Sectra AB (publ) (SECTB) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Sectra Q4 2019-2020 Call. Today, I'm pleased to present the CEO, Torbjörn Kronander. [Operator Instructions] Speakers, please begin.

All right. So this is Torbjörn Kronander.

This is Mats Franzén.

And we have Fredrik Gustavsson on the line as well for presentation of our new model. Welcome to this year-end report meeting. Next slide, please. The agenda today is highlights and trends, which will be done by me, financial development done by Mats, and then we will have a deep dive in the new subscription model for software licenses, that will be done by Fredrik, and then I will finish off with our way forward. And then we have a question session at the very end. Next slide, please. Highlights and trends. Next slide. We are happy to see that we made our best earnings so far this year. The earnings per share has been up by 18% or 19% almost. And our cash flow is also solid and stable, which is important in these kind of difficult times, cash is king, so I say. Next slide. We have had seen no significant impact from COVID-19 on the financial outcome. Our deals are long term, and we also have a substantial part of our business in recurring revenue, and recurring revenue will be there, almost whatever happens. It's only when the customers go bankrupt or enters Chapter 11, and we haven't seen much of that at all in our market. We are dealing in health care. Now we would like to point out, though, that we have, as very often the case, but even more pronounced this year, we had large variation between quarters we did -- we don't do much guidance, et cetera, but we guided a little bit that at the beginning of this last year would be weaker and that we've recovered that in the end of year, which is exactly what we did. This year, the coming year, we will continue to have large variations, even though a little increased because of COVID-19, some go-lives, and the go-lives triggers a large bulk of the revenue recognition has been postponed as many hospitals in the U.S. are simply shut down, and they cannot take on a lot of IT products go-lives in that period now. That will, however, [ recoup ] later in the year as we see it now but we are guiding that the first quarter will be weak also this year. Next slide, we have come back to where we have all our financial targets for the group fulfilled. The first, equity-to-assets ratio should be above 30%. We are at 54.1%, which is a healthy situation to be in. Profitability that's our sanity check that we do reasonable business. We do not intend to be substantial about 15% if we make more than 15%, which we'll reinvest that in the most important project, which is growth of profit per share over 5 years. That should be above 50% and it's nice to see that we are now well above that target at 90.2%, growth in EBIT per share over 5 years. Next slide. In Secure Communications with our cybersecurity division. Next slide. We have seen good growth, but the margins are not adequate. We need to get the profitability up in that business and grow profitability as well. We have expanded secure mobile communications offering, though, we are adding products, and we're adding customers all the time. We've also grown critical infrastructure with some monitoring of the most important parts of society, where as we have built more and more sensitive society from cybersecurity aspects, this is a growing market. Our growth initiatives in that sector is mobile secure ecosystems, where not only mobile phones that we used it before, but the entire workplace. Critical infrastructure product area, and we're also starting up in new geographical markets and notably Finland and Norway. Next slide. We have seen now that over the last quarter, we've seen an increasing demand in mobile secure workplaces. And that has been partly because of COVID-19, people working from home, they need to be able to work securely from home as well. But we also see a general increase in awareness that we need to be protected against cybersecurity threats, both from foreign states and foreign governments or countries, but also from cyber crime. Next slide, Imaging IT Solutions. Next slide. There we are -- have a trend of adding new customers, especially in the U.S. We are extending and increasing contracts with existing customers. We have strengthened our delivery capacity. We have invested in quite a large growth in people, and it takes people to deliver. And some example of growth initiatives, new markets, direct and indirect, digital pathology and integrated diagnostics, I'll come back to that. Cardiology as part of our general imaging offers, and we have focused a lot on the United States. Next slide. We also initiate a Dutch AI collaboration with University Medical Center Utrecht, where we will add an AI-based app store to our portfolio, which has been developing in collaboration with Utrecht. Next slide. We also got a new order from Canada. Canada is one of our newest subsidiaries, but we had, had a head start there. First with Trillium, which was announced last year, and then now Mayfair Diagnostics, which is also a first sale based on a new subscription model in North America. Next slide, please. We have a growing customer base in the United States. We have new orders from MetroHealth University hospitals in North Ohio. And we have St. Elizabeth Healthcare, which is a member of the renowned Mayo Clinical Care Network. Next slide. Trend in the United States. We have had a special focus, and we have been speaking about this for several years. We have the most happy customers, and we don't have a massive market share. In Sweden, for instance, we have a market share around 70%, 80%, and it's extremely kind of difficult to grow from that position. We can add more things to the existing customers, but it's difficult to add a lot of customers in such a situation. In the United States with the happiest customers and be clearly below 10% in market share, we have a huge growth opportunity, and we now see this delivering. As you see on the curve, we are growing rapidly in the U.S. and the United States has now passed Sweden as our largest market. We have had recent orders from luminary customers. And we have also received FDA-approved digital pathology, which is a very interesting market going forward. The opportunities, since the world's largest market, normally, you said that about half the world's medtech is actually -- or half of the medtech revenue of the world is in the United States. That is not perfectly correct, but on the order of [ orders ] , it's correct. Sectra, we do top customer satisfaction. We increased this lead in the last year, and we have a small but growing market share. And next slide, please. I will say a little more about digital pathology. This is the last frontier in digitization of medical images, and other medical images, radiology, cardiology has been digital for a long time, but pathology and microscopy images have been very difficult because they are very large. We started a product in this 7 or 8 years back in Sweden. And Sweden is today the leading market in digital pathology in the world. We have, by far, the largest penetration and Sectra has a dominant market share in Sweden. We do see rapidly increase in sales in the U.K. and the Netherlands, and very common in medtech is that in new technology, Northern Europe leads on the development of new technologies, and we see this happening here again. We received FDA approval, as I said before, which means we now can begin to sell our digital pathology solutions in the United States also for primary reading. We have been able to sell it before for secondary reading and consultation. But of course, a big market that when you actually can do without the microscope for a primary reading instrument. Our growth strategy is a single system for pathology, radiology and cardiology without having different back ends for service. And we are currently the only vendor in the world who can deliver a fully FDA-approved system with a pathology, radiology and cardiology primary reading in the same system, which saves a lot of money for the hospitals because of less service and maintenance and also [ some] investments in the back ends. We see also an increasing trend of integrated diagnostics, and that means that the pathologists or radiologists, for instance, work side-by-side instead of just doing a pipeline for diagnosis. They work side-by-side and agree on the diagnosis of especially cancer patients before it goes to the surgeons or the clinicians, which is a very important way of speeding up the diagnosis and also increasing quality. And we are growing in the United States. Next slide. As we said before, we have the digital FDA approval -- digital pathology FDA approval in place now. The approval was together with a specific scanner from Leica, that's also the market-leading scanner in the United States. So that's fine. We have had a customer in the Hospital for Special Surgery, which is the most prominent orthopedic center, at least in the East Coast, probably in all of the United States. They are beginning -- are using our digital pathology now and putting it into operation. And that's a very important reference in New York case, in New York City, Manhattan. Unfortunate, of course, they as well are affected by COVID-19, so it's getting a little bit delayed of having been able to use them as a reference. We're also expanding. We can now offer our radiology customers to expand into pathology without actually buying completely new IT system, they can only add pathology to the existing systems they have. Next slide. Here, you see a map of the current coverage of digital pathology. And you see, as I said before, Northern Europe very often is the case of leading a development in new technology. Next slide. Business innovation, that's our greenhouse for small things or smaller things that are -- might be big or might be nothing at all. We don't know. But it's an interesting greenhouse of things that might become very important. For instance, digital pathology came out of this group, and we moved it into Imaging IT when it became a real product offering. The new areas within orthopedics is -- we have 2 areas right now or 3 areas. Orthopedics as a medical education and research. And in orthopedic, we have something called, Sectra Implant Movement Analysis, which is postoperative. This is to evaluate if a person who got a prosthesis needs a revision, needs a new prosthesis. That's a very expensive operation, and it's also a dangerous operation. You don't want to do this, if not absolutely necessary. We have very positive clinical results for these trials. And we have CTMA, which is more or less the same product, was has used for evaluation of prosthesis and that is sold to the prosthesis manufacturers as a research tool. And then in medical education, we have seen some very interesting developments during the COVID-19 in, where hospital -- universities are teaching. As the universities have been shut down, they have been forced to teach students from home or at home. And we have a very interesting way of doing that through a platform of clinical content. And our most prominent pilot customer in this area has been La Sapienza, which is the leading University of medicine in Italy, who's actually been very happy by providing this to all their students during the COVID crisis. And in research, which is our long-term operations, we have a large focus on AI for medical applications of various kinds. Next slide. We would like to present a little about the risks. As we see the COVID-19, everyone is talking about this right now. Next slide. If we take health care IT in general, of course, exhibitions and travels are canceled. This is actually short-term benefit because we save money with less travel and less cost for the exhibition. But of course, there is a reason why you participate in exhibitions, that is to sell more later. And of course, long term, this will impact our future sales. Elective procedures on hold. Almost all hospitals in the world have stopped elective procedures. For instance, orthopedics, cancer treatment, cancer screening, almost all of that is stopped. And that is where hospitals make the most part of the money and where hospitals are ready for profits. So of course, this has a huge impact on the ability to invest long term. Now that is, however, a snowball being pushed ahead of the hospitals and all those procedures that should have been put in, et cetera. They are not gone, and all that work needs to be done when hospitals open up again. Telediagnosis, we have seen also, for instance, pathologists wanting to work from home with the microscope, that is not possible. We have had a leap of interesting telepathology and teleradiology where the radiologists and [ their clinicians ] work the [ seat ] from home and do their work. We have also seen that, of course, the imaging volumes may overwhelm hospitals when these kind of opens up again, and that would drive demand for efficiency even further. And that is good for us. It will enforce a good, effective IT solutions of the kind we provide. So there's some ups and some downs. In cybersecurity and the same thing, the World Mobile Congress was canceled, for instance, and of course, if we can't exhibit on large exhibitions, we -- it's more difficult to see new customers. Short term, a gain, long term, this will, of course, be less sales unless it opens up, but we think it will open up during the next year. As a good thing, increased demand for our cybersecurity products and mobile crypto solutions, as I said before, when people work from home and also secure mobile workplaces. Next slide, and then I'll leave the word to Mats.

Thank you very much. Next slide, please. As Torbjörn, you touched upon earlier on, the order intake is good, but it's up against a very strong comparative year with the huge order from New South Wales in Australia. So number -- compared with numbers, say, 50% contraction but taking the New South Wales, say, it's a 50% hike, actually. So -- and as for the sales, in total, we see a healthy growth full year on a double-digit growth, also taking the weaker krona into accounts. As for the fourth quarter, the order intake is down some 35%. All in all, taking out the New South Wales, it's actually up 31%. So the order intake in the fourth quarter is the second best ever when including also the New South Wales. Having said that, as we often reiterate is that the fluctuations between quarters can be very significant indeed. So one shouldn't make too much of a very high or sometimes even quite low numbers in terms of the order -- in the deal flow. And the operations in Imaging IT, so especially the U.S. and Sweden, by comprising the largest chunk of the order intake. And compared with last year, obviously, Australia is way less considering that big order. And in absolute number order intake growth, it's between the U.S. and Sweden in terms of Imaging IT, the Communications group had a good quarter as well. So -- and for net sales in the quarter, the growth isn't that impressive. However, the last year's fourth quarter was very strong. So we are up some 5%, currency neutral. And the U.S. contributing with about -- just [ about ] 50% of that growth actually and some SEK 60 million in absolute numbers in growth. Second, being the Netherlands, having a very strong quarter. Whereas for the fourth quarter, the U.K. and the rest of Europe showed some contraction in that particular quarter. And again, both order and sales, we have grown used to, and we don't see that going down, as Torbjörn mentioned earlier, that the variations between quarters and between quarters, between years can be quite significant. Next slide, please. And here, pointing perhaps the obvious that the U.S. had a very good run this year, up 43.5% for the year, that's including currency effects, and 52% in the final quarter. So there was a big push there. And as I said before, whereas the U.K. and the rest of Europe had a sluggish sales in the third -- the fourth quarter, we see on the full year that the rest of the world has grown. And also when we look at the U.K. in terms of order intake, it shows a growing traction compared with last year. So we consider that to be a demand increase in the making. In the U.S., the contribution in the fourth quarter was especially significant, as I said before. Next slide, please. And when we go to the different segments, we see that the -- pretty much the traction we had in third quarter, which we end the [ search ] it would continue. It has actually done so in the fourth quarter. So there's a growth [indiscernible] with the U.S. been [Audio Gap] They have [indiscernible] product-based growth, and the product-based sales does also help [indiscernible] margins [indiscernible] of product deliveries. And [indiscernible] there are small units. [Audio Gap] Internal eliminations have increased as the total business volume increase as the internal sales between segments increase with the total business volume. Next slide, please. Profit increase. Obviously, we get a good traction when volume increases. And speaking about the fourth quarter, we also had a stronger gross margin due to a higher software portion in that particular quarter. So that gives a good traction on the gross margin, which finds its way all the way down to the operating profits. And we see that the communications -- we do see we have a job to do there, obviously, in terms of converting this -- the different elements of the business from the projects-based revenue stream to the other sub parts of the business with higher margins. So next and final slide, please. As we said, for the first quarter, we had a very, very adverse impact on the cash flow, which we foresaw to be reversed in the second [ year ]. We do have that stronger expected flow in. Fourth quarter was a good quarter, but not as good as the third quarter as we tied up more capital in working capital, as we can see due to the big billing ratio we had in the end of the year. And as well, we had a quite significant investment in the fourth quarter. The total investments in the fixed assets was actually half of that compared with the first 3 quarters combined, especially to increase our base in our cloud operations, so that you can also see reflected in the depreciations for the quarter. The cash flow per share increase healthy, 17% about, and also in the quarter. So now it's significantly above the dividend projected. And so no big surprises as far as I'm concerned from where I'm sitting in the performance in the fourth quarter and in terms of the cash flow for the year. So over to you, Torbjörn.

All right. And then we will leave the word to Fredrik Gustavsson, CTO, who has been working a lot with a new subscription model, which will gradually be taken into account, starting in North America. Now this will not be impacting our financial figures in any significant way over the next few years, but long term, it will have effects. So I'll leave the word to Fredrik.

All right. Thank you, Torbjörn. So I think we'll start with the next slide. Thank you. All right. I'm going to make sure we're [indiscernible]. Good. So thank you, Torbjörn. So I'm going to run through a presentation here of introducing you to our new business model, called Sectra One, which is an enterprise imaging subscription. So I'll take you through some of the customer challenges that we've been looking at and hearing from the market, what we're doing about it, how we help our customers moving forward and help our future customers. And then finally, looking at some of the financial implications of this and sort of, as Torbjörn briefly mentioned the impacts that we're looking at more on the mid- to long-term perspective. So next slide, please. So as we talk with our customers and health care systems around the world, these are some of the challenges that they've told us about. These are basically the reasons for which we've created Sectra One. So customers tell us when they're moving into digitization of new ologies, they're often faced with cumbersome procurements, steep investments and a lot of friction. So they see, as an example of that, moving into digital pathology, it's kind of a bit of a hurdle. Also for existing customers being stuck with old systems, going out, asking for more capital, buy things, that wasn't included, those are also problematic. Our users want to have the best tools to deliver the best care, and unnecessary friction in getting access to them is a problem. On a whole, too much options and things to take into account, make that up for complex offers and a sense of not being in control as a customer. Capital investments has also become harder and harder. And I think during these times right now with the pandemic situations, operational expenditures are much preferred. So I will come back to the differences between license and subscriptions, but this is one way that will help them. So managing ups and downs in business volume is equally important, and being either locked in or having to buy increments in 2 big steps is something they tell us is an issue. And finally, they say that aligning business-wise with the vendor is extremely important. They want to have a partner that supports them in improving and becoming even more successful. All right. So next slide, please. So with Sectra One, we really set out to address these challenges, and we've been working with this for quite a while now. And we're really looking out to help our existing and future customers. And with Sectra One, customers will actually have access to all the great softwares that we produce for all ologies. And I think making it so much easier to start that journey of digitization, for example, pathology, cardiology or other ologies. And in aligning with customers they only actually going to pay for what they use. So we're looking at a volume-based payment model, creating a strong alignment between customers and Sectra, focusing on joint success. And a great thing is that future versions and features are included, and so is our best-in-class winning support. Next slide, please. What this means is that we make it even easier to buy Sectra's great software. And we are really proud of all the effort that we put in every year into our products, creating new, I think, really wonderful functions, features and supporting imaging out in the field. And with this model, we're going to improve return on investment, both for customers and for Sectra. And again, creating this strong alignment around success and growth of our customers, puts us, I think, on another trajectory for focusing on growth, focusing on expansions into new ologies and really just making a great experience of being a Sectra customer even better. Next slide, please. So we've been talking a bit about licenses and subscriptions. So I'll just spend a few seconds here describing what we mean by that. And historically and traditionally, software has been sold on a license-based model where customer gets an ownership, a perpetual right and they buy that right, typically through payment in a lump sum. A subscription, on the other hand, provides the customer with an evergreen future-proof right to use the solution, whilst they're having an active subscription. And looking at payment models, cash flow-wise, it's a question about recurring payments for as long as the subscription is active versus the license lump sum. Again, we'll come to financial implications at the end of the presentation. But these are the key characteristics of license versus subscription business models on a simplified level. Right. Next slide, please. And most of you will probably already be quite aware of this. I mean, we, as consumers today, just looking at the way that we purchase music or movies or a few years back, we bought CDs, music records. Now we have subscriptions to Netflix, to Spotify. We have subscriptions to great software from Adobe, Microsoft or Salesforce. And looking at some of the industry predictions is that basically most licensing vendors historically will shift to subscription models. It's just a better way to sell software and then licenses, and I think really underpins this question about ensuring that I, as a customer, have the access to the latest and greatest at all times. I don't want to be stuck with old solutions. So -- and that's similar to being a consumer. And the same thing goes for our users. So next slide, please. As I mentioned earlier, we provide customers with, I think -- and this is quite, I think, a drastic change. We say that you get access to our whole portfolio. So you can start small. Today, I mentioned in the first slide, customers face challenges when going into new ologies. They have to make the decision to go full in. What we're saying now is you can actually start small. You have access to all the great softwares that Sectra produces. And if you're a radiology customer, and you want to get your feet wet and you want to get started into pathology to explore opportunities of using resources more efficiently across the -- your enterprise to do telepathology reads, et cetera, we will take down the threshold for our customers and future customers to get started. And this is really, I think, transformational in a way that they're getting access to this portfolio, and we're taking down thresholds to get started. And we really help customers on the journey of digitization, new ologies, not the least, digital pathologies that Torbjörn mentioned earlier. All right. Next slide, please. Another thing that we've worked with quite diligently is to simplify. And we realize customers are different. They have different businesses, strategies, preferences and different financial situations. They also range from mid- to small customers up to major enterprise health care systems, covering whole or parts of the country. Mats did mention New South Wales. It's actually a quite significant part of the Australian market. What is common, though, is that they want to have the best solution for them, no matter their size or their other preferences, but they want to have what's right for them. And now we make it even easier for them to buy a great solution from Sectra. So we provide them with 4 different subscription plans, allowing for differentiation of both features and content and capabilities. This allows customers to select their level of solution based on their specific requirements, needs and their preferences basically. So still not like 100 different options, it's 4 different options tailored to the different customers' preferences. So the subscription is also unified across all our offerings, which means that they can get access both to our traditional on-premise software but also our cloud offerings. So with the Sectra One subscription, we provide them with a very easy way to get access to all the great things that would create. And again, best-in-class winning support, future versions are included in the subscriptions. Next slide, please. I did mention earlier as well the alignment around customers and vendors. And I think, ultimately, they're really looking for a partner that supports them in their mission. And when we align with our customers, we also do that in the payment structure. So with Sectra One, customers will pay based on their actual usage, which is strongly related to the value that the customer is getting. So it means that they can start small, they can grow and will have access to all that great software in Sectra from the get-go. And in terms of committing to larger volumes, there is ability for customers to do that, to commit to certain volume over contract periods, providing with a better unit price. But key here is, ultimately, they have full flexibility to grow continuously. And if they make commitments, they always will be able to pay for any overage above those commitments. So there is a high degree of flexibility to make sure that we are aligned and support customers on their mission. Next slide, please. And as mentioned before, we really believe that it's key, having a future-proof and evergreen solution, not having to hear, well, that wasn't included. So new features and improvements is made available continuously, and they're getting continuous benefits with the subscription, enabling them on their mission to provide world-class health care to their patients. And from a Sectra point of view, the shift to recurring revenue stream, as Torbjörn talked about earlier, will in the mid- and long-term, even out revenue variability to some degree. And I'll come back to the financial implications again in the end and we'll look at what that looks like. So looking at the financial implications, I want to make sure, first, before we start looking at some graphs and illustration is our offering is different. So what we're offering to customers with Sectra One, it's much more comprehensive. It's very elegant and ...

If you could go to next slide there, Fredrik.

Oh, sorry. Okay. I missed that. So let's just resynchronize on the slides. Please. Right. We're on the right slide. Sorry about that. And so our offering is different. And when we look at these comparisons that I'm going to do now, I just want to make sure that they are effective. There is no real numbers. The relation between the examples are also a bit effective. So the numbers and the examples are just for illustrating the principles behind revenue recognition and expected cash flow. Another key thing that I want to point out here is that professional services such as training, [ elbow ] support, installation is outside the subscription. So those are services that varies quite a bit between customers, and those are paid and recognized revenue-wise as incurred. And so those are not included in the examples to come. Right. Next slide, please. All right. So in the top row, we see the license-business model. In the columns, we see cash flow and revenue, respectively. So starting with the top row and just baselining with what a traditional licensing model looks like. Looking at the cash flow, as I mentioned in the earlier description of subscription versus licenses, we can see that there is -- in the first year an initial lump sum being paid for the license. And in consecutive years, we'll see that there is a smaller recurring level of payments, and those are in relation to provided support. On the revenue side, we see a very much, pretty much just aligned model. Of course, these are some simplified assumptions for the examples. I mean, obviously, things can be delayed in terms of cash flows and cash based on revenue recognition and when they go live, so forth. But basically, these are the principles. So revenue is then recognized as the customer will be paying the license and starting to use it. So pretty much straightforward the way that software industry has been doing business for many, many years. If we then move down to the lower row, the subscription row in orange, we can start with the baseline numbers on the cash flow. So you see the first diagram. And what we see here is that the subscription fee from a cash flow point is the same for all the 5 years. So it's the same, and the customers keep paying the same amount of money unless we have growth and take that into account. What I want to point out here, and I think Torbjörn has mentioned this in some earlier discussions and calls is that as we sign up the initial contract with customers, and as we're providing them with the software, we will have a performance obligation effect. So when we look at the revenue recognition side, you see that we will still pretty much look like the revenue on the licensing side. So what we want to point out here is that cash flow-wise, we will have a higher cash flow on an average -- or rather it's going to be spread out over the contract period. But on the revenue side, there is an upfront revenue recognition due to the fact that we have delivered on our performance obligations. So from an IFRS perspective. Now as we are adding new ologies in the example of the subscription, let's -- for the sake of the example, say that we would add pathology, it would be added year 4 for and would be paid year 4 and would be recognized year 4. So nothing really strange there. So this is in a short summary, I think the main comparison between the licensing and the subscription model. Again, cash flow being spread out in the subscription model as compared to the upfront license deal. And then due to initial contract performance obligation effects, we will have a revenue recognition impact on the first year. However, as we proceed to the next slide, if we look after the first 5 years, as customers keep extending their subscriptions, which we hope they do, given that they're getting all great features and benefits of a Sectra solution, the consequence will actually be. And if we look at this graph, again, cash flow is the same for every year. Customers are paying for their subscription in the same way that we're paying for Netflix or Spotify, we look at the first 5 year, this example is the same as from the last slide. We're saying we have the upfront initial performance obligation effect. But as they proceed through year 6 and 7, and as they make yearly extensions, you see that the revenue recognition is then aligned with the cash flow year 6 and 7. So this is where in a simplified an example where we can start seeing that revenue recognition and the effect of recurring revenues will even out that type of recognition effects. And I want to point out here is that as a difference here, customers actually getting all new version features. They don't have to buy additional licenses. It's really evergreen and future proof. And for the customer, it's this operational expenditures set up a subscription, and it's -- and we believe that's really beneficial in many different ways. So next slide. And all in all, we feel that this is going to be so much easier for customers to buy our great software again. We're spending so much resources, dedication into providing the market's best software, and we're just happy to have more customers get access to that. And we're trying to really focus on that, make sure that it gets used to get it out there, help our customers improve their business. And obviously, also get a better return on investments, both customers and Sectra, and again, align with the customers on their success and their growth. And next slide. It's really a true win-win for both customers and Sectra. So that was a bit of a deep dive into our new subscription model called Sectra One. So thank you very much, and I'll hand it back to Torbjörn.

Thank you, Fredrik. Next slide. I will finish off this with our view -- our way forward. Next slide. We are focused on customer satisfaction and quality and delivery. It is our way of competing. We are -- some of our competitors are giants with the marketing budget, more than our revenues. And we started this effort 7 years ago with winning Best in KLAS. And Best in KLAS is -- actually KLAS is a survey institute who makes a living out of Salt Lake City, Utah and selling reports of performance of medical IT systems. Today, they also actually measure performance of modalities and hardware, but in the beginning, it was only IT. So electric -- electronic medical record systems and all different various aspects of IT. What we are competing is PACS, which is Picture Archiving and Communication Systems. And we have won U.S. Large PACS which is our kind of soft spot. We really want to address that market, the large providers of health care in the United States. Now small providers have not been our focus, but we, of course, have a few of those customers as well. Now this year, we won both Large with an increased margin compared to last year. We also won Small, which is not even our prime focus. And we also won Canada for PACS, which is, of course, very happy to be Best in KLAS in 3 categories. Next slide. Why do we win it? We receive an A+ for our company's culture. We have proactive services, we keep our promises. This is actually what KLAS mentions in their report. So I'm just quoting what they are saying. And product works are promoted. We try not to overpromise, if we'll only hunt you down later. Loyalty. That's an A+ as well, highest grade. We are part of customers' long-term plans. They have no plans to replace us. Of all the -- KLAS also measures and as people do plan to replace this vendor long-term or are they part of your long-term plan. And we are #1 in that by a huge margin. We have the fewest customers who want to replace us of all the measured companies. People say they would buy from us again. And they are likely to recommend us to other customers. We internally, without making it public, we measure a Net Promoter Score. And that, of course, is also a measured that would you like to recommend us to others. And they -- overall, they're very happy with us. Then operations, services, relationship and value, we're graded A, which is the second highest. Next slide. This is actually our -- grade of our competitors' names there on the left. But you can see, we're #1 in Large PACS in the United States, with a total score of 93.9. And the next one is 90.5, and then it's hugely down to 80. And actually, the average in all IT is around between 75 and 80. Next slide. This is Canada, where our lead is even larger. We have never received such high praise, and it's very nice to have that in a new market because new market is always difficult to enter. And we actually score 95.2 and the second one is 84.5, so we have a solid lead in Canada. Next slide, and there is a quote from Edwards Deming, the consultant that told the Japanese to have high-quality and not only produce stuff. "Profit in business comes from repeat customers, customers that boast about your product or service, and that brings friends with them." And it's very important, even in a speedy and fast and rapidly evolving market as IT. These old truths still owned, and that's what we try to live to. Next slide. Now in order to deliver that quality to customer, you need staff, you need competent staff. We all need staff that is -- likes what they're doing and likes staying with the company, and we need to attract good staff. And we're very happy that we're voted #3 of Sweden's Best Employers 2019, which, of course, is a very good thing if we want to deliver good quality as well. Next slide. Third important philosophy is to choose markets wisely. You can fight in a nongrowing or shrinking market, and it will always be a dogfight on price. In a growing market, it's easier to grow because we can grow with the market without too much fighting on price. And that's where we are. We are in healthcare, IT and cybersecurity. These are markets where society that mandates growth. The market will grow. Next slide. And our philosophy for shareholders is in order of priority. If you have happy customers, if you have happy employees, a good position in growing markets and you have reasonable cost control, you need to be a little greedy and careful with expenses as well, then shareholders will be happy. It cannot be avoided. But it comes in that priority. You have to prioritize in that order, and then shareholders will be fine. Next slide. We have seen in the year -- as we see, we have more recurring revenue. And pay per usage has, generally, as Fredrik described it, been found to deliver large value to both customers and vendors. The customers get more up-to-date products earlier without a lot of hassle of buying new products, and you simply get the greatest and the latest over time. And vendors, of course, get a more stable income less influenced by pandemics or whatever happens temporarily. This will be an important role in Sectra's future, this new model, but we will, as I said before, the transition will be over several years and we'll not see a big impact, either the next one or the next year after that, it would gradually come into operation. Next slide. COVID-19, I would like to emphasize that, again, we'll temporarily even increase our already large seasonal variations. There are -- it's a huge short-term impact on the U.S. hospitals' investment budgets as they have -- some hospitals have taken the revenue of the hospital down by 70% to 80%. Now these are solid institutions, but even then, they become a little nervous. Now there's been several studies done that the bottom will be quarter 2, not our quarter 2, but the calendar year quarter 2 of 2020. And that America, who actually went down quite fast, will also recoup faster. So they will be back to more than 100% of revenues in the winter or even quarter 4 of 2020, and above that to kind of work back what they lost in time here in procedures early next year. We haven't seen that yet but this is predictions given by several large consultant firms. Longer-term effect in Europe, we don't see those short-term liquidity effects. It's basically tax-based health care. Long-term FX might be seen in Europe 1 or 2 years down the line when there is less tax paid this year. We don't know that yet. As with government and nations injecting massive amounts of money into the system with a quantitative ease, we don't -- we might not see such a big effect on the tax-funded healthcare systems, but that is yet to be seen. Now however, what we have seen now in the early phase of this year as some of the go-lives we planned for in Q1 will be delayed and move into our Q2 or later in some cases. These are delays. We don't think that will have a huge impact on the whole year, but it will actually have an impact on Q1 as we see it right now. Long term, our new subscription model will reduce variations but not significantly over the next few years, as I said before. Next slide. Little final words about being a shareholder in Sectra. Next slide. We have proposed a share redemption proposal to the AGM, which is our way of paying dividends. We have a solid financial situation, we have good projections for the year and we have not made any temporarily redundancies or layoffs. So we are in a very good position to continue to pay some of our earnings to shareholders here. So we propose unchanged program to be decided by the general assembly in September of SEK 4.50 per share. Next slide. Why should you invest in Sectra? We have high customer satisfaction. This is since capitalism was invented, the most important thing there is. We do have a high employee satisfaction, which is required for having a high customer satisfaction. We have a strong brand in markets where trust is critical. If our systems stop working, hospitals go down, entire hospitals stop. Nothing can be done. And of course, you don't buy this from 3 guys in a garage, which is presenting barriers of entry into the market. Difficult to get into the market, but when you're in the market and you have that strong brand, it's a very important asset to have. And the same in cybersecurity. We handle nation's most secret secrets, the top secret levels. You don't provide that to 3 guys in a garage either. The barriers of entry are large. We have a good, profitable -- we are profitable, and we have a strong cash flow and a solid balance sheet. We have substantial and increasing recurring revenue. We're positioned in niche markets with substantial underlying growth where the society trends, as I mentioned before, which mandates growth. And that's an easier place to grow in than into a dogfight on a -- on a nongrowing market or even decreasing market. All management owns shares in the company, and we have sustainable investment in R&D with exciting future opportunities. Not all of our growth opportunities will mature into large business but some will or might. Next slide. Our upcoming financial reports and general meeting. September 4, we have our 3-month report and presentation. That will also be done. But we -- normally, we have this end of year as in-person, in real life, as you may say these days, meeting but this year because of pandemic, we did this on telephone as well, or video, we will do that in the 3-months report. Also, we have the Annual General Shareholders meeting in Linköping, September 8 and November 27 will be our 6-months report. Next slide. Please remember your feedback is important. We don't do these presentations for our sake, we do it for your sake. So we are trying to adapt these presentations, so they become better for you every time. In the same way we behave to customers, we want to behave with our shareholders and investors. So please fill in the survey provided in this link. We'll look into it, and we'll try to improve these presentations for the future. Next slide. And then we leave over to questions. You can either put an e-mail button or you can send your questions by e-mail or -- and we'll try to reply to your questions here online. And that means we could go over to questions mode, moderator.

[Operator Instructions] The first question comes from the line of Carolina Elvind from Danske.

Okay. So I have 2 questions. The first is on the pathology solution. You have your pathology solution approved for primary diagnostics in the U.S. earlier this year. Are clients familiar with the solution there? Or what does the sales process look like for introducing a product like this? And how does the order side for this product look during the quarter?

All right. The sales process is, of course, we have been promoting this for several years already. So it doesn't start with FDA approval. FDA approval is when you actually can deliver things for -- or are actually selling it for primary diagnosis. So we've been on exhibitions and fairs, and we are quite well known. I would say that all of the more prominent pathologists knows of us, most of them already know our name. And now they can buy it as well. And of course, we'll start with trying to promote this into our installed base because we can easily convert them into digital pathology, but we also see some interesting -- or very large interesting from some very prominent institutions in this area.

Perfect. And the second one more on long-term outlook. So you've managed to work with your focused markets over time and gain large market share and strong positions. You mentioned earlier a 70% to 80% market share in Sweden, for example, and now you're targeting the U.S. and have built up a strong brand there. What challenges and opportunities as you have [ to use ] the same strong market share in the U.S. over time that you had on other markets, what is the competitive landscape there?

Okay. Well, we'd love to have 80% market share in the United States. I think that would be a tough one, though. Now United States, also, you must remember, realize, this is not one market. And they speak the same language, and they have one president, but the variations between different U.S. markets are -- is significant. So we aim to be large in a few areas of the U.S., and we will not likely reach anywhere near to our market share in Sweden and a few other countries. But now U.S. is half the world market share, as relative market share, which is on #1 or #2 would be a very interesting place to be. Now we are not close to it yet, but of course, that would be a very nice aim to be #1 or #2 in the United States.

Okay. And how large market share would #1 or #2 ranking in the U.S...

Typically that -- I think today, it's 20 or between 20% or a little less than that from #1. But we are not giving that as a forecast in any way, but it's interesting to have that as a vision. That -- but you cannot aim for anything larger than that, not in the United States too. It's too competitive and too diverse market.

Our next question comes from the line of Kristofer Liljeberg from Carnegie.

Three questions. First, on the EBIT margin, once again, you are a bit above the 15% level. Last time that happened, margin fell down again towards the 15%. And you talk now about the importance of reinvest to accelerate sales. So how should we see this? When you talk about 15%, do you still aim in the next few years to be close to that level? Or has something changed versus the past? And related to that, if you continue now to invest in growth, is it possible that you see to accelerate growth further because they have come from growing maybe 10% and now we were close to 15% last year. Is that -- is it possible to accelerate that further? Or it's getting more challenging? And particularly, I mean, in the U.S., which is an important factor for the better growth. How much could you internally handle when it comes to growth because I guess there are challenging also -- challenges also if you grow too quickly, if you want to keep customers as happy as they are today?

Well, I can take that one. We see 15% as a sanity check. If we get below that, we do -- that is not a place we want to be. We do want to be a good business. But if we get above it, as we do now and then, that should be invested in future growth, not in revenues, but in profits as we measure growth in profit per share. And we intend to continue. As long as we have the opportunities we have right now, we are in a very good position to continue to grow. Exactly how much that growth will be varies between years. It varies more based on the market conditions than it does on our performance. We try to grow as much as possible. Right now, we grow faster than anyone else in the U.S. market in our segment, and that's a nice place to be. And then you just need to do that for a couple of years. And so to be very -- point to your question, 15% is a lower bound. We will now and then go above that. It can -- we don't have perfect control, but we don't intend to increase it before we run out of growth opportunities because long term, it's better for shareholders. If we grow profits then it grows margin and decrease growth of profits. If that replies your question, Kristofer?

And U.S., fantastic growth last year, [ 43% ] if I remember correctly. Is there a limitation to being able to continue to grow this much?

Well, growth is, of course, we need -- we will not compromise customer quality for growth. We will not. Because then it becomes one of these up as a sun, down as a pancake as we say in Sweden situations. We will -- and in order to keep the quality up, and you can be very large having quality up but you need to train people. And before you send them out in the field. And that means they have to work with us for half a year to a year and not as primary product managers and so on. And of course, that is investment that costs money because they will not be completely productive for that first half year or a year. So the major cost of our growth is to get people trained so they can provide -- continue that -- their high quality. And that is what we used our money for.

Okay. One more question before heading back to the queue. You talked about delayed go-lives projects in the second -- in the first quarter now, is it possible to quantify these effects? And could you just confirm that you said, you don't expect this to have any significant impact on the full year, i.e., that there will be a catch-up effect in the later part of the year?

I will say like this, we have seen a few, not a lot, a few projects. Projects being delayed because the customers have simply stopped all visits to the hospital. Now if they stop, even though we do remote training and remote for installation and so on, when go-live happens, we have to be there to help them in a go-live situation the first week or so. And now if you're not allowed to go in, even in the door of the hospital, that's impossible. Now these restrictions are gradually being lifted. You can't have them on, you will not have any hospitals left. So while they are lifted, we can go and restart these projects again and just finish them off. It's very often just a very final go-live that is lasting. So we don't see a major effect of that. Well, there is another area, another cause of delay, which is actually the purchasing departments and the investment budgets being frozen because of COVID and they are simply not there to do large investments. There, of course, Sectra One, our new model comes in very handy because that reduces their capital expense. And so we'll try to use that situation to promote that. And second, also, that we will come out of that as well. There is a quote, I think, from King Solomon once that said, this, too, will pass. And we very often forget that. This pandemic will not go on forever. And then all those procedures and all those health care needs to be provided, and then this [ block ] will take -- speed up again. Now we don't see any significant impact on the full year from COVID-19 as we see it now. And otherwise, we will not have suggested the dividend. We think we are -- we will be okay. There will be impacts. But we see them both positive, negative and not significant.

Actually, given your comment here that you need to be at the customers' side for starting up projects, how does that fit with the subscription model that you have a lot of initial work to do before starting up?

Yes, that's fine. As Fredrik said, the subscription model is only the license, the software license for work for man hours, et cetera, that is always required. We simply bill per the hour and that is billed upfront, directly upfront. So part of the revenue from a typical product is licenses and parts are professional services. The professional service we will billed as before, upfront for the customer and not spread out over the time.

[Operator Instructions] And the next question comes of Christian Lee from Pareto Securities.

If you can't talk, Christian, you can actually e-mail to info@investor (sic) [ [email protected] ], we'll read your question from here.

Okay. And we do not have any more audio questions registered, so I hand back to our speakers.

Okay. We have had a few questions coming in over e-mail that Helena Pettersson will read here, and we'll try to reply to them as well. So please?

Yes. We have -- the first question is related to our Imaging IT Solutions business in regards, which are your largest competitors in your large markets like Sweden, Netherlands, U.K. and the U.S.?

It varies by the market. There is a few international competitors of them. I would say that Carestream that used to be Kodak in the old days, which has now been acquired by Philips is the one we meet in large products in different countries, most often. And that's the only international competitor we really see often in these large products that then we see. Then there are local players, there are local players in Germany, in the United States, et cetera. And they might be very good sometimes, but they're often local to that market. And they are -- there's a company called [ Visech ] in the United States. There is Intelerad in the United States. There is Visus in Germany and several other, a little bit smaller players in -- but that's local, for local each market.

Next question is also related to Imaging IT. When do you win a deal and when do you lose a deal?

Well, we -- it's very difficult. Sometimes we win, sometimes we lose. Very often, we win the deals where a lot of ologies are involved. And that is -- hospitals today want to consolidate. They have hundreds and hundreds and hundreds of IT systems. And it becomes very clear that connecting the different IT systems is needed in order to become effective. Now -- but the connection cost of all the different various IT systems is higher than the investment to buy in the IT system from the start. So they often want consolidated fewer contractors, fewer vendors of IT. Of course, we can provide a workhorse working next to the EMR and the EMR is the electronic medical record. These have been consolidated. They are very often hospital-wide or even system-wide systems now. And we are more a vendor who provides a pixel EMR next to the EMR that takes [ share ] of all the images. In these situations, we very seldom lose. We are -- if they are interested in pathology, radiology and cardiology, one single system, we're the only one who can provide that right now. That will change, but that is how it is right now. When it's specific for a given ology, for instance, specific to pathology, radiology, cardiology, there might be strong specialized niche players and sometimes they win on price and sometimes, they're better than us for some reason in some of these ologies. And then we might lose. But we very often win these as well. But that is -- typically, we can lose in this situation when it's only one ology at the time.

That was what I had right now. But there's indications that one that follow on the phone have more questions. So if the operator could check that again, please.

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

Great. A few more. First, on the core gross margin loss on the high side, if you could explain that? And also, on the other hand, amortization, depreciation combined were significantly higher than a year ago and also versus what we have seen in previous quarters. So I don't know if this is correlated in any way, could you explain that?

Yes. Thanks, Kristofer. They're actually not correlated. The high gross margin pertains to the fact that the significant rise in the revenue this time, this quarter, had a significantly higher portion of software content, which has a higher gross margin. So that's basically the carry home from that part of the business in -- and obviously, obtaining to the different parts of the business, that was mainly due to the final push in the U.S. As for depreciation, about just short of half of that is the IFRS 16 effect, the depreciation of rights to use for the leasing. And the second portion, to a large extent, is actually a higher installed base of material fixed assets, especially pertaining to our cloud -- expanding cloud offering to the market. So that depreciation, the asset base has increased on a higher basis at the end of the year, actually.

Okay. But it seems a bit -- but it's going up so much quarter-over-quarter that...

Yes. The investments in fixed assets has increased quite significantly from the mid-section, you could say, of the second half of the year. That wasn't sort of fully full internalized in the third quarter report. So the underlying depreciations are on a higher level now, supporting the business.

I can comment on that. Again, this is Torbjörn again. We are selling more and more cloud-based solutions. And we -- these cloud farms that [so far ] is providing the cloud-based solutions. They require investment, then we have to actually purchase hardware ourselves. A thing we don't like to do, but we are forced to do it in that situation. And they are then, of course, depreciated over the next years to come when we do these investments.

Okay. Good clarification. Then if there's time, 2 more. And that's relates to the new subscription model. First one, this -- the difference in cash flow and sales or cash flow and earnings, where will that show up? Is it -- that's going to be accrued income or account receivables? Or is kind of the inventories?

You mean the billings that hasn't -- that are on a long-term basis?

Yes.

Yes. And actually, we are having an ongoing discussions with auditors as well. Where would that be the most appropriate place to record this because a large chunk of that will obviously be for the longer-term and to some extent, let's say -- and what do you say, embedded interest component to it. So I think you would more like to expect it to be in the fixed -- in the financial fixed portion of things, but we'll get back on that.

Okay. That's fine. And also, how long time do you think it will take until, let's say, 50% of new U.S. sales has been converted to this model?

We don't know. And even if we knew it, we couldn't say it. But we don't know, especially now with the cash or an investment problems in the U.S. and liquidity problems for the hospitals, it's actually impossible to say. This might very well speed it up, but we don't know. We are available on both situations. Actually, we have a strong equity-to-asset situation, which is a very good situation in this because we cannot finance the customer any way here. We are stronger in equity-to-assets than our customers are. And so it might actually speed it up, but we don't know.

Is it okay with 1 more question?

Sure.

Okay. Yes, it could, as to -- I guess, of course, it's very good with the subscription model being recurring revenue. But if you look at the business today, how common is it really that your customers are not buying a new license, and they think it's [ sold ]. So I guess there must be very few customers that you are actually losing already today.

Well, you're right. You're right because almost everyone, I would say, very close to everyone has a software subscription agreement with us, including the service contract, which means they get upgrades. But we -- so the difference is that we are moving a small recurring revenue or a small return on revenue, typically 18% per year or something like that of the initial price. We're moving that to a larger portion, which is actually amortization of the entire system over those 4 or 5 years from the beginning. So that's a difference. But you're completely right, there is literally no customers who not get the upgrade. They don't buy a new license. They pay for it by another type of recurring revenue.

And then we are going back to Christian Lee from Pareto Securities.

Can you hear me now?

Yes.

Okay. Great. Apologies for the previous technical issues from my side. I have one question regarding your new subscription model. You said that this payment model is volume-based. If you could please elaborate what kind of volumes you are referring to?

Typically, there is a production per year. So this is kind of -- it's actually emulating what Microsoft does with their systems as well. We don't want to invent too much. We like to do what customer's used to. So the IT department are used to this model before. You do an estimate of the minimum volume we'll do, we'll do a number of diagnosis or procedures per year. Now that would normally be a little less than actually what you do, but the higher you promise that minimum volume to be, the lower the price per exam you pay. So you can pay a low such minimum volume will give you a higher cost. And if you promise a high one to get lower, then you pay the overage. So if you -- for instance, promise, you will do 100,000 exams per year, and you actually do 150,000 you have to pay for those. First, you pay upfront to the 100,000 and then you pay for the 50,000 afterwards to compensate. Next year, you will have to increase your minimum volumes because you overshot so much. So that's how it's based. So it's kind of -- it's based both in the prediction, which you promise and guarantee, which we can do revenue recognition on. On the overage, you have to pay for in aftermath. In general, that's how it works, a little different in the different tiers, E1, E2 and E3, E4. But in general, and that's how I explained it.

And there are no more questions registered, I now hand back to our speakers for any closing comments.

Okay. We have no other questions coming in on e-mail either. Thank you very much for attending. I remind you again to give us feedback on the presentation so we can make them better. And thank you very much, and wish you all a very good and healthy, as you should say these times, summer. See you back in September. Bye now.

This now concludes our conference. Thank you all for attending, and you may now disconnect your lines.