RaySearch Laboratories AB (publ) (RAYB) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to today's telephone conference in conjunction with RaySearch's Q2 Report 2020. [Operator Instructions] I must advise you that this conference is being recorded today, Wednesday, the 26th of August 2020. I would now like to hand the conference over to your speaker today, Johan Löf. Please go ahead, sir.

Thank you very much. Good afternoon, and welcome to RaySearch Earnings Conference Call for the Second Quarter of 2020. My name is Johan Löf, and I'm the CEO and Founder of RaySearch. I have here with me our CFO, Peter Thysell. And together, we'll try to answer any questions that you may have after my presentation. So I will start by giving an overview of our second quarter. The COVID-19 pandemic has led to a temporary shift of focus of health care organizations all over the world, which in turn has resulted in a lower demand for RaySearch products in the second quarter of 2020. Market conditions were quite challenging in North America, while we noted a recovery in the Asian market. In the second quarter, net sales amounted to SEK 164 million, which represents a 14% decline year-on-year. We have taken measures to reduce our selling expenses, but due to the lower license sales, our operating profit declined to minus SEK 11 million compared to 29 -- plus SEK 29 million previous year. This means an operating margin of minus 7% compared to plus 15%. The operating profit was negatively affected by currency conversion effects. And adjusted for these, the operating profit would have been plus SEK 16 million compared to SEK 25 million. So in reality, a less dramatic decline. Despite challenging market conditions, the cash flow was strong and amounted to SEK 66 million in the second quarter compared to SEK 4 million. The COVID-19 pandemic is affecting people and companies all over the world. As a software company, RaySearch is well equipped for remote collaboration, and both our research and development activities as well as our delivery capacity have remained relatively unaffected by the pandemic to date. However, the extraordinary measures taken by governments and authorities to prevent the spread of the virus have made it difficult to drive sales and marketing campaigns. Instead, RaySearch has mainly conducted training and marketing via digital channels. As a result, in the wake of the pandemic, we have developed new methodologies for reaching out to customers that will also be useful going forward. The future effects of the ongoing pandemic are difficult to assess at present. Several countries have started to reopen, but it is still difficult to say how the pandemic will evolve. We expect that the pandemic will continue to have a significantly negative effect on the company's sales and earnings for several months to come. RaySearch is monitoring the situation and the effects of the pandemic closely and is prepared to take action and align the company's operations, if needed. Despite the short-term challenges, we remain optimistic about the future. The underlying need for efficient software solutions for cancer care remains unchanged. And obviously, all cancer patients still need to be treated. We, therefore, believe that the market conditions will get back to normal when the pandemic is under control again. One effect of the pandemic could be a further acceleration of the ongoing digital transformation. The pandemic has clearly shown the major potential and benefits of digital technology. This could be positive for RaySearch operations in the longer term because the company's software solutions make it possible for cancer centers to increase their efficiency. This has been illustrated by cancer centers such as Mälarsjukhuset in Eskilstuna, Sweden; and Leeds Cancer Center in the U.K., which quickly achieved dramatic time savings by using our machine learning algorithms for tumor contouring. Our products have thereby helped to reduce the effects of the current resource shortage, which has also been worsened by COVID-19. RaySearch's long-term strategy remains, and our high pace of innovation will continue. RayStation and RayCare are already the market's leading systems for simplifying and streamlining the highly complex workflows of cancer centers, and we are determined to increase that lead. More and more cancer centers are now introducing RayCare for clinical use. And in May, we achieved a very important milestone by signing an interoperability agreement with Varian to connect RayCare with Varian's TrueBeam linear accelerator. Interoperability with Varian's TrueBeam will significantly increase the market potential of RayCare while improving the workflow of our existing customers. The development of RayCommand, our treatment control system; and RayIntelligence, which is a system for analytics and machine learning, are both progressing according to plan. Both will have commercial launches in December 2020. Our teams are also developing tools to support surgeons when planning surgical procedures to remove tumors and to support the processes in the operating room. In the long term, our goal is that RayStation and RayCare will form a single system for planning, optimizing and managing comprehensive cancer care within a range of treatment modalities, medical oncology, surgical oncology and radiation oncology. Overall, we see both challenges and opportunities, even though we're currently living in a turbulent time due to the ongoing pandemic. This concludes my presentation. Peter and I are now ready to answer your questions.

[Operator Instructions] Your first question comes from the line of Kristofer Liljeberg from Carnegie.

When it comes to the order situation and customer demand, have you seen any improvement when it comes to interacting with customers for new deals during the quarter so that the situation might be better now than when the quarter started? And related to this also, do you think it's fair to assume the second quarter, what's the low point when it comes to sales and order? Or are you concerned the third quarter could be even worse?

Okay. The second question first. I think it's hard to say. It's hard to predict what will happen in Q3. We -- as we have expressed, we are concerned that COVID-19 can still have a significant impact. Regarding your first question, I think we see some improvements actually, regarding interaction with customers. For sure, in Asia, we see -- Asia has been very strong actually compared to all our other regions in Q2. We see signs in both North America and in Europe that the customers are starting to be more responsive. And in fact, I'm going on my first business trip for several months now next week to a customer in Europe or a potential customer. And that would have been unthinkable in May or June. So clearly, we feel that there are -- there is -- things are improving in that regard, although I think Europe seems to be improving quicker than the United States because they are having huge difficulties there.

And when it comes to the lower demand, hopefully temporary, do you see this mainly being an issue of practical -- more practical problems? Hospitals having had to focus on other items, you have travel restrictions, et cetera? Or is it also a factor of maybe not in Europe and in the U.S., that hospitals are stopping investments due to financial difficulties?

Yes. That is the [ nature ] that -- all the practicalities that we mentioned, but there are -- in some cases, there are budget freezes. They just don't -- it doesn't mean they don't want to open up the budget when things get back to normal because obviously, they need these systems. They probably need these systems to an even larger extent now when there will be built-up demand where many cancer patients that don't show up to -- they don't have their cancers diagnosed. And obviously, there are as many -- should be as many new cases this quarter, last quarter as compared to the same quarters previous years. And because these are pretty stable numbers, the number of new cancer cases every year in every region. And this means that we have anecdotal stories from customers in Europe, for instance, where they see now patients coming in with cancer and their tumors are like bigger than they have ever seen. So -- and that's a sign of this, that people are just delaying their visit to the hospital to get whatever problem they have investigated. And this -- what it means in the long run is that when things normalize, we should have at least the same. For some time, it could even be an increased demand to handle all the buildup based on number of cases of patients that have to be treated. There is no choice, we have to treat them regardless. And I think our software, that to a very large extent, focus on efficiency. That's one of the main themes for our various products, is that it allows centers to treat more patients per day in various ways. So it's just a matter of time. This demand will come back for sure. The question is just, when.

And your comment about Europe seem to improve quicker than the U.S. Is that because of the budget issues among U.S. hospitals? So more about the number of virus cases?

COVID in general, is more under control in Europe than...

Your next question comes from the line of Kirill Kutakov from Avaron Asset Management.

I have 2 questions. So first of all, could you please specify how you are revamping the go-to-market strategy in the current situation? You've mentioned this in your talk and the report as well, but could you please provide some details on this?

Yes. We -- in general, we attend more than 150 conferences, trade shows around the world. There are 4 major conferences that we have a big presence at. Basically, all of these conferences have been canceled or postponed, and several of them have been converted to virtual conferences. So that's one way, is that we participate in these virtual conferences where customers can in a similar way, that's not as efficient, but in a similar way as they go into the conference hall, visit -- they go through the conference hall and they go to booth and they schedule a demonstration of the system. The customers can schedule these demonstrations online instead. So we -- during the summer, instead of AAPM, that was -- should have been in July in the United States, for instance, we did a lot of demonstrations for customers online. And that works quite well, given the -- how the system works. We can do those demonstrations quite efficiently. And the message comes across. We do a lot of training online. So we have classrooms in California, in New York and in Stockholm. Customers don't want to -- can't travel here so we provide training classes online instead, and that has turned out to be much more popular than we had expected. And I think this will be more common going forward, that -- because sometimes, the clinical staff, is a big hassle for them to leave the hospital for several days to attend a class. So if they can do it, they can do this much more efficiently by if we give the classes online. So I'm not saying the regular classes will go away completely, but I think it will be complemented to a very large degree by these virtual classes. And then regarding sales processes, we interact with the customers via phone, Teams or there is technologies, Zoom, et cetera, to have discussions, to have meetings and also demonstrations. But as I mentioned in my answer to Kristofer, now -- exactly now, we start to see, especially clinics in Europe opening up to visits as well, physical visits. Obviously, it's going to be very interesting in the future to see how -- I think it will be more common with virtual meetings with the customers than before. But especially for the initial contact, I think it's -- yes, it's much better if you can visit in person than if you just have a conference call or a virtual demonstration.

Okay. I see. And historically, did you quantify what share of your new orders comes from contacts obtained via conferences, for example? Or it's not quantified?

No, it's not quantified. And it's not -- we follow this, of course, internally, but it's not public information.

All right. Fair enough. And then another question I have is, say, what sort of actions do you talk about when thinking about the scenario where sales and orders take longer than expected to recover? So this was also mentioned in the report, and I was curious to hear what sort of cost-cutting measures or reorganizations you are potentially considering as a fallback scenario.

So luckily, so far, the -- we have had tremendous cost cuts by -- I mean it is both good and evil at the same time, that the trade -- of course, we need the trade shows. So it's not great, obviously, that they are being canceled or turned into virtual equivalents. But the not being physically present on those with big teams have led to huge cost cuts and also all the traveling associated with those shows. So that has led to a natural cost reduction. Another thing that we do now when we monitor how the situation evolves is that we postpone, and we very carefully recruit new people. So there have been a number of -- quite a large number of delayed recruitments, where we want to see how things pan out before we take on more people. Obviously, if this situation gets much worse, if something unpredictable happens, we have to act accordingly. And in the end, the last resort, we will have to reduce our organization to adapt to the situation, but I should say that we are very far from that situation. So far, we have very good cash flow and good liquidity. And we -- it's very good that we see that some markets are coming back. Asia is really coming back and we have a lot of new customers in China this quarter, which is very pleasing. And as I mentioned, signs that Europe is coming back a little bit. I think if nothing new happens like a huge second wave or something unpredictable like that happens, we should go back to normal step by step. It may take a year, it may take 2 years, but if it doesn't get worse than this, then I think we don't have to resort to very drastic measures. We can just -- yes, stick to our plan and just be very conservative when it comes to adding new people.

All right. I see. And finally, I wanted to talk about the new product that you mentioned, your RayIntelligence. So a little bit of -- I'm a little curious about what sort of potential you see for it in the market? And how does it fit into your other, say, product family? What are your expectations with regards to when it will be launched and how you will be marketing it?

We see already that -- it is a complement to all our other products, especially to RayStation and RayCare, also RayCommand down the line, but that's a more -- much more narrow product in a sense. But if you talk about RayStation, the treatment planning system, and RayCare, what RayIntelligence will do -- RayIntelligence consists of 3 products: Ray-Data, RayAnalytics and RayMachine. And what Ray-Data is doing is that it is extracting all data from everything that happens within RayStation and within RayCare. Everything that is related to the treatment planning of the patient, all the diagnostic data, and from RayCare, everything that's been done to the patient in terms of workflow, administering of drugs and radiotherapy and follow-up. All of this data is sort of sucked out of the -- extracted from RayStation, RayCare, and later on, RayCommand into Ray-Data, which is a big -- huge repository where you can store everything and also index everything. Then RayAnalytics is a way to provides means to visualize the data, to see connections and look at population data because if you talk about RayStation, it deals with 1 patient at a time. But with RayAnalytics, you can extract data covering, let's say, just the size of prostate tumors, over 2,000 patients. And you can -- with RayAnalytics, you can have that data at your fingertips and you can look at it and understand connections. And then RayMachine can -- based on all of that structured data, can create machine learning models that are used to drive machine learning algorithms within RayStation and RayCare. And we see already that it's a huge -- we have several of our clinical partners that use already prototypes or early versions of RayIntelligence to work on -- to do real research. And they are extremely happy with the ability to look at huge amounts of data in a seamless fashion. So it's a necessary complement. It's not -- to unleash the full power of both RayStation and RayCare. So RayCare was built from the beginning as a machine learning system that will learn from past experience on how we treat patients to improve methods and protocols. And for that to be possible, RayIntelligence is a necessary component. So to say, I can't say now what the -- in numbers, what the market potential is for RayIntelligence. But it's both an enabler of both RayStation and RayCare to be what those systems should be. But it's a viable product in itself that, of course, creates a revenue stream for RaySearch. I hope that clarifies the picture. I can, unfortunately, not give you numbers, but I can tell you that this is -- given also that the whole field is moving into a more scientific, more machine learning era, these systems are -- yes, required for this to happen.

Okay. I just have 2 follow-ups. So it does sound like RayIntelligence is more of a product for big clinics with the RayAnalytics being a big part of it. But say, when you extract data, do you pull this data from all of the customers? Or is it customer specific? So the data is contained within their server and you cannot access it?

That's a very good question. Yes. Can I answer that first before you ask the next question?

Yes, yes. Sure, sure.

Yes. So we don't collect the data ourselves, but Ray-Data resides within the walls of the hospital or center or their virtual walls in the cloud. But they decide where the data should reside, but it's within Ray-Data. So we just make it possible to store this huge amount of data. The hospitals can -- with that being said, they can still collaborate across institutions and across countries and across continents. And the beauty with machine learning is that you can train models -- because hospitals are usually quite protective of their data, because that's where they -- that's their edge. And that's where they can get a competitive advantage and that's how they see their research and so on. So it has -- data has -- this sort of data has huge value. So they are quite protective, but they can still -- the beauty of machine learning is that the models that train on data can be trained on data without the data leaving the premises. So a machine learning model can -- so if a cluster of hospitals across the world decided to collaborate on a certain aspect in cancer care, the corresponding machine learning models can go from hospital to hospital and train on the data within the respective hospital. And the thing with machine learning models is that there is no -- you cannot deduct -- the identity and the structure of the actual patient data is lost in a machine learning model. So it's completely anonymized and so they can share without sharing the actual data. So that's the -- but that's outside, we can -- we just support that behavior, but it's not -- it is more of a political decision by the hospitals if they want to collaborate or not, but our infrastructure supports such collaboration.

Okay. So leading into my second question, your answer, I guess, clarifies this. So I was wondering whether the output of RayIntelligence would be the say, treatment model that can be shared within the Ray ecosystem and sold by larger hospitals to smaller hospitals. Like I remember, one of your team mentioning in some of our conversations. This especially, I think, applied to RayCare. Is this the direction that you plan to head to?

We are already there, actually. So we -- it affects not only RayCare, it affects also RayStation. So a very good example, we have a collaboration with MD Anderson in Houston. So we'll take their treatment protocols and their entire workflows for all cancers, head and neck, breast, prostate, lung, et cetera, et cetera. And those are -- will be -- those projects are running right now, and it will result in complete workflows that are viable options for both RayCare and RayStation. So a clinic in India can mimic the MD Anderson way of treating any cancer. So it will be like a step-by-step procedure. And it's so much information in such a protocol. It's exactly how you define the tumor, how you define the margins, how you -- which structures to include in the treatment plan. How much dose should be given to various areas? What was the maximum dose to other areas? And what's the quality assurance procedure, et cetera, et cetera, et cetera. All of that is embedded in a complete workflow. And this is extremely powerful, that we can spread the highest standards of care that are developed in these most advanced centers in the world, and they can be easily applied to a much smaller clinic with much less resources anywhere in the world. And RayCare, RayStation will be the vehicle of that and combined with RayIntelligence.

All right. This is clear. I guess I'm out of questions.

You have a follow-up question from the line of Kristofer Liljeberg.

It's regarding the RayCare agreement with Varian. Do you believe the current agreement, which is for TrueBeam, is enough to start driving more meaningful sales? Would you also need a broader agreement for other Varian machines?

No. This will be -- this is supported in itself. But I think it will then involve into other machines, other machine types as well. But this is their stronger selling machine, of course. It has a very big installed base. So it's an extremely good start.

The reason -- but I guess, most clinics have other machines as well. So that means you can't -- still can't rely only on RayCare.

Yes. There are quite a few clinics that have only TrueBeams within our installed base. So we start there, and then we can grow into other machines as well, expand the collaboration into other machine types as well.

So do you see hospitals then acquiring RayCare now for the TrueBeam machines and then hoping that the collaboration will be all Varian machines in the future?

Yes.

Okay. So you don't believe that hospitals want to see that agreement in place before ordering?

I think we -- RayCare is also useful even without any machine connection. We have RayCare...

Yes. I know. I know.

So it's still -- it's not like a binary situation like that. Given -- if so, then at least the clinics that are pure TrueBeam clinics, they -- TrueBeam clinics combined with IBA machine or an Accuray machine or some other combination, they are -- and that's already there. We have a good target -- the first target customers. We have to start-up there, and this is where we are now. That was still like a challenging -- it was a challenging situation and something we achieved. And now we have 2 years build on this and continue with other machines. And also other vendors, for instance, Elekta.

Yes, yes. And the fact that the combination now of Siemens Healthineers acquiring Varian, do you think that will have any impact on the timing of broadening the current agreement?

No, I don't think so. I think Varian's approach to -- from what has been communicated is supposed to be -- the company will run quite independently of the rest of Siemens as has been explained to me. So that will keep Varian pretty much intact. And so far, we have many -- our collaboration integration with RayCare and TrueBeam is proceeding exactly as before, even after the announcement of the Siemens deal.

Okay. Another question when it comes to cost and the expansion of the organization, which has been extensive in recent years. Now you're being more careful, of course, adding more people. So what do you need to see to start hiring again?

That the situation goes back to normal, and we can start to visit our customers. And from our point of view, it's very concrete. Take United States, there is a large number of discussions, ongoing projects that have been put on hold, so it doesn't mean that we lose anything. We are just -- we haven't lost any deal in that sense. So when those discussions restart and things are -- and we start to see the sales picking up again, then we can start to consider hiring those people that we need.

Your next question comes from the line of Matthew McNeill from Fiera Capital.

Most of them have been answered already, but I just have one. If you can talk about the interest that you're seeing for hosted versions of RayStation on a subscription basis and then whether or not that varies by region?

Okay. Yes. We see an increased demand of that, increased interest. And we have some deals like that already. Hosted and prescription, they can be unrelated because we can have -- the prescription is just the payment model. And the hosted or not hosted is -- help implement the system, and they can be combined in any way. But for some time, we have taken subscription orders and those are, I would say, increasing in popularity. It's both good and bad. It's good in the sense that the threshold to enter into a new hospital is lower, but it also delays the cash flow, of course. So yes, for us, it's quite good that both models coexist now and by far, the most -- the predominant model is the regular license and support fee model. By region, I would say hosted solutions is most asked for in the United States. We see very little of that elsewhere. Actually, we don't see it at all in Asia or Europe yet. So in these 2 regions, the hospitals still want to have their service on-premise, on-prem. We are supporting all of these different models. And of course, in the long run, a few years out, everything will be in the cloud. And that's -- it's just a matter of time.

And then as a follow-up -- a follow-up, if I may. When it comes to your pricing model for RayCare and then your new product launches for RayIntelligence and RayCommand, do you plan to have a subscription pricing offering as well?

Yes, yes. There will be subscription for all our products. The subscription option will be there for all products.

[Operator Instructions] At this time, you have no further questions. Please continue.

Okay. Thank you very much. I think we should then conclude this conference call. And I appreciate all questions, and wish you all a great day. Thank you. Take care. Bye-bye.

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