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

Good day, and thank you for standing by. Welcome to the telephone conference in conjunction with RaySearch's Interim Report for Q3 2021. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Johan Lof. Please go ahead.

Thank you. Good afternoon, and welcome to RaySearch earnings conference call for the third quarter of 2021. My name is Johan Lof and I'm the CEO and Founder of RaySearch. With me, I have our CFO, Peter Thysell. And together, we'll try to answer any questions that you may have after my presentation. I will start by giving a brief overview of our third quarter. The COVID-19 pandemic had a negative effect impact on RaySearch also in Q2. Market conditions remain challenging in Europe and North America, while the market situation improved in Asia. In the third quarter of 2021, our order intake was SEK 128 billion, representing an 8% decline year-over-year. However, our net sales increased 15% to SEK 136 million. The change is mainly explained by a 37% increase in license revenues. In addition, our recurring support revenues rose 12% and accounted for 49% of our net sales. However, because of increased operating expenses, our operating profit amounted to minus SEK 22 million, corresponding to an operating margin of minus 19%. Our cash flow was minus SEK 10 million in the third quarter, mainly due to investments in our new headquarters in Stockholm. We are now increasing our sales activities. For example, we participated in ESTRO in Madrid, in August and ASTRO in Chicago in October. Historically, these trade fairs have been important for our sales. So it's uncertain how long the pandemic will have a negative impact on our revenues. Going forward, we will focus even more on our costs. For example, our travel expenses will be significantly reduced by holding merchant meetings with customers and partners, whenever this is a good alternative to physical meetings. In a normal year, RaySearch will participate in about 160 market events all over the world. Going forward, we will reduce our participation in trade fairs and focus more on virtual marketing events. Moreover, until the effects of the pandemic subside, we will not engage consultants or recruit any new employees. Despite these actions, our operating expenses will increase year-over-year in the short term, mainly because several product launches during the past year have resulted in increased depreciation. Therefore, we expect our profitability to remain under pressure before sales return to normal and the cost savings take effect. The ongoing pandemic has caused significant challenges for RaySearch. But we still believe strongly in our strategy for comprehensive cancer care, and we will continue our important product expansion and investment in our product portfolio. At the end of last year, we launched 2 new products, RayIntelligence and RayCommand. RayIntelligence is our platform for data-driven oncology and machine learning. This Software as a Service platform is fully integrated with both RayStation and RayCare, and it enables cancer centers to consolidate, structure and search data to individualize treatment protocols and hopefully improve patient outcomes. RayIntelligence is our first system that is only available via annual subscription. This allows customers to pay on an annual basis and avoid a substantial initial investment. Then RayCommand is our treatment control system, which offers unified management and control of the main systems in the regular therapy treatment creme, such as the treatment machine, treatment couch, imaging systems and patient positioning devices. Going to ensure safe and effective treatment delivery by offering a more consistent user experience and a more efficient workflow regardless of the type of treatment machine. The development of RayStation and RayCare also continues at a fast pace. One of the main use for RayStation is that we have introduced support for Accuray's Cyberknife machine. We already supported TomoTherapy and Radixact machines and thereby RayStation provides complete support for the entire suite of Accuray machines. The focus for RayCare has been improved workflows and integration of RayCare with various treatment devices. One of the most important new features in RayCare 5B, which is scheduled for release next month, is that users will be able to configure their workflows on their own, something that previously required assistance from RaySearch. This will make it much easier for cancer centers to implement and a back to RayCare to specific ways of working without the help from RaySearch. Another important area is the integration of RayCare with various treatment devices, 1 of the key features of an oncology information system. For example, in October, a first patient was treated with Accuray's Radixact device combined with RayCare at the clinic in Switzerland. Regarding the integration with the Varian TrueBeam, the work with Varian has intensified during the fall. When Varian release a new version of TrueBeam, the TrueBeam software that is elevation tests are planned. RaySearch primary clinical partner in this testing will be Iridium Network enhancer in Belgium. After a successful validation, Iridium plans to connect RayCare to all of the TrueBeam machines and to transition to RayCare as their only oncology information system. TrueBeam paid away for other clinics. We're interested in RayCare and we have been waiting for interoperability with variants TrueBeam to be validated. Because of the large number of undiagnosed cancer cases during the pandemic there will be a surge in new cases post COVID. That means that clinics will need to treat more patients per day with the same resources, efficient resource utilization in CancerCare long in focus area for RaySearch. Our software enables fast and automated preparation of treatment plans. It also shortens treatment duration while retaining treatment quality and provides more efficient scheduling of the treatment machines and health professionals. It's RaySearch mission to show cancer clinics, large and small, how they can improve their activities through software-driven innovation. A strategy that will ultimately deliver workflow efficiencies by giving more patients access to the best possible cancer care. With our product portfolio, our stable and loyal customer base and a very strong team. We have every opportunity to succeed in both existing and new markets. This concludes my presentation. Peter and I are now ready to answer your questions.

[Operator Instructions] We have a question from the line of Kristofer Liljeberg, Carnegie.

It's Kristofer Liljeberg from Carnegie. Three questions. First, could you maybe explain a little bit more how you see demand here following the pandemic. You said in the report that you still expect a negative impact short term to see any sort of COVID improvements because if I hear from some of your competitors, maybe are a bit cautious on sales near term, but seem able optimistic when it comes to orders. So what do you see there? And then my second question relates to the cost savings. Is it possible to quantify them in any way? If you could discover how we should think about operating costs in 2022 versus 2021? And then I wonder, when it comes to cash flow, will there be any large investments additional investments in the new offices here in the coming quarters?

Okay. Thank you, Kristofer. The first question regarding demand. We see, obviously, Asia has recovered quite well. I would say there's a lot of activities going on there. And also from a revenue perspective, it is our strongest market right now. Used to be our weakest, now it's our strongest. We see much more optimism in North America. There are more the sales activities, we get to visit some hospitals, still not all of them, but more hospitals than before. We had the ESTRO Conference in Chicago that has been virtual lately. Unfortunately, Sweden were not allowed to go there. But now that ban has been lifted, we will be able to travel during the rest of the year to the United States. So I think the pipeline is much more active now, if you will. It's hard to say when exactly all of this will be converted to orders. Overall, during this whole pandemic, we haven't really lost any orders that they have been postponed over and over again. It's quite obvious that when a hospital is completely absorbed by treating corona patients. They don't have the resources. We really focus on that and then we won't make investments in new software. I think there is an important difference between us and, for example, the net manufacturers in that software so to say, last forever. You don't -- if you have a working, let's say, treatment planning system, you can continue to use it. There is as opposed to a linac, which has a certain period of -- after which it has to be decommissioned and replaced. So it's really a consumable even though it's a long time consumable. So there is a difference there. But we really see already some really positive signs. I would say the rate markets, Asia, strongest, the U.S. is coming next and Europe is coming last, I would say, in that order. But for sure, I mean this at some point, the pandemic will go away and then the market will open up in all of these orders that haven't come in will come back. It's not a way. This is a matter of when it will happen. I personally hope that it will happen sometime during 2022. And then there was a question about cost savings. It's hard to quantify. We, of course, we have quantified it internally, but we haven't communicated these numbers. Some things can be if you can model yourself in terms of the depreciation, it's quite easy to think all of the necessary information is public to be able to do that calculation. If you look at selling expenses, they will -- thanks to quite drastic cost cuts will be able to keep those flat, which is sounds like a contradiction that will be able to keep those flat for from 2021 to 2022. But of course, the reason why they only become flat and not reduced is that we compared to 2021, we will have a lot of sales activities in 1 way or the other during 2022. And that's obviously, a necessity to be able to -- when the markets open up, we want to sell our systems. We will do it in different ways so that we can still maintain the relatively low cost that we had during 2021 for sales because there were basically no marketing activities that will not travel at all in 2021. And in terms of large investments, most of these investments have will be -- have been done and will be done during the 2021. So no significant big investments are planned for 2022.

Sure. And the new offices that -- does it come with higher cost or lower cost? If I remember correctly, they are lower than the previous ones or the current ones.

Yes, there are. We'll sublease quite a lot of space to other companies. so that we can call back in the future when we need to expand, but...

Yes, Kristofer. Peter here. The new offices is more than double the size, but then again, the square meter rent is about half. So all in all, the total rent goes up, but we will have an opportunity to sometime during 2022 find areas that we can sublease to someone until we expand into that part of the office. But all in all, we hope that we can keep the rent at a similar level in 2022 that in 2021, at least by the second quarter -- second half of 2022, we will be at some same level as 2021.

And we have our next question comes from the line of Ilja Ivanov from Avaron.

Can you hear me?

We can hear you.

I have 2. The first 1 is can you maybe discuss the feedback you got from the ESTRO and ASTRO, [ please ].

Okay. I hope you had several.

I have other one.

Okay. That's good. We had very positive feedback, both in ESTRO and ASTRO. And it's always such a boost for us to go to these trade shows. Because when we -- it's been very tough year or period for us. But when we meet the customers, they -- that's when we always get extremely good freedom because they are so enthusiastic and happy with everything that we do. So that's just a fantastic energy boost for us to meet with customers and interact with them. So we are completely reenergized just thanks to these 2 conferences. But this will, of course, increase during 2022. So we really lack -- we have really missed that contact. So very positive in terms of the -- in terms of RaySearch can you get positive feedback. People are excited. This integration with the TrueBeam, which is the most common machine for Varian, Varian is the biggest linac vendor, of course. It's a huge step for RayCare. And when we have a clinic that is treating -- we're using RayStation RayCare and TrueBeam that will open up doors to other linac vendors, obviously, because then we have an extremely strong example of how this integration can go forward. And also customers have an alternative when they go to tender, and they want to have RayCare. They can just decide to choose on the machines. They can chose machines from Accuray or the Varian that are integrated with RayCare. So it can be a disadvantage for a linac vendor that hasn't opened up into Phase 2 to RayCare. So that's something that we get good feedback on. RayIntelligence, this was the first time we show RayIntelligence in trade shows and people are very excited about RayIntelligence. We showed online adaptive together with Accuray in Chicago, and that was also very well received, I would say. So all in all, very positive.

And if you compare it to, let's say, pre-COVID times, lead amount or the not potential deals with the same attribute phase or it's level than that?

Sorry, I didn't hear the question. Can you please repeat?

So if you compare the current let's say, potential leads in got from the fair for potential new contracts because compare well with the pre COVID times? Or is there something structure you have changed?

Okay. So it's less in this road because attendance is still very much down this ESTRO was like 1/3 of the usual number of participants and similar to ASTRO. So there's less activity, but it's a huge increase from nothing. But so yes, the simple answer to that compared to a normal year. It's -- we have -- we get less leads from -- there are less demonstrations because there are less people there. But yes, that's a simple answer to that question.

And then my second question would be on the -- you mentioned that how fares and exhibitions and face-to-face are important to think about. But at the same time, we are pulling back on sales ending on costs, especially in sales traveling face-to-face meetings. And it's just a little bit confusing as the world starts to reopen, and we're pulling back at the same time. Is there a structural reason for that? Or why now on that way now?

Yes. Again, I didn't completely hear the question to end. But we will have more face-to-face meetings, but we can still do it in a much more careful way. For example, is for customers and partners that we have met with several times and know well. It's not as important to have a face-to-face meeting, when it's the first time we meet the customer, it's good to have a face-to-face meeting. So we have a much more -- we can be much more careful with when we need to travel. So we've been much more selective in that -- in those choices. And in addition to that, we have become much, much better at virtual demonstrations and virtual meetings. And not only like everyone with FaceTime and Zoom, et cetera, we also have a studio so we can have a more, let's say, exciting presentation in a much more professional way than just rectangles on the screen. It's more like, let's say, I wouldn't say talk show, but it's a more interactive and more professional experience. So we worked -- so now these virtual meetings are a much stronger alternative to a face-to-face meeting. But then it was before the pandemic. So we can rely more on those. But if you want to initiate relationship, I think you have to build trust, you have to have a face-to-face meeting early in that process. We can still overall reduce the travel very, very much, and that's our intention.

And [indiscernible] consultant, is that also a temporary or something immediate which will go on for the longer term?

Yes, it will for sure, consultants will revolve almost completely for I'll say, for the entire future of RaySearch because except for very special circumstances, we will not hire or rely on consultants going forward. And in terms of recruitment, we will not re-recruit new employees. I mean there is a natural turnover as well and with our employees, we are staffed. And the source of the staff will over time, over 2022 decrease. And so we'll keep it like that for, until we have a stable a more stable revenue situation, a more stable normal market, then we can see what needs to be done. Of course, this is a good experience for us also to try to do the same things with a bit less staff.So I think it could be an opportunity for us to become more efficient overall. So I think -- I mean we will try to see the positive -- take the positives out of this situation and see if we can come much -- and I'm sure we will become much stronger out of this when things are back to normal with a more efficient organization and more efficient ways of working. And then, of course, when the revenues come, then we -- it's going to be a very good time for RaySearch.

There are no further questions on the line, sir.

All right. Thank you very much. Have a good day, everyone. Bye-bye.

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