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

Good morning, everyone, and welcome to Sectra's financial report presentation with CEO, Torbjörn Kronander; and CFO, Jessica Holmquist. My name is Helena Pettersson, Investor Relations, and I will be the moderator of the Q&A session after management's presentation. [Operator Instructions] And with that, let's get started.

All right. Thank you very much. So welcome to our 3 months quarter 1 presentation for this fiscal year. We will begin with interim highlights by me, and then Jessica will take over and take the financial development. I will briefly mention Sectra way forward. And then we have a Q&A session, which is a little bit different this time as everyone can ask things online. But we'll come back to that when we come to that session. Our business operation, for those who are new to us, well still you are probably not, but just in case. Our biggest business is imaging IT, which handles images in hospitals. All medical images are handled by us if customers wanted, but mainly is radiology. Radiology is the clear dominant part of all of our imaging IT, and imaging IT is the dominant part of Sectra. And the second largest is secure communications, which was actually Sectra's origin, Sectra's transfer secure transmission, that is encryption and [ patent ] systems for transfer, highly confidential data on the national security levels. And then we have business innovation, which is our greenhouse for future successes or sometimes we have to close them down. A little more, business innovation products is to be either become a business line. It can be sometimes, we said, sold off, or sometimes we'll close them down. If we do not see success come. Coming back to this, we have medical education IT, which is an interesting area of medical professionals live also in a rapidly changing world, and they need continued education. We started that area mainly for education of medical doctors in medical school, et cetera. It's increasingly for education of all [ partitioning ] doctors in the field. And we recently got the contract for all of Norway, where we are to supply all Norway radiology and pathology, continued education from a cloud platform. It's a pure cloud environment. We have orthopedics IT, would provide special tools based on images, both the [ patients ], planning surgery and follow-up after surgery. We have our new area, genomics IT, which is about the DNA and modern medicine, especially in oncology, is very much about DNA sequencing, but it has not been reproduction. We have production systems, we have production specialists for medical. So this is not images, but it's closely related to images, so we'll do that in genomics IT. And then we have research part mainly doing AI research. In Sectra communication, we also have a growth area in critical infrastructure. IT secured a critical infrastructure. And in imaging IT, we have one area that we've moved from the business innovation group into imaging IT about 10 years ago for digital pathology. We add that to radiology. And a new area is output. All diagnostics must result in a result, and that is documented in a report. And that report needs to be efficient, needs to be tightly integrated with imaging components, especially in radiology. And that has been dominated by other companies before, especially in the U.S., but we are now creating tools where we can sit and interact with the report based also a lot of AI there, creating a very efficient diagnostic reporting directly when interacting within. Highlights from the quarter. Our contract order bookings went down, but we had an exceptional first quarter last year. And our contracts are now very large and very long in time. And therefore, we are not overly concerned about that. The book-to-bill ratio of 12 months is still very healthy. Net sales rose by 26% and profit per share rose by 55%. We are transforming to as a service model, Software as a Service. And instead of paying upfront as customers see before for big license sales, they pay us now while they use the product. That means delayed -- or longer time to we begin to get revenue from order, but also much longer revenue [ strain ] long term. Long term, this is very beneficial for both customers and vendors as we go. The cloud recurring revenue is the part of recurring revenue that we deliver over the cloud, and that predominantly is in the U.S., Canada, U.K., but also to some extent, in Europe. And that rose by 75%, is now beginning to be a significant part of our revenues. Recurring revenue, in general, which includes the cloud recurring revenue as a part, rose about 32%. That includes normal service contracts and a few other things as well. And the churn -- the recurring revenue that we lost, which is a very important factor. If you have a -- customers who pay for usage, you don't want them to stop using your system. The churn was 0.5%, which is a very good figure. We don't lose many customers. We lose some, but not many. The financial targets for the group's stability, equity assets ratio. We sell critical systems, both in cybersecurity and in medicine. In [indiscernible], they also come to [indiscernible] so imaging is a critical part of modern healthcare. And then they look -- the customers do not want to buy that from an unstable company. It's dangerous. So being a stable company, financially solid, is important. And we have an equity to assets ratio of 30% target. We are -- [indiscernible] about that at 52%. Profitability, which is a second -- these are prioritized in the order of 1, 2, 3 here. The second highest prioritized target is profitability, operating margin. That should be about 15%. We are well above that at 21%. Both of these are hygiene measures. The most important figure, but after the first 2 are fulfilled is growth of profits per share. So EBIT per share growth over a 5-year period should be 50% of [indiscernible]. We are currently ways above that at 90% growth. In imaging IT solutions, our largest area headed by Marie Ekstrom Tragardh, we are leading that cloud transition. We have a large contract that we have published in over the last 2 or 3 years. They are now in rollout. We are rolling out. We are installing a hospital a week or something like that. Some of these contracts are very many hospitals in one single contract. So the deployments go over 7 years. Two health boards in Scotland. Scotland was one of those large. Two health boards are now live, and then a new one added over time. And in the U.S. and Canada, we have very large contracts, both in Quebec, which is public, and some other operators in the U.S., which we are not allowed to disclose which who they are, but they are very large. These are all now in delivery mode. All of the big contracts are in delivery, and we added a few every month -- or we're adding many every month [indiscernible]. We also have a large interest in diagnostic reporting that I mentioned before. The output of diagnostic is a report, and that should be -- include images and be very efficient to produce, and it contains a lot of AI in making that as well. We are revamping that and we're leasing new diagnostic reporting system, initially offered mainly in the U.S., but we have large interest all over the world. That is a significant part of radiology business that is up for grabs if you can do it, but there are other competitors there than we normally see. And second, communications, we are supporting national resilience and total defense preparedness. And of course, these are now the crisis in Europe with Ukraine this -- The interest in growth has gone up in that area a lot. We had production problems in Q1 that meant a factory came to a grinding halt for a while. That is now resolved. We have begun deliveries again, but it impacted Q1 a lot for communications. That is now resolved. And of course, the crisis in Europe drives demand. In general, cybersecurity is a rapidly growing area, not the least to AI, that I will come back to later. Then I will leave the word to Jessica, who will go into the financial [indiscernible].

Thank you. Good morning, and thank you for joining our call today. And we are reporting a first quarter of strong growth in recurring revenue and in operating profit. Before I walk you through the financial development I would like to highlight a few changes that we have made to the format of our interim report. So first, to improve readability, starting this quarter, we report amounts in millions without decimals, unless otherwise stated. Secondly, we have added external sales by segment. And we have expanded table [indiscernible] 6 to reflect this change. Thirdly, we have expanded the income statements by quarter, and we have added cash flow statements by quarter. And we hope that these changes will add value to the readers of the reports. So order intake, we reported SEK 699 million of contracted order bookings in the first quarter, a decrease of 47% year-over-year. And despite the lower figure, demand for our solutions remains high in all operating areas. And as you heard Torbjörn say, given the nature of our -- the long-term nature of our contracts, we expect to -- quarterly order intake to continue to fluctuate significantly going forward. And the rolling 12 book-to-bill ratio is at 1.9. We did not sign any individually large orders this quarter, but we saw increased order intake in Australia, Norway, Germany and Portugal. Our net sales in the first quarter amounted to SEK 963 million, corresponding to an increase of 26% year-over-year. And the continued growth of usage or use of our services is driving the recurring revenue growth, up 32% year-over-year. We also saw nonrecurring revenue increase year-over-year by 11%, mainly from license revenue, migration and professional services delivered during the quarter. And our cloud recurring revenue keeps growing. We -- increased by 75% to SEK 315 million. And for the first time, we saw rolling 12 -- that cloud recurring revenue is exceeding SEK 1 billion. Currency movements had a small negative impact on sales in the quarter, and the pattern for recurring revenue churn is unchanged. Please note that the chart on this slide shows the changes in external sales, whereas in previous reports and presentations, we have included internal sales as well. Imaging IT increased sales by 30% year-over-year. And the main driver is volume, increased usage of services and additional deployments of new sites. The share of recurring revenue in this area is high. It was close to 78% in the quarter. Sales in Secure Communications decreased by 4% to SEK 89 million year-over-year, following continued impact from the delivery -- delays in delivery. And then in Business Innovation, we primarily got -- sales in Business Innovation primarily go through the sector 1 service in Imaging IT. As a result of that, we will see limited external sales reported for Business Innovation. Looking at our geographic markets. The U.S. reported the by far largest increase in sales. All other markets contributed to growth, except the U.K., where we saw a temporary decline year-over-year. Our operating profit increased significantly year-over-year by 61% to SEK 191 million. The operating margin improved to 19.8% compared with the 15.5%, driven by the development in Imaging IT. Profit was held back by Secure Communications performance in the first quarter and also partly by currency headwind. Operating profit variations have leveled out over the past 4 quarters, which is according to expectations transitioning to become a service provider. With large individual contracts and also on-prem deliveries, there may still be quarters deviating from this trend. Imaging IT increased the profit by 77% year-over-year and the margin reached 23%. And again, the driver in this area is volume, more medical images through increased usage and also additional deployments and add-on sales. We also note that rapid growth in this area requires investments, investments to further scale and refine our offerings, our organization and also our ways of working, while at the same time, maintaining a strong focus on quality and security. Secure Communications reported an operating profit slightly above breakeven. [ Serial ] production started end of last fiscal year. But as already commented, it was on a small scale in Q1. Our cash flow from operations amounted to SEK 3 million in the first quarter compared with SEK 118 million in the corresponding quarter last year. Our underlying performance has improved, but the changes in working capital had a negative impact on cash flow, mainly temporary timing effects between quarters. And we ended the reporting period with a cash balance of SEK 1.8 billion. And based on our strong financial position, the Board and CEO proposed a total dividend of SEK 443 million to the shareholders, and -- for approval at next week's Annual General Meeting. That was my last slide.

All right. Thank you, Jessica. Going forward, I spoke last time about the AI wave. We have a tremendous wave of AI coming all over, and it has not slowed down. It's rather faster than before. The AI wave comes so we can like it or dislike. Can't do much about it. We can choose as individuals and companies to either surf on the front side, try to keep the balance. And if you fall, you rise up and try surfing again. Or you can pedal like a crazy man on the backside and try to keep up, and that would be very difficult. We have chosen the previous, we are surfing on the front side. But it's fast moving. There have been huge changes just over the summer in the AI world, not the least in cybersecurity. Many of you might have heard about Mythos. And he's coming out, where large vulnerabilities in cyber systems or IT systems, all of the world have been discovered that in some cases have been 30-year-old -- 30 years old, no one have seen them. That, of course, means that we, as IT companies, all of us, all over the world, have to patch things and fix holes that we discover. We are not different from others. We will spend a lot of effort now to fixing cybersecurity issues in the products as all IT companies do. That means we will develop a little slower, but so is the case for everyone. We are to help our customers to benefit [indiscernible] in health care as well in resilience and defense. And we are getting quite good at it. So we can provide a lot of advice and help into health care as well as in cyber. We also see it increasing internal efficiencies. In the beginning, people speak most about coding part, software -- writing software is today, to a very large extent, done by AI, but we see it all over. AI is changing the way we operate, and it is becoming -- will become more efficient. So is everyone else. So it's a race here to be faster than the other ones. In medical IT, we have said many times, our main areas and the growth areas of medical IT is our medical at large is the age-related diseases. That is for society have to act because those are the ones who grow the most. Neurological diseases, neurodegenerative diseases, MS, Parkinson, Alzheimer. These are very expensive and needs to be handled by society. Cardiovascular disease, cancer disease. Cancer is transforming from being an acute deadly disease 50 years ago, to now a chronic disease. People can live with multiple metastatic cancers and continue living, but they need a lot of diagnosis and health care while continuing their life. This drives the growth of health care at large. Musculoskeletal disease, grossly undervalued area affecting mainly women but also men. But women, very often after menopause have osteoporosis, which results in a lot of musculoskeletal problems that we are good at handling and planning and following up from. And vision. Vision is also an age-related disease that is very expensive society and insurance companies. These are the main drivers for future needs in health care, and we will be there with image-related diagnostics and, of course, now also genomics. We are bundling all of these in one service called Sectra One. Customer can sign a contract with us and they can do all of these if they use cardiology or ophthalmology or radiology, they just have a [ take ] and they get that on the next invoice. But the only way to use it, not just for having access to. And we are adding reporting into that as well. Especially, we have had reporting in Europe for a long term, but we're adding reporting as a service into this, especially in the U.S. and Canada, where the need is the largest right now. We see ourselves a little like Microsoft Office in medical imaging based diagnostics. We don't only have Word or Excel or PowerPoint. We have all of those in one subscription. And we are the only one who have all of these in one single system. Radiology, cardiology, pathology, genomics, ophthalmology in one single system. And the output, all of that will go into diagnostic report. Right now, we do radiology reporting primarily. But in the long term, there would be a diagnostic report that the clinician can get. What is a program with specialty. In cybersecurity, there has been a lot of events in cybersecurity and AI. Agentic AI broke out of OpenAI recently and broke into a -- other company despite that the environment where they tried out this new AI was sandboxed. That is -- there are very interesting videos in YouTube, how that worked. But it's clear that AI would play a very strong role in attacks -- cyberattacks in the future. Moments after a vulnerability becomes known, there will be attacks with AI. So AI will also be used for automatic AI defenses. This is a rapid game now, and we will work and see what we can help out within AI defense of cybersecurity. Sectra will be there at the front of this wave, but so are many other companies as well, but it's a rapidly moving field. Good to remember, we had a Board member once [indiscernible]. He minted the phrase, "Where there's change, there is margin." The trick is you have to be faster than the other guys. Now we are quite a fast company. But this, of course, is a challenge to keep that speed up because now, the world moves faster than before. Upcoming financial events. In September 8 next week, we have our Annual General Meeting that will be a fiscal meeting in [indiscernible]. Those of you who are shareholders are most welcome to come or if you have announced your arrival, you have to pre-note us that you're coming. And then we have the November 25, we have a 6-month [indiscernible]. Again, I'll remind you these meetings or presentations are not for the sake of us. We knew this stuff beforehand, and we wanted to be good for you and effective way of transferring what you need to know. If you have any comments on the format of the presentations, please send an e-mail to info.investor@sectra.com. And we have changed the content quite a lot based on that input over the years.

Now we open up for questions. [Operator Instructions] And then I leave the word to Helena, what we have heard anything coming in.

Yes. Thank you, Torbjörn and Jessica for your presentations. I actually will start with handing the word to Nikola Kalanoski at ABG.

All right. I hope you can hear me?

Yes, we can.

All right. Great. So I'll ask them one by one, if that's okay. So the first one is on the reporting module. So it sounds like you have quite significant interest in this module. But I'm curious on one thing here. So for your existing North American customers that are also potential future reporting module customers as well, would you say that -- what would you say is the primary advantage for purchasing your reporting module compared to purchasing from a competitor that does not provide [ PACS ] to them?

It's faster. You can only -- I mean, radiologists today or [indiscernible] are stressed. They have a very high workload. Every click is important. If you have to leave for another application to write or dictate a report or make a report, that takes time. We do it from inside the imaging window, which makes huge efficiencies. I mean we can provide more intelligent reports because we can provide links to images, et cetera, for the clinicians to read. There's a speed up and an efficiency boost for the diagnostic reports.

Yes, that sounds very reasonable. And then a bit curious on another topic, which is -- you've historically recruited quite significantly each year, but that pace has slowed a little bit somewhat recently in percentage terms. And now that AI tools are very helpful, should we see this as changing the balance between hiring new people versus spending more on AI tools that allow for higher productivity per head? Or should we think differently?

No, that is a correct statement. AI will take over a lot of routing work. It will be a slow process. We can't change this overnight. But gradually, AI will do a lot of boring stuff that we had people for before, and we will have a little less growth in people and growth in the cost for IT and AI.

All right. Yes, that's also reasonable. And then a bit of, I guess, reporting question here. So just on the gross margin, it was down a little bit year-over-year. Is this primarily because of higher cloud costs that arise in relation to Sector One cloud revenues ramping up? Or is there some different element to this from the Secure Communications segment as well?

There are several explanations behind the margin development, increasing cloud costs, yes, also increased external costs for migration. And we also had a slightly higher share of hardware versus Q1 last year.

Thank you, Nikola. Then I will hand over the turn to Jakob Lembke of SEB.

Yes. I hope you can hear me and see me as well. So I'll start with a question on the cloud recurring revenues in the quarter, which I think, the quarter-on-quarter increase looks quite strong. So if you can elaborate on what type of customers are driving that in the quarter?

The main increase is for the large contracts in the U.K., U.S. and Canada, because these are contracts we've been working with and investing in for a long time, but they're now beginning to go live, and larger and larger portion of these customers are live. And that, of course, drive where they begin to use it, it drives growth.

Good. Then also on the nonrecurring revenues in Imaging IT, which also is quite strong. And I'm wondering if you can elaborate on sort of the year-on-year increase we have here in the quarter, how much of that is driven by license sales and how much is driven by sort of professional services and migration as well?

Well, you're spot on, it's driven by all of them. And so it's -- we have some license revenue in the quarter, but also, of course, in relation to these large go-lives, we provide more migration and professional services generating revenue.

Okay. But were there any sort of unusually large go-lives of sort of on-premise customers here in the quarter?

We had, not unusual, but we don't have them every quarter, on-prem go-lives with license revenue. But -- so it contributed without being too detailed on the numbers it contributed, but it's not only license revenue.

In Scotland, it's a little special because Scotland, we're also responsible for some hardware to clients. And that's a lot of PCs that is included in our shipment that we forward to customers. So Scotland is a little bit. Normally, we don't do that. But in Britain, the contracts include some hardware as well, even though the service side in the cloud, the clients are not.

Okay. And just a follow-up on this. I mean, given that you are in this sort of intense period in implementing a lot of large contracts, I guess, we should expect this sort of consulting hardware sort of migration revenues is on to remain at a quite high level here for the coming, let's say, 2 years?

We don't give that forecast. It goes -- it changes from quarter-by-quarter. It will not be significant. It will go up and down a little bit.

Good. Then I'm also wondering if you can elaborate a bit on the reporting solution. And for example, if you're starting to win any customers in the U.S.?