of it, if they are using EPR, well, then, obviously, we've got to talk about upgrades to those customers. But at the moment, we're not really joining both of those products together. The overall opportunity for AuditPro, however, it should be -- it's almost -- you should look at it like it's an ultrasound product rather than as a trophon product in that the AuditPro is designed to capture the data associated with every ultrasound procedure and capture the information as to whether or not that probe requires to be low-level disinfected, high-level disinfected, sterilized, et cetera. So in one sense, it should exist beside every ultrasound console as opposed to thinking about it as being beside every trophon. So it's really more an ultrasound product. That's how we're thinking about this. And therefore, over time, when you think of the volume of ultrasound consoles that are out in the marketplace, the ultimate opportunity for a product like AuditPro is actually quite large.

Yes. And in terms of the competitive landscape for that specific product, what does it look like?

There are quite a number of different track-and-trace-type systems that exist out in the marketplace for instrument decontamination. Not that many -- nothing really relevant in the ultrasound space and nothing really that has an in-built compliance and education component associated with it as well because what AuditPro does is, as I've mentioned before on previous calls and in previous presentations, there are over about 150 different ultrasound procedures that confer semi-critical status on a probe. What that means is if semi-critical status is conferred on a probe, then it should be high-level disinfected. So what AuditPro does is it, in one sense, ensures that infection prevention requirements are a forethought rather than an afterthought in that the customer actually has to choose when -- knowing the procedures they're about to carry out, they have to choose whether that procedure is critical, semi-critical or noncritical. And then depending on what's chosen, if it's semi-critical or critical and they choose that, well, then it automatically links in the cloud to an associated trophon cycle, and all that data then is centralized and which enables the customers to actually analyze and look at the data in real time from a compliance perspective.

Your next question comes from [ Neri Gross ], private investor.

It's [ Neri Gross ] here. I'm a shareholder. Just a question about -- you said you were moving to Macquarie Park precinct, and you're doing R&D expansion in the areas of microbiology, chemistry, engineering. Just wondering if you could talk a little bit more about that, what you're actually going to be researching.

Yes, [ Neri ]. The -- so when the organization started, it was over in a number of small units in Alexandria, and then just over 5 years ago, we outgrew that and moved over here to where we are today in Lane Cove, which is in the old Cochlear global headquarters. And 5 years later, we've outgrown that from an expansion perspective and have now taken 2 buildings over in the Macquarie precinct on Waterloo Road and Talavera Road. And the expansion that we're doing is not just from a head count but in terms of the capacity with our laboratory size across microbiology and chemistry and all the engineering laboratories. We're going about a threefold increase in the actual capacity for -- in those laboratories, which then enables us to continue to expand our R&D efforts over time.

Can you hear me?

Yes. Yes.

Okay. I was just wondering what you were going to be researching in microbiology, chemistry, engineering.

I guess they're interrelated disciplines. So the areas that we've discussed in the past, our primary areas of focus, are around instrument cleaning, instrument decontamination, storage solutions, environmental decontamination and there's a whole data and traceability components as well of infection prevention.

Okay. So it's all related to trophon-type stuff.

Not necessarily. Trophon, in one sense, and that is an instrument decontamination unit, but like Coris is a totally new technology platform that's not related to trophon at all. So it may leverage some of the research, may leverage some of the fundamental IP that we have in some of our existing technologies or it might be around generating new IP. Okay. I think we're on the hour, so I will call it there. And I thank you all again very much for attending the call, and we'll continue to -- hopefully continue to grow internationally with both trophon as well as expanding our portfolio. So thank you all very much.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.