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

Hello, and welcome to the presentation of RaySearch Interim Report for the second quarter of 2023. My name is Eva Nelson, and I will be the moderator here today. Joining us in today's call is, as always, Johan Löf, RaySearch Founder and CEO; and also the new interim CFO, Annika Blondeau Henriksson. Johan and Annika will give you a short summary of the quarter, including the financials. [Operator Instructions]. I also want to remind you that you can -- that this session is recorded, and you can find it through the same link as you used for this call and also on RaySearch website. And with that, I hand it over to you. Johan, please go ahead.

Thank you, Eva. I would also like to welcome everyone to today's webcast. And the next welcome to Annika as well. I'm happy to note that the positive trend is continuing. Sales during the second quarter were our highest ever for a second quarter and amounted to SEK 240 million, up 49%, would have been 41% at unchanged exchange rates compared with the year-on-year period. And also this is the second highest sales figure ever for the quarter, Q4 2022 is still the highest. We had a cash flow of minus SEK 3 million and EBIT was SEK 18 million, resulting in an operating margin of 7.6%, which is still well below our long-term target. The quarter was negatively impacted by currency translation effects, increased rental costs due to inflation and higher costs for external services. The sharp increase in sales that we've seen in the last couple of quarters is clearly linked to the reopening of the market and our strong offering. We believe that this momentum will continue and have, therefore, decided to continue our offensive marketing strategy. As in the previous quarter, sales for the second quarter were not based on any major orders. The largest single revenue item was SEK 11 million, but mainly consists of a combination of revenues from many small and normal sized orders and, of course, the support revenue. We have a strong financial position with cash and cash equivalents of SEK 246 million. We have renegotiated our financing solution with the bank where we terminated it previously unutilized revolving credit of SEK 150 million and replaced it with an increased overdraft facility of SEK 75 million. Overall, we have a stable financial position for continued growth. I would like to highlight some important orders that we received during the quarter. In early May, New York University Langone Hospital on Long Island placed an order for RayStation to replace their existing treatment planning system. Today, the center is equipped with the combination of Varian, linear accelerators, Accurays, CyberKnife and Radixact Systems. And because RayStation is compatible with all of this, the hospital will now get a unified solution for treatment planning across all their machines. Another U.S. order for RayStation is the 1 from Southwest Florida Proton. They're setting up a new facility on Florida's West Coast, which will be the first Cancer Center in the region to offer Proton therapy, and it's here that RayStation will be installed. Moving over to Asia. We received a new order from Shinva which is a Chinese manufacturer of linear accelerators. We've been delivering RayStation station to Shinva for many years, which they have sold in China together with their own machines. The new order is for 15 RayPlan systems, our streamlined version of RayStation. As the Chinese market has a huge potential, I'm really looking forward to our continued collaboration with Shinva. The largest order of the quarter, approximately at SEK 21 million came from another Asian company called SHI Industrial Equipment based in Taiwan. They will install RayStation in Taichung, Veterans General Hospital in Taichung. Concerning RayCare, I'm excited about the order we received from the Australian Bragg Centre for Proton therapy and research. This is center under construction, and it will be the first Proton center in Australia, thereby also the first of its kind in the Southern Hemisphere. The Center is planning to purchase RayStation at a later stage. So I hope to be able to talk more about Bragg in the future. As previously communicated, the interoperability between RayCare and Varian's TrueBeam took longer to achieve than we had hoped. But now after an extensive and joint validation program, this is in place. TrueBeam is Varian's most widespread treatment platform. It's used by thousands of centers all over the world. And therefore, expect that the certification will significantly increase the market potential of RayCare from 2024 and forward. Yonsei Cancer Center in Seoul, Korea has been using RayStation for both photon and carbon iron planning for a long time. It was also the first sector in the Asia Pacific region to buy RayCare. And a couple of months ago, the team at Yonsei treated their first patient using both RayStation and RayCare. It's the first center to take RayCare in clinical use in Asia. So this is an important milestone for us. In June, we signed a collaboration agreement with a small Japanese company called B dot Medical. Together with them, we hope to advance proton therapy further by integrating RayStation, RayCare with their ultra-compact proton therapy system. It's a very impressive design, indeed. UniteRT is the new and unique collaboration of leading stakeholders in radiotherapy that was initiated during the spring. The purpose of UniteRT is to improve collaboration and competition in our industry. During AAPM in Houston at the end of July. We continue to spread the message about this initiative, and there was a great interest from both companies and customers. Today, we are already 17 members, and we see a growing interest among industry colleagues. Now let's take a closer look at the financials. So please, Annika. Go ahead.

Thank you, Johan. And we start with presenting our key metric of presenting our order intake and net sales first. So the order intake in the second quarter amounted to SEK 239 million, and this is an increase by close to 13% year-over-year. License order intake was SEK 94 million, which corresponds to an increase of 41, and support order intake increased less than 1% and came in just below SEK 120 million. Net sales amounted to SEK 240 million, an increase of SEK 49 million compared to the same period of last year. If we adjust for the exchange range impact, change in sales increased by 41%. Licenses net sales increased by 47% compared to Q2 and came in just above SEK 100 million, while support net sales was SEK 102 million and an increase by 39% compared to Q2 of last year. In the quarter, it's worth mentioning that we have a couple of customer contracts for support that were renegotiated which generated SEK 6 million of additional support net sales and should be considered to be one-off effects. Our operating profit improved and from a loss of SEK 20 million in 2022 to a profit of SEK 18 million this year, and this represents an operating margin of 7.6%. A strong improvement, which is driven by our higher net sales, but partially offset by higher operating expenses compared to Q2 of last year. And their operating expenses, they increased due to currency translation effects from our subsidiaries, increased selling expenses due to a return to a more normalized activity level post-COVID, and they also increased on the administrative expense part due to still a relatively high share of rental -- external consultants. And then we also have a general inflation impact, which particularly hits our renting cost. So in the second quarter, total operating expenses, they increased to SEK 221 million compared to SEK 180 million of last year. Lastly, we had come to our cash flow for the period, which was a negative SEK 3 million, and we would like to highlight the cash flow always needs to be seen over a long-term horizon, and can fluctuate over time for RaySearch. However, in the period, we have seen a high net sales, in particular, in the last month of the quarter, which explains why that our customer receivable has increased. And consequently, we have presented and reported a negative cash flow. Half year, order intake amounted to SEK 446 million, a decrease of 8% compared to the same period of last year. Net sales for the period amounted to SEK 470 million and represent an increase of 28%, [ whereof ] licenses was reported to SEK 205 million support revenues amounted to SEK 189 million, hardware revenue amounted to SEK 56 million and trading and other revenue amounted to SEK 20 million. Our operating profit increased -- was reported to SEK 42 million in the first half of the year from SEK 10 million in the same period last year, representing then an 8.9% margin compared to 2.7% of last year. Lastly, cash flow for the 6-month period was SEK 81 million to be compared with SEK 52 million of the same period last year. This graph displays in our order intake and revenue over the past quarters in a rolling 12 months perspective, and we can see that our rolling 12 months order intake amounts now to SEK 1.179 billion. The rolling 12 months net sales amounts to SEK 945 million, and the trends for both order intake and net sales shows a continued growth. And at the end of the period, our total order backlog was SEK 1.955 billion, of which SEK 615 million is expected to generate revenue over the next 12 months. The remaining amount in the order backlog pertains to support commitments that are primarily expected to generate revenue during the 4 coming years. Operating profit over time and by quarter. The second quarter of this year 2022 was the fourth consecutive quarter, which was positive on the operating profit side. So at the end of the period and to reference to what Johan just mentioned, we have -- closing, ending the period with a strong financial position, a cash and cash equivalent of SEK 256 million. And in July, the previous unutilized revolving credit of SEK 150 million was terminated, and we replaced it with an increased credit facility of SEK 75 million. So back to you, Johan.

Thank you, Annika. So just to summarize, I'm happy to see that the market conditions and RaySearch momentum continue to improve. If we summarize the first 2 quarters, the first half year was the strongest ever for us. Our order backlog also continues to be very strong. To date, almost SEK 2 billion. Moving forward, our focus will be on improving the operating margin. And we have set a target to have a margin of at least 20% within 3 years. And with our strategy and market outlook, I'm convinced that we will reach this goal. Thank you very much.

Thank you, Johan and Annika, and we now open up for questions. So operator, over to you.

[Operator Instructions] Our first question comes from the line of Kristofer Liljeberg from Cartage (sic) [ Carnegie ].

Yes. Thank you. It's Kristofer here from Carnegie. A strong quarter. Congratulations to that. I have 4 questions. The first relates to the higher selling and R&D costs in the quarter. First, I thought it would maybe go up a little bit more gradually. So I don't know, did you do a lot of hiring at the end of last quarter or early this quarter that impacted this? Or is it something else not related to an increased number of personnel that's driving that? My first question.

Okay. So I thought you would -- I appreciate that. We can answer a question at the time. So would you like to take that?

Yes, I can start and then you fill in anyone if there's some supplementary information you would like to give.

Okay.

Well, the selling expenses and R&D expenses gross, I assume most question. The selling expenses have increased, and we have had a lot of activities on various -- trade shows and similar. So that's 1 of the reasons. And we have also, obviously, the increased sales also trigger some more bonuses and these kind of things, commissions to the salesperson. And also, we -- I don't -- I want you to comment on the headcount side. And R&D is increasing because we have had less time spent on certain of the projects. So that's why the gross R&D is going up, and we have -- consequently, we have high -- more personnel expenses. And yes, basically, we have worked less on what we have normally capitalizing in the quarter specifically. And the headcount on this 2 functions?

Have not increased significantly during Q2. We have been recruiting but [indiscernible] will join during the second half of the year. But I think ASTRO should be highlighted here as a driver. And the -- because we have -- we had a much smaller presence at ASTRO 2022. And as Annika mentioned, we do travel for sales, a lot more 2023 compared to 2022.

That's very helpful. Do you think it's fair to assume that selling cost will be lower in the third quarter than in the second quarter and then you go up again in the fourth quarter with the asset ratio?

Yes, that's a fair assumption.

Okay. Great. And my second question also related to cost, but administrative costs. And you mentioned there's still quite a number of external consultancies. So when do you expect that to go down and will it be replaced by internal hiring instead so that we won't see any positive effect on the cost level from this?

Yes. Okay. So I can start, Annika and you fill in. We -- I think -- that's the main driver here for -- I mean, the main reason for the high admin costs, the rent is another important one. But -- we -- I would say -- I mean, we want to do this as soon as we can, but it can be done in an instant. Now we have -- but we have a very -- I mean, we have a stable financial department, but it's expensive. I would say I mean, during next year, for sure, this will be, for sure, the second half of 2024, we should have a normalized situation with less if any consultants in place. Annika?

No, I can only echo what Johan is saying and that we are working on a plan to replace consultant with permanent staff.

Would it be possible to give some sort of indication how much that impact would be on the cost level?

I think, unfortunately, it's a little bit too early to say because it depends also what kind of profile we are looking for. And labor market, particularly in the Stockholm area, still very competitive, yes. So we are working on it to make it as a good solution as possible for RaySearch.

Makes sense. The third question, really nice to see an EBIT margin target, something that I think many have been waiting for. For that to be reached, is it possible to say anything about what type of sales growth is needed? Because I guess -- you're also talking about doing more investments in marketing, et cetera. So yes, I don't know if you want to answer that or not.

I can say that we can reach -- I mean, of course, we have modeled this extensively before we commit to a target. And I will not say exactly what growth it requires, but it's a reasonable growth. It's not -- it's quite a conservative assumption on growth year-over-year. So we are quite confident that this can be reached. But I will not lock myself into exact top line and cost this particular margin will be reached.

Yes. Okay. And have you done any assumption when it comes to the level of capitalized R&D, et cetera related to this target if I compare with maybe historically also?

It's been on a similar level as historically.

Okay. And then my final question, with TrueBeam clearance there. How much do you believe this could impact sales positively in the next 1 to 2 years?

I can't quantify that. But there is -- there are many customers that are happy about this new possibility to choose an alternative oncology information system. But I cannot quantify it now. But what I can say is that we won't see any real impact on sales until 2024. But then we'll start to see this. And going forward, it would be -- have a very positive effect on the RayCare sales.

Our next question comes from [indiscernible] from Protea Funds.

Johan and Annika, can you hear me okay?

Yes.

Yes, we can hear you.

Well, first of all, thanks for the solid report and the model target, I only echo what Kristofer say -- said that it's a nice crunch for us when we try to model the future here. I just have -- I have a few questions. One is on the order estate side. I mean license orders grew 41%, but support orders certainly a fraction of above 0. Is there a lag there? Do support orders normally follow license order with a lag? Or how does that work? If you could explain.

I think we -- did you catch?

No, I did not catch the questions.

Can you please repeat the question?

Okay. Now I'm just noting the discrepancy between license order growth and support order growth. Is there a lag effect in there? Does the support orders follow the license orders with a lag?

Yes, of course. I mean support is based on the total installed base from 2009 contribute to the support. So -- and the sales, yes, simply put the sales during 2023 of licenses don't generate -- there is a 12-month warranty period, so they don't generate any support revenues until 1 year after. So it's -- the answer is yes, there is a lag between. But also the support revenues as a percentage of the entire installed base. So every customer that bought licenses from 2009 and forward contribute to the support revenue. That does make sense?

My second question is -- yes, that makes perfect. Then on the FX side, I mean, it is a bit difficult as an external observer to understand why you don't have a positive effect from FX. Could you elaborate a little bit on that?

Yes. I mean we mentioned in the report that we are impacted favorably of the favorable development on the net sales, 8% is currency -- the currency impact.

The difference between 49% and 41%.

Yes. But then obviously, we also have in the OpEx also a negative impact of the currencies, dollar and euros predominantly. But net bottom line, we have a favorable impact, which we have not stated in the report how much it is. So favorably, yes, but we have not stated how much it is.

Okay. Right. That on a couple of your industry peers have noted that some noise in the market on suspected corruption in China, involving Western hardware manufacturers. Do you see an impact from this at all? Or is it an opportunity for you given your collaboration with the Chinese manufacturers?

Which part was an opportunity? I mean we have not been -- we have not seen any corruption from our perspective. Do you refer to...

Well, there is elegantly a clamp down on suspected corrupt incident where someone has been bribed to acquire [indiscernible] manufacturing. I'm just wondering whether you provide software for a Chinese that perhaps there's an opportunity there?

First of all, we haven't seen any corruption, but we are well aware that there is plenty of corruption in China. But I don't see how we could see an upside. I guess I can. I don't understand the question. Any other question?

That was all my questions.

[Operator Instructions]

Okay. Then there are a couple of written questions. There's the first 1 for Anders Hedlund. Have you considered going cloud with 1 or more of your products? And subsequently, change revenue model to a more subscription-based one?

Okay. So yes, we have 1 product that is only cloud, which is a RayIntelligence, and it also has a rental subscription payment model attached to it. All our products can be cloud-based. And I mean we run them like that. RayCare is essentially a cloud-based product, but it's based in the hospitals, it runs on the hospitals, own cloud because they want to keep the patient data within the walls of the hospital. RayStation can also be run in the cloud, and that's how we demonstrate, for instance, RayStation and we distribute evaluations. Before in the past, we distributed computers to hospitals that wanted to try RayStation for 3 months or 6 months or something like that. But they can now try RayStation running it from the cloud. So technically, is not an issue. It's just a preference from -- and we actually have a couple of customers that run -- that we -- where we provide a cloud service for RayStation. But in general, most hospitals want to run it on-prem, so to say. And it's not -- the payment model is actually a separate issue. We can -- we have subscribers even though the system runs on-prem. And we offer any customer can choose to buy anywhere products either -- except for RayIntelligence it's only available -- you can only pay by subscription. But all the other products can be paid either with a traditional license model and our upfront payment for licenses and then a support fee -- annual support fee or you can have an annual subscription fee. We only have, I would say, less than 20 subscribers of RayStation, but it's up to the customer to choose. And yes, hopefully, over time, this will be a more common payment model because it is attractive. It's also good that it doesn't -- that people don't convert everyone at once because that will be a cash flow issue for us. But if it happens gradually, I think it's -- it would be a very nice transition for research.

Okay. Thank you. Hope you're happy with that, Anders. Matthew Anderson asks, can you please inform about the potential concerning license revenues for TrueBeam and Philips, which of these has the biggest potential?

I think -- what he refers to is when he mentions Philips is that Pinnacle is end of life in 2026. And there is an installed base out there in the world that has -- have Pinnacle and they have to convert to something else before the end of 2026. So that's a big potential for us. And we constantly grab customers like that, that go from Pinnacle to RayStation. But it will be a spike during or an increase of this conversion in 2025 and 2026. And then it's hard to compare that with the RayCare, which 1 is the greatest RayCare potential, thanks to TrueBeam or this Pinnacle conversion. I can't say that. I don't know, simply put.

Okay. And then Eric has 2 questions. Eric, probably not his name, but Eric. It's just a gmail address. So I don't know. Eric Anderson, sorry, I can see that now. Okay. Can you please elaborate a bit on the interest from customers in RayCare and what you foresee in terms of RayCare sales going forward? We just talked about that. Can you also please indicate how much RayCare sales was as a share of total sales so far in 2023?

Do we have that number?

I have to pick it up. So we have it I can -- as it year-to-date.

But it's still a smaller portion, of course. So RayCare sales is still in its infancy, let's say, especially on the revenue side, we have huge orders for RayCare, for instance, the Ortega project, where 9 centers, proton centers purchase RayCare. So -- but the revenue contribution for RayCare is still small, but it will -- it's growing, and it will, I think, accelerate in growth and have a much bigger impact on revenues from 2024 and onwards.

8.6% in the quarter, licenses.

Okay. We'll move on to the next one. Eric has another question. The 3 large orders that you took in the quarter that has not been recognized yet as revenue. When will these orders be invoiced?

It varies. I don't think we can comment on that.

It depends on the customer agreements.

Okay. That was all, I think.

All the questions?

All the questions. You had any more? No?

Right.

Okay, then. Thanks, everybody. I think we can conclude this session now, and we look forward to continue talking to you and that would be when the report for the third quarter will be presented. And that's on the 17th of November. And I also like to remind you that you can always find the presentation with the same link as you use today and also on RaySearch website. So thank you for your participation, and goodbye.

Thank you. Bye-bye.

Thank you.