Sectra AB (publ) ($SECTB)

Jessica Holmquist, sorry. My name is Helena Pettersson. I will be moderating the Q&A session after management presentation. The chat function is open from start, and you are most welcome to write your questions during the presentation. Management will address them afterwards. And with that, I hand over to you to, Torbjorn.

All right. Thank you very much. So we will go through interim highlights as a start. We'll do the financial development, and we will do that, Jessica Holmquist. And then briefly, I will go through a little way forward at the end, and then we have the Q&A sessions. You can do questions both via chat and e-mail, and we'll reply to that, and also some previously sent in a question that we got by e-mail before the meeting. So our business operations as a short brief. Our largest business area, led by Marie Ekstrom Tragardh is Imaging IT. That is management of images in hospital health care. Main part of that is radiology, but we have increasing other areas as well such as pathology, we have ophthalmology. We have other operations as well in that area. We're becoming an enterprise imaging company there, by far the largest area. Then we have Secured Communications, which is high security encryption systems for communications mainly. And that is managed by Magnus Skogberg. And we have good growth in that area as well. And then we have Business Innovation, which is our greenhouse, including research. We have an extensive research industrial docket still program we'll keep at the very forefront. And we have some business areas there that are not big enough to become a business unit itself but are still interesting areas for the future. Those are in orthopedics, medical education, which is growing well. And we have genomics, a relatively new area with a high future potential. Highlights from the year. We have long-term recurring revenues going up. The contract order bookings went a little down, but we still are ways above our turnover at more than double the turnover of revenue in order bookings. So we're not all panicked about that. Then we have -- and I should point out that in order bookings, the orders are very large relative to our size. And that means that individual quarters and even years are heavily influenced by individual orders when one order might be 25% of the annual revenue. It is not like selling a lot of small units. It's individual orders that come. Net sales rose by 9% and profit per share grew by almost 20%. The cloud recurring revenue, which is our big growth area when we transform into as a software-as-a-service model, grew by 55%, which is now increasingly a very large portion of what we do. Recurring revenue as a whole, which also includes the cloud return revenue, but in addition to cloud recurring revenue, it includes the old service contracts and more type of that which is not related to the SaaS model, that grew by 19%. And the main part of that growth is, of course, the first one, the cloud return. And then we had churn. If you are in a service model, you don't want to lose customers as they pay per procedure. And we have a very low return revenue churn at 0.5%, which is a very important figure to look on if you compare to the first half. The financial targets for the group are equity to assets ratio, a measure of stability. We sell into areas and customers who do not want us to cease to exist. The medical informatics solutions we sell are named to be the most important IT systems in hospitals. If radiology -- management of radiology stops, most of the hospital and modern hospitals come to a grinding halt. You don't buy that from 3 guys in a garage. You will it from someone you trust. And that trust comes both in other references and other happy customers, but it also comes from financial stability. And our target there is 30% of equity assets for each year, and we are well above that, 48%. Despite that, we also increased the dividends for last year. Profitability, which is a second prioritized target, is margin. We have a margin target of 15%, and we are well above that at about 20%. These two first are hygiene measures. Increasing margin can only do one, but growing profits, it can do forever. So stability, profitability, when these are fulfilled as hygiene in measures, and they are, then the main goal of the company is growth of profit per share. We measure that by EBIT per share growth over the 5-year period. That should be above 50%, and we are well above 100%. We, once again, we're ranked #1 in customer satisfaction. When you have such a high trust business as we were in, what other people say is very important. And we have now had the 13th year in a row in the United States and large hospitals, we have been named the system in our business which customers are most satisfied with. Seventh year in a row in Canada and in global PACS, which are other areas in Northern Europe, we are -- we have the happiest customers in Southern Europe. We have the happiest customer in DACH, which is a very large portion of Middle Europe. Middle East, Africa and Oceania, which is Australia and New Zealand, we also had the highest customer satisfaction of all vendors in our business. And these are important things when here in such type of business as we are. We also, towards the end of the year, acquired an AI company. We have said before that we do not normally do AI in-house, but this one is a little bit different. This is not, I guess, a system adopter. It's a system that is approved in Europe for autonomous AI. And if an AI can do at least high confidence normals, when this suspicion or the probability of disease is very below but you have to go through a very large amount of images, you can actually, in some cases, replace a doctor all over. And that means great savings for a hospital. Just to have another measurement for the doctor who needs to review an image anyways, that is not really saving. But if you can take the doctor away for the group, for some extent, that's when you have savings. And that was the main reason when we acquired this Lithuanian company located in Vilnius. Very confident people and we are very happy to have them in the group. There is no material impact on the group earnings '25/'26. This is a small company with small revenue. But strategically, it is important for the future. In Business Innovation, we won a national-wide agreement in Norway for education portal. And that was not to universities. We are mainly selling in universities versus earlier. But now medical doctors are becoming like us engineers. What I studied when I was in engineering school is by far obsolete. The only thing that's still valid is probably the math. But in -- so the half-life of knowledge of an engineer is short. You have to be a continuous learner for life. Medical has become such, also medical professionals in hospitals and working all of the world needs to keep up to speed on what's happening in the field. So they need continuous education. And the nationwide agreement in Norway is for pathology and radiology. All over north, all Norwegian doctors will be continuously trained on our solution that is mature. That is, we hope, a good example of reference going forward because we think this will be more and more important, to have continuous education of medical professionals because there is a new article every week for something that is important for them. And you need to have an organized training for that. In Secure Communications , we had a very high revenue for a single quarter. We are growing in a way because of a sad reason. There is a war going on in Europe, and that has driven security concern and defense concerns all over the world. And we are doing encryption, which is very important to keep secrets. And with the inclusion of NATO, we hope to have a larger market going forward as well. We have a lot of growth in that there. We also do civilian defense encryption systems. In financial development, I will leave the word to Jessica.

Thank you. Good morning, and welcome to our call. We are happy to report a solid financial performance for the full year and the fourth quarter. And as usual, during our presentations, I will guide you through the key financial metrics, starting with order intake. We see sustained demand for our offerings. Full year contracted order bookings amounted to SEK 7.6 billion, surpassed only by last year's record high order intake, which was driven by the SEK 3 billion Quebec contract. Our rolling 12 book-to-bill ratio is 2.2, and we have seen strong order inflow across our geographic markets with North America leading and solid contributions in Sweden and in the U.K. Our fourth quarter order intake amounted to SEK 1.6 billion, not a bit down versus the comparable quarter when we signed several larger U.S. contracts. And this again confirms quarterly volatility in our order book gains. Net sales for the full year amounted to SEK 3.5 billion, corresponding to a growth rate of 9.3%. The SaaS transition drives recurring revenue, which increased by 19%, whereas our nonrecurring revenue declined by 7%. And I'll point out again that the cloud recurring revenue grew by 55% to SEK 960 million. Currency movements impacted sales negatively with the U.S. dollar, the euro and the British pound all weaker against Swedish krona than in the comparable period. And adjusting for currency effects, sales increased by 16.5%. And high customer satisfaction is reflected in our figures with a low recurring revenue churn of 0.5% rolling 12. Fourth quarter sales increased by 13%, and for the first time, quarterly sales exceeded SEK 1 billion. All operating areas increased sales year-over-year. In Imaging IT, the drivers are increased usage of our services and continued deployment at additional sites. In this area, we report close to 76% recurring revenue for the full year. In Secure Communications, we increased sales by 11% to SEK 453 million. The fourth quarter was strong despite product delivery delays with sales reaching the highest level ever for a single quarter. And in Business Innovation, where we include Orthopaedics, Medical Education and Genomics, the performance is driven by growth in our medical operations business. All geographic markets report sales growth year-over-year in local currencies. We reported the highest growth in absolute numbers in the U.S., and Canada is the main market driving growth in rest of world. Please note that our year-over-year comparisons on operating profit exclude the nonrecurring patent settlement recognized in '24/'25, which had an EBITDA impact of SEK 110 million. Excluding that, our operating profit rose by 16% to SEK 711 million, of which SEK 209 million was generated in the fourth quarter. Profit growth is seen across all 3 operating areas, and the margin was improved to just above 20%, up from 18.9% the year before. And this is driven by higher volume, cost control and more capitalized work for own use. Imaging IT delivered a strong finish to the full year. Operating profit increased by 25% and the margin is just above 23%. And the drivers are the same, as I mentioned previously, increased use of -- increased usage and deployments of new customers and add-on sales. And combined with cost control, this resulted in profit growth and improved profitability. Secure Communications operating profit increased by 24% and the margin was 17.6%. Throughout the year, we have seen the impact of delayed product deliveries. But nevertheless, the fourth quarter was strong through both growth and efficiency improvements in underlying operations. In other operations, we report a larger operating loss than in the comparable period, and this is mainly due to employee profit sharing recorded during the fourth quarter. Cash flow from operating activities amounted to SEK 1.078 billion for the full year, of which roughly SEK 500 million was generated in the fourth quarter. And the strong cash flow generation comes from profit growth and also from increased short-term liabilities related to advanced payments from customers. And given the cash flow generation and the overall financial position, our Board and CEO proposed an increased ordinary dividend of SEK 1.30 per share and an extraordinary dividend of SEK 1 per share for approval at the Annual General Meeting in September. Thank you.

All right. Thank you, Jessica. Our way forward. There is a wave of AI coming to our entire society, and we have said several times that this wave is not something that can be stopped or hindered, it's on the way coming in. You have two choices. You can either try to surf on the front of that way and benefit from it. You would fall a couple of times, but you can at least try to surf and use that energy to your own benefit. Or you can fight like on the back end of it, trying to paddle to keep up, and you would probably not succeed anyway. We prefer to try to surf on the front side, and we're using AI to both help our customers, both in making health care more efficient, actually, we can see a trend that health care, as we know, will not survive without this new trend in AI. It makes survival or increase of production in health care possible. So we are helping with our customers with that. We're also helping out on the cybersecurity side to defend and also use this to increase cyber resilience. Problem there is that also the crooks have access to these tools. So it's kind of an increasing speed of change in cybersecurity. But our job is to help our customers as good as we can in both areas. We also use AI to increase in total efficiencies. We have very large increases in efficiencies, as probably most of you also have seen in your own environments. If you use AI carefully and cleverly, you can become way more efficient than you were without it. In medical IT, we have the growth areas that we have presented many times. Based on the demographics of the world and the relative numbers of older people to younger people growing, the main focus has to be related to the age-related diseases. And these are neuro-degenerative, cardiovascular disease, musculoskeletal disease and vision and hearing. And we do image-related diagnostics. We don't do therapy but image-related diagnostics and now also genomics in these areas. And these are areas that we have to grow if we want health care we know to survive in the future. And that's our main focus. We need to be good in all imaging and all diagnosis, but these are the ones that will require the highest investment from society in the future. And we do that increasingly with what we Sectra One. Sectra One, our customers are now in the cloud. They can sign one contract with us, and within that one contract, they can get all of these different services. That is radiology, which is the biggest one, but we also have pathology, cardiology, genomics, education, as we discussed before, imaging, orthopedic planning all in one contract. And that means the customers can -- when they use one of these functions, there is a tick and they need to pay for that, but they don't have to have multiple vendors. That simplifies the environment in the world of our customers tremendously, but it also provides a possibility to have these interacting in the future diagnosis, many different -ologies, so to say, and many source information needs to to be unified and participating what the customer uses. So we can say that we separate, in a way, a Microsoft Office in medical imaging. You would not today buy Excel or Word separate. You have a Microsoft Office contains that, and we have that possibility for our customers. And as with Microsoft today, you don't normally buy Microsoft as a package in the bookstore. You get a subscription and get all the surface going forward. And that is exactly what we are doing. But we charge per usage, we don't charge for seats. And we are also adding now reporting into that. We've done reporting as kind of the output of the diagnostic process, and we have done that in Europe for many, many years. But we also add that in now in the U.S., and that is an important part because reporting can take the result of the different diagnostics make comprehensive report and then go to the referring physician, which is a very important part of diagnostics. We hear from customers all over the world, we like medical staff and our workload is increasing. People are getting older and older, and old people in general, get sicker. And we are also seeing cancer, especially that cancer is transforming from being an acute deadly disease to a chronic disease. If you have cancer, you can live on, but then you need medical diagnosis all the time while you continue living because you need to monitor that. Burnout risk is real in hospitals today, especially in the U.S. but also in Europe. A serious issue. People can not work all the time. They have see their kids and have a life outside is even if you make a lot of money. Workflow efficiency, therefore, is paramount and important, and that is our core, what we do in products. We increase production in hospitals by improving workflows. Workflow efficiency is what they need in order to survive. Another thing we hear from customers, we have too many IT systems, there are hospitals with thousand IT systems. There's a huge cost base of maintenance. They have staff and hospitals that look on all the differences and know all these different systems. That's expensive and cumbersome. But it's also high cybersecurity risk. All of these thousand systems is a possible place of attack for cybersecurity. You would like to decrease them so you can have various cyber security control over your hospital environment. And these two both motivate having one vendor from many systems. And lately, we see personalized medicine, which is applying therapies that is different for 2 different patients. They have the same disease, they look the same. But they are perhaps different in genomics or something, and then you want to target personalized treatment for that person. And that requires integrated diagnostics. You need input from radiology, pathology to take those decisions and not the least, genomics, our newest area. And this is what we are building, as we saw that big circle before with Sectra One. This is what is needed. It's one system doing all of these, but we can also have one report imaging to have an input to all these different areas. And we are the only vendor in the world with all of these in one single system, radiology, cardiology, pathology, genomics, IT and ophthalmology. And that is a strength. It's fewer systems for the hospital, less concern and one integrated report going forward. In cybersecurity, we normally say we, well, not Sectra, but we as humanity have built a very fragile society in IT. It can be compared to building a skyscraper one floor at a time. We built a very primitive, very early versions on TCP/IP with protocols underlying most of the communication in Internet, et cetera. That was very primitive in the beginning. I still remember when the first possibility to send data over the Atlantic was done in the mid-80s. But they work fine. So we build another floor in this building and a third floor. There was no plan. There was no foundations made to support it. But today, that's a big skyscraper built on the foundation that was never intended for this. And there was no foundation, no plan. This is scary. But that building now runs on society. And that building needs protection and we need to pass it as good as we can. We can't rebuild it. It's already there. But we need to patch it. And that is cybersecurity in a nutshell, and we are good at that. We had put in protecting that building. In both of these markets, Sectra is very well positioned. Health care and cybersecurity are markets that even if you have a low tide in economy, even there is -- inflation goes up, due to external pressures, we need to have health care especially for elderly but also for ourselves. And we need that huge skyscraper to be protected. These markets have to grow. So we will grow despite -- or our markets will grow despite if there is high tides or low tides in economy as a whole, which is an important and nice place to be, but that was intentionally built. So the priorities, key takeaways going forward. We have significant go-lives in progress now. The large contracts we've taken over the years were all set of one, so they're spread out of many years. are now in progress to be taken into real life and then they get to pay. They don't pay now at order. They pay when they go live and they pay per procedure they do in medical. the quarterly variations in revenue and profit will decrease slowly. The quarterly variations in order intake will still be very large, and we are also exposed to currencies. So we want you to be aware that the Swedish krona affects our results quite a lot. The upcoming financial events. We have a 3-month report in September 4. September 8, we have an Annual General Meeting, we are old-fashioned. We do it, as the kids say, in real life. So that will not be digital. It would be physical in Linkoping. And in November 25, we have our 6 month report for the year that we are now in. I would like to remind you these meetings are not for the sake of us. It's for the sake of you. So we have the same thinking about you as we have about our customers. You need to tell us what you think works. Otherwise, we cannot improve them. So send and e-mail to [email protected] if you want us to improve this, if you have suggestions how they can become more efficient. We are changing quite a lot over the last years based on that feedback. And then we open up for questions.

Thank you, Torbjorn and Jessica. We have received a lot of questions during your presentations, but I will start with one that we have seen from several investors and it's connected to the Sectra One Cloud. Could you please update us on the implementation status and timeline on some of the larger Sectra One Cloud deployments and how they are proceeding, especially contracts nationwide enterprise imaging in Scotland, the Quebec contract in Canada and the major U.S. contract?

The major U.S. contract, we are now in the early phase. We have the first half for of regions or markets depending on which chain it is going live. In Quebec, the first hospital is live, but there is still a huge chunk to be done. And in Scotland, it's a little delayed, but that's proceeding well. But the early start is a big delay.

And a follow-up question on that from Kristofer Liljeberg at DNB Carnegie. Are sequential growth for cloud recurring sales likely to accelerate in the new fiscal year?

Well, long term, it cannot grow faster than our revenue. The proportion of the revenue will increase. I mean, long term, we think we'll be, by far, majority be a recurring revenue company. But it cannot grow faster than top line growth long term because that doesn't work.

And also in relation to the Sectra One Cloud contracts, a question from Nikola Kalanoski at ABG. Do you expect to be able to deploy with new customers faster given that you've now opened a new office in Denver, Colorado? Or do you expect this will mostly improve your customer service for local customers in the region?

Denver is open for mainly two reasons. It's a nice area to recruit in. A lot of people would like to go -- a lot of people would like skiing. So that's one of the reasons we have that office. But it's also close to the West Coast without being all the 9 time hours away from Europe. So it's only 1 hour away from our customers on the West Coast and [ subtracted ] to the customer on the West Coast, but it's still not 9 hours away from Sweden, which makes Denver a very good choice. It's also a very dynamic area.

And then I think we will move on to a question from a private investor. It's regarding the installed or the -- how much is in the cloud today. How many percent of the installed base in terms of exam volume is in the cloud today?

That's not something that we...

We have actually disclosed that in the report.

Then I shouldn't say we haven't disclosed that. I don't know, but you can....

Yes, it's 25% of the 180 million.

Okay. So about 25%.

Yes.

I mean, all the new deals we do in the U.S. are cloud-based. Europe is delayed as for cloud because as the political situation is more insecure right now or uncertain right now, what's going to happen in Europe than it was a year ago. In U.S., more or less all -- U.S., Canada and the U.K., all [ jurisdictions ] is public and cloud.

Thank you. And then we will move on to questions from Jakob Lembke at SEB. Can you elaborate on the strong order rate intake in K4, which type of orders, which regions?

It's not as big as the biggest one. And some of them, we're not allowed to disclose because customers do not want us to do it, but it's dominant in the U.S.

And then we have a question from Nikola Kalanoski at ABG also regarding the order bookings. When we look at your contracted order bookings in the last 12 months, would you say that a significant share of the order bookings includes modules other than radiology and mammography?

Well, mammography is part of radiology in many aspects taken together. The absolute majority is still radiology and mammography, but increasingly shares of cardiology, pathology and the other -ologies as well. But they are small compared to radiology.

Yes. And then another question from Nikola Kalanoski at ABG. Are customers using Sectra Amplifier Marketplace more this year so far compared to last year? And are you generally seeing more adoption of AI applications among customers?

Yes. The growth in Amplifier is large. And over 2 years, it's doubled. So it's a heavy growth, and customers are using AI more and more for every year that goes.

And we also have a question from [ Daniel Albin ] at [ Pleiades ] regarding AI. Historically, PACS has been the central hub of the imaging workflow. However, if AI increasingly performs triage and primarily interpretation directly at the modality or edge level, one could argue that the center of gravity in Imaging IT will shift away from PACS over time. Do you believe Sectra is structurally protected from that risk? And what evidence are you seeing today that support that view?

It is correct that might happen for a few cases, but it's mainly -- if you take the model thing, if you put an AI into the expert machine, it will differ for different vendors, and few hospitals want that. But acute settings like appendicitis or stroke can be detected in theoretically. No one does it today, but it can happen. Will that change that you need a final report signed by a doctor? No, it will not. That requirement -- the legal requirements are actually signing is still there. And in order to do that, you need to see the images. So for some acute settings, it might increase. But for the final handling to trading and medical report, the diagnostic report will not change. But reporting that we do, it will be increasingly important.

Okay. And then I think a question for you, Jessica. Could you please clarify the increase in other operations? Is most of the increase related to performance-based profit sharing or central cost distribution in the group?

Well, as I said during the presentation, it's employee profit sharing that is the driver of the increased loss in other operating in that area.

And then I will move on to some more questions from the chat function. And we have one question here from Kristofer Liljeberg, DNB Carnegie. Would it be possible to say the number of U.S. annual imaging exams you have in the backlog as an update to the figure given the latest Capital Markets Day?

We have not disclosed that. So I cannot reveal. But we normally, we'll report back on the Capital Markets Day, and there will be more to come.

And the next question is regarding the U.S. market. Is the sales you're reporting now purely recurring? Or are you still incur some license revenues in the U.S.?

It is still a mix of the recurring revenue is growing. But we have revenue, for example, from migration or implementation that is not classified as recurring revenue and some license upgrades.

And another question related to that. Do you anticipate that nonrecurring revenue in Imaging IT will continue to decline this fiscal year we are in now?

We are not giving predictions on that level. And long term, it will be declining because we are also transferring the old customers over to the new model. So the license sales we did before will decline.

And then we have a question from Jakob Lembke, SEB, regarding our acquisition. When do you expect that Oxipit could contribute meaningfully to your growth?

That will take years. It's a strategic investment on the type that Sectra knew will be long term. it will contribute strongly but not in the short-term future.

And the reflection regarding the order bookings, it seems like you are booking less nonguaranteed orders recently. Has there been any change in contract structure or tight deals you are winning?

I would say it's just temporary fluctuations. As a context, a very large, one single contract can make a change there.

And then we have question regarding U.K. and Rest of Europe. What are the causes of U.K. and Rest of Europe weakness when there's so much untapped market, especially in rest of Europe?

I would say that the geopolitical situation and in general also, I mean, Germany is a large country that have financial problems. But mainly the geopolitical situation, where people are waiting to see if they should go cloud or stay in what they have. And uncertainty always creates delays. That's part of human nature.

And then we have another question from Kristofer Liljeberg. In what type of deals are you getting advanced payments from customers, both Imaging IT and Secure Communication, U.S. Canada, Europe?

Yes, yes, yes. That can be both business areas, both in Imaging IT and Secure Communication. It's also across the geographies.

And another question from Kristofer. Your peers say they take orders from competitors. Do you see any change in win rate trend between the two of you?

I wouldn't comment on that, but we have a good order intake. And now previous year, we took almost everything. Now we have not been able to take everything, but we have taken a very large chunk .

Okay. We have another question from a private investor also regarding our key competitor, which claims they are the only cloud-native vendor. How far is Sectra to become cloud-native?

We are cloud native. I will not comment on other company's statements, but we sell a lot of cloud. And we wouldn't do that if we're not cloud-native.

And then we have a question regarding the profit sharing. Can you explain the employee profit sharing? Is that a one-off, or going forward, should be a recurring expense in other operations?

Okay. So I can explain the principle we have used over the last years. That is to have a stock options program, a very long term vesting program that we have been granted by the annual meeting. And we have run that every 2 years. We intend to propose that for this general assembly as well. And in between years where we do not issue that stock options program, we've used profit sharing. Profit sharing is that we set a target, and everything above that target for profits is shared between the shareholders and the employees. And that is what you see this year. We had a good year. So that became a quite significant sum. But that is good. It's all the people out there that contribute this profit.

And then we have another question regarding implementation times. Have you been able to improve implementation times this year? If yes, what percentage? Should we expect the new Denver office to clear the implementation bottlenecks you have been having? So it's previous...

Two questions. Yes, we are improving but we are learning fast. And it's also important that you can use AI for implementations as well, which means we onboard new recruits faster than we used to do because we have AI to [indiscernible]. The Denver office is more being closer to the West Coast. So that's a quality issue or not, but also recruitment issue will not make any big difference in deployment as such. Most of the deployment work today is done in months.

And I'm looking through the chat function. And if you have any final questions, please write it. And I will just check the e-mail if we have had some there. I think that's all the questions for today. Thank you, Torbjorn and Jessica.

All right. Then we thank you for viewing and listening. We look forward to seeing you in September again. Thank you very much, and best wishes for a good summer. .