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

Hello, and welcome to the presentation of RaySearch Report for the Fourth Quarter and Year-End 2021. My name is Eva Nelson, and I'm the Corporate Communications Manager at RaySearch, and I will be the moderator here today. Joining us in today's call is Johan Lof, RaySearch Founder and CEO; and also our new CFO since November, Torbjorn Wingardh, who will be presenting his first quarterly report for RaySearch today. Johan and Torbjorn will give you a short summary of the quarter, and we will look into the financials and then there'll be some final remarks. After that, we open up for questions, which you can either ask orally in the call or submit in the text field here on the presentation. Let me also remind you that this session is recorded, and you can find it with the same link as you used for this call and soon, we will also publish it on our website. With that, I now hand over to you, Johan. Please, go ahead.

Thank you, Evan. And also, warm welcome to everyone from my side. As previously reported, the pandemic has had a negative effect on RaySearch sales. Therefore, I'm very happy to report that our order intake increased by 44% in the fourth quarter of 2021 compared to the same period last year. We could also see a clear positive trend in Asia, while market conditions in some European countries and in North America are still challenging. Our order backlog at the end of 2021 was almost SEK 1.4 billion, which is the highest ever. Based on this, and the improved market conditions, I'm confident that we have solid foundation for resuming growth during the year. Towards the end of last year, we could finally start to meet with our customers again. One example was in October when we participated in the ASTRO Annual Meeting in Chicago, which is the largest trade show in our field. We also arranged two major user meetings for our customers, one in Europe and one in the U.S. The European meeting was fully virtual, but the one in the U.S. was a hybrid with both physical and remote participants. During the quarter, we received several major orders. One of these was a RayStation order in China from a company called Lanzhou Ion Therapy Corporation for three new carbon ion centers. Carbon ion therapy is the most advanced form of radiation therapy. At the end of December, we signed an agreement with Proton International Arkansas, to provide RayStation at the University of Arkansas for Medical sciences Radiation Oncology Center. With this deal, RaySearch products are now present in 30 proton therapy centers in North America, and this is by far the majority of existing proton centers in this region. We also signed a collaboration agreement with a U.S.-based company, Mevion. Together with Mevion, we will develop the next-generation treatment planning techniques for proton radiotherapy treatment with FLASH, and that is something that will complement Mevion's advanced HYPERSCAN delivery system. Another important collaboration agreement during the quarter was the one that we signed with a Belgium company, IBA. We have collaborated with IBA since 2013. And this is the new agreement. This new agreement will further expand our partnership within proton therapy in the areas of flash, proton arc therapy and management of uncertainties in tumor position. I would also like to highlight two key milestones on the clinical side. The first one is that RayCare is now in clinical use with Accuray's Radixact machine at Swiss Medical Network in Switzerland. And the second one is that Heidelberg Ion Beam Therapy Center in Germany has treated their first patient using helium ion therapy with RayStation. And this is a true milestone as it is the first time in the world that helium ion treatment is used with the modern pencil-beam scanning technique. The center in Heidelberg will also -- is also about to initiate a large clinical trial in this field. As you know, we are a company with a strong R&D focus. During the pandemic, our priority was to maintain our strategically important product expansion, while at the same time, continue to develop our existing products. And in line with this development plan, we released RayStation 11B, RayCare 5B and RayCommand 2B in December last year. In RayStation 11B, we have implemented improvements for adaptive therapy and also tools for combined treatment such as brachytherapy combined with external radiotherapy. In addition, the new version of RayStation is the first treatment planning system on the market to support clinical evaluation of linear energy transfer, so-called LET, for protons and other ions. In RayCare 5B, the biggest news is that users cannot configure their own workflows, something that RaySearch previously had to help the clinics with. So that's easy for clinics to implement and configure RayCare themselves and thereby adapt the system to their specific ways of working. Another important area is the integration of RayCare with treatment machines as this is one of the key features of an oncology information system. The third delivery release that we did in December was RayCommand 2B. RayCommand is a treatment control system that coordinates the different systems involved in the treatment delivery such as imaging systems, beam delivery systems and the patient support system. In the latest version, we have implemented the functions that MedAustron, one of our first customers of the system, needs to be able to take the product into clinical use. And the plan is that MedAustron do this during the spring. The fourth product that we're working on is RayIntelligence and the 1D version of RayIntelligence will be released in February. That is in a couple of weeks. Okay. So now let's look at the results for Q4. As already mentioned, our order intake increased 44% and amounted to SEK 345 million for the quarter. Our revenue increased by 18% to SEK 188 million. However, our costs also increased, which was mainly due to the increased marketing activities that I just talked about, but also the relocation of our head office to the new premises at New Karolinska in Stockholm, which was of a nonrecurring character as well. And this then resulted in a loss of SEK 17 million for the quarter. Before I let Torbjorn present the financial details, I would like to add that we have a strong focus on costs and for the full year 2022, we expect the cost level that is on the same level as last year. To ensure this, we have implemented a cost-saving program and have also strengthened our purchasing processes as well as our financial governance. So with that, Torbjorn, please go ahead.

Thank you very much, Johan. So in terms of our development, and talking about our income statement for this quarterly report, we are very happy to see that the license revenue and support revenue increased during Q4 and resulted then in having SEK 188 million in revenue in the fourth quarter as compared to SEK 160 million in the fourth quarter last year. This increase was, however encountered with increase in operating expenses. And just like Johan mentioned, there are a number of factors explained in that increase. We have had increased sales activities, which we think are very beneficial and good for our business. We have since long way back, a planned relocation of headquarters. And of course, we have continued to invest in our product portfolio as just described by Johan, which have led to higher R&D costs. Taking all this into account, we note that our operating result was a loss of SEK 70 million (sic) [ SEK 17 million ], which is a slightly higher loss than in the corresponding period last year. Also, as Johan mentioned, we think that it's important to reiterate, we are looking forward to 2022, where we will work, committed to preserve our costs as compared to 2021. Looking a bit on our balance sheet and cash flow. It's important to note that we have a large increase in tangible fixed assets and then also an expansion of our balance sheet connected to the IFRS 16 effects, coupled to our new headquarters, the lease for those premises. So this item increase is more than SEK 450 million. We also increased, and as a result of our continued investments in our product portfolio, the intangible fixed assets. Looking then at our cash flow. The cash flow from operating activities before changes in working capital was a positive SEK 68 million during the period in spite of the negative result. We have seen an increase in operating receivables, which, to a large extent, was offset by an increase in our operating liabilities. In total, during Q4, our investments was SEK 67 million, and this resulted in a cash flow for the period to be a negative SEK 21 million. Our end-of-period cash and cash equivalents amounted to SEK 102 million. And having said that, I'd like to give the word back to Johan.

Thank you, Torbjorn. So to summarize, we expect that the market conditions will improve during 2022 as COVID-19 recedes. Hospitals will no longer be completely tied up with treating COVID patients and they will be able to invest in new technologies again. The clinics have started to open up again for meetings and demonstrations, our pipeline is growing and perhaps, most importantly, our order intake has started to increase again. It's worth noting here that we haven't lost orders to competitors during this period. They have just been delayed. We know that there has been a drastic decrease in screening in cancer diagnosis during the pandemic which indicates that there should be a sharp increase in cancer indications once the pandemic is winding down. This should in turn, lead to an increased demand for software solutions that enable more efficient planning and delivery of radiotherapy so that the increased patient volumes can be managed. With our product portfolio, we are perfectly positioned to meet this demand. With a record high order backlog of SEK 1.4 billion, improved market conditions and stronger products than ever, we have a solid foundation for returning to growth during 2022 and this, without increasing our costs. Finally, I would like to thank all of our employees for the flexibility, creativity and dedication that they have continued to show during the second year of this pandemic. The past 2 years have been challenging for everybody, but now I believe that the most difficult times are behind us, and I'm looking forward to 2022 with confidence. Thank you.

Thank you, Johan and Torbjorn. We now open up for questions. So operator, over to you.

[Operator Instructions]

Okay. Then we have some written questions. The first one comes from Rain Leesi . Sorry, if I didn't pronounce that correctly. Can you please specify one-off costs related to the headquarter relocation?

This is Torbjorn. Thank you for your questions relating to the one-off cost. No, we do not specify the amount of the one-off costs related to the relocation. What we stay communicate is, as we said before, both Johan and I, that we look forward to keeping the cost levels in line with costs during 2021 in 2022.

Okay. There's another question from Ilja Ivanov. Can you please describe why despite higher order backlog quarter-on-quarter, you expect SEK 350 million to be realized as revenue during the next 12 months compared to the SEK 400 million expected in revenues in your Q3 '21 report? That was the first question?

Yes. I mean, we have -- this is Johan answering. We have more visibility into the revenues than what was reported there. There are other items such as support contracts, et cetera, that will generate revenue during 2022 that are, so to say, safe revenues. Would you like to add something Torbjorn to that?

Yes. Yes. I could add to that also that part of the very large order intake during Q4 was related to contracts, which has a longer implementation time than 12 months. So those revenues will then occur later than in 2022.

Okay. I have another question from [ Eric Anderson ]. I'm wondering regarding the increase in leasing. Now how much is attributed to your new offices? And for how many years have you signed, i.e., what is your yearly lease cost?

So if I interpret your question correctly, I'd like to comment. So the lease that we moved into is a 10-year lease. And the amount -- the increase in the balance sheet was as discussed, more than SEK 450 million relating to the new premises at the headquarters.

Okay. And then there was another question again of the one-off costs, but we've discussed that already. So I'm taking Eric Anderson's third question. Looking at cost savings, regarding headcount, which is still increasing, what is your view going forward?

Going forward, we see a decrease. I mean, this was the report for 2021. We see decrease now going into 2022. And there is a hiring freeze, so that decrease will continue. And we have also made some layoffs in our daughter company in the U.S. RaySearch Americas. So the number of employees are decreasing now during 2022 according to plan.

Thank you for that, Johan. Rain Leesi has yet another question. Could you please elaborate on sales activity in recent months? Have you managed to increase direct contracts with the customers? What is the near-term outlook for client meetings and demos?

Yes, for sure, there has been much more activities with customers in several ways. People are coming back to work, so to speak. And a good example is I've been -- after having been out of North America for 2 years, I was in the States, both for -- during December last year and a few weeks ago now in February to meet customers, and that's a very clear sign that things are changing. So there it is -- and we also see it in the pipeline compared to -- yes, just a few months ago, the pipeline is much better. There is much more communication and it feels like the whole market is waking up in a way. And now we're planning for the ASTRO European big meeting, will take place in Copenhagen in May. So we're planning for physical presses there. And then AAPM -- the two big ones in the U.S., AAPM and ASTRO are also planned to be physical meetings, although there is always a virtual component of the meetings now going forward. But we have gone back to physical meetings during this year.

Thank you for that, Johan. I have a couple of questions from Kristofer Liljeberg. First one is what actions are you taking to keep operating costs flat at the same time as activity should pick up?

Yes, we are doing several different things. We pick the trade shows that we are engaging in. We have -- in a normal year, if you go back to 2019, 2018, we are present in around 160 trade shows or different types of events all over the world. And this year, we have made a very big up of that. So we want to go to 50% of those shows. We also make sure that we have a smaller more cost-effective presence during 2022 in the shows that we go to. We send smaller teams to these shows. And we're also very careful about which trips that we do. So we don't just go and visit any customer if there is an opportunity that may materialize in 2 years or 3 years, it's way out there, then that would be clearly a virtual meeting. If there is something that's very interesting, we will triage the trips that we do. We still believe that physical meetings are important and physical on-site demos are important, but we'll make sure that we do it in an optimal way in those cases where it can make a difference. Obviously, now we are also much better at doing virtual demonstrations and having virtual meetings like the rest of the world. So this -- I think we can substitute a lot of meetings with all business partners, all customers that we have established relationships with virtual meetings will be much more common in those situations. So -- and in addition to that, we look over costs across the board. There is, as I mentioned before, continued reduction in workforce. We will sublease some of our offices, both in Stockholm and in the U.S. and several other things. It will just be more a very strict and strong focus on the costs during this year and going forward.

Thank you, Johan. Kristofer Liljeberg second question is what will be the IFRS 16 effect on EBIT?

So in terms of the effect, that really takes us to the changes in costs connected to the new headquarters, and we are not presenting that number, but there will be a certain increase related to the new office because it is a larger space. But as Johan just mentioned, we will also, for the time being, sublease that.

Parts of it, yes.

Part of it, yes. So we don't make a specific prediction on what that number will be for 2022, but it will be an increase.

Okay. Kristofer Liljeberg last question then for now. When could we expect RayCommand deals in the backlog to be booked as sales?

Yes, some of it will be during this year and some next year. I mean, one -- there are two big takers currently of RayCommand and it's MedAustron and AVO. And MedAustron, as they are going clinical during the spring, that everything that's related to that customer will be -- that revenue will be recognized. And AVO, probably they are a bit later than MedAustron. So I would say, yes, not this year, but yes, may be next year, let's see.

Okay. Thank you for that, about RayCommand. Rain Leesi has another question. Has the interoperability with TrueBeam resulted in some more tangible new opportunities for you or not yet?

That's a very good question. We are on track with Varian on the validation of the interoperability. There are activities going on right now in Palo Alto at the facilities of Varian. So -- but we haven't done in the concrete say, offerings of this before it's released. So -- but our potential customers, a lot of them are aware of that this will become. As we have communicated this, this will -- it's on its way. So for sure, later this year, I hope sooner than later, this will be available for customers, and then we can really start to push it because there are, as you know, many, many TrueBeam customers. A lot of Varian customers that have only TrueBeam. There are many facilities like that. And they would be a perfect fit for -- and some of them have RayStation already, and there will be a perfect fit for RayCare. And it will be that even if they don't have RayStation, they could buy both RayStation and RayCare. So this will happen this year. And it is on track, even though as probably everyone knows, this has been delayed, but that's surely not RaySearch's fault.

Thank you for that, Johan. I know there are some other people that want to ask questions as well. So over to you, operator.

[Operator Instructions]

There don't seem to be any more questions. Thank you very much, Johan and Torbjorn. And with that, we conclude this session, and we look forward to continue talking to you, if not before, then when we present our report for the first quarter of 2022 in May, that is, on the 18th of May. So lastly, I'd like to remind you that you can find this presentation to the same link as you used for this call and soon also on our website. Thank you very much for your participation today, and goodbye.

Thank you.