Senzime AB (publ) (SEZI) Earnings Call Transcript & Summary

Hello, and welcome to Carnegie and today's presentation with Senzime and its Q2 report. My name is Klas Palin, and I'm an equity analyst. And with me in the studio, I have Philip Siberg, who is CEO of Senzime. Very welcome, Philip.

Thank you. Nice to be here.

And it would be really interesting to hear your presentation of the Q2 report. Please go ahead, Philip.

All right. Thank you, and thank you for listening-in in to this. It's both a Q2 report but also a little bit of an update today on some of our long- and short-term guidance and what we believe in the market. So for those of you who don't know Senzime, a quick recap. We are a Sweden headquartered medical device company. We've developed a monitoring technique that's used for precision-based monitoring in the operating room while patients are undergoing anesthesia. It's all about securing the right dose of drugs and securing that patients are woken up and off the ventilator at the right time to avoid any type of postoperative complications. We're in the midst of a rapid growth phase and a market inflection point. It's driven by new clinical guidelines in Europe and U.S., recommending our type of technology. And we're today active in over 30 countries. So if we look at our Q2 numbers, we're in a continued strong growth phase. Our numbers -- our sales numbers were up 76% quarter-over-quarter. And if you look at the most important market for us, the U.S., it was up 167%. So we reached just under SEK 15 million in sales. And we're in a classic hockey stick phase right now. If you look at our run rate revenues here to the left is total sales and to the right is sales of disposable sensors. The pink point on both of the graphs is signaling that's the point where the European and the U.S. guidelines first were preprint announced. So you can see that that was truly the inflection point for the company. So our business model is providing and selling monitors that we provide to the operating room. We predominantly sell the monitors, but we have some cases where we place them and then create different kinds of business models. We've now shipped over 2,600 monitors to hospitals around the world, which is about a doubling from where we were last year at the quarter. And we shipped just under 50,000 sensors in the quarter, which is also just under a doubling from last year. So if you look at our sales, as I said, U.S. is our main market. We have about 74%, 75% of our sales in the U.S. market alone. We had a phenomenal growth there of 167%. The Asian markets had also a very favorable product sales quarter. It doesn't -- in the numbers here, it looks like a minus, which it is because of a onetime license fee revenue that we had last year. So if I look at the comparable numbers for products, we have a very steep curve upwards. The European market is still a little bit flat. It's been a slow start of the year. Consumables and disposables are continuing to grow, but new accounts and hospitals are just being very slow in their process in converting to our type of technology. So we continue to win fine and large accounts. During the quarter, we secured 40 new hospital accounts which is a mix of Asia, Europe and then U.S. So only in the last year, we've secured over 100 new hospital accounts. And this is important because every hospital accounts, depending on the number of monitors in place, has a very long-term strong growth trajectory for us. So some of the highlights that we announced during the quarter. We secured some very fine prestigious U.S. pediatric hospitals where they implemented our technology to monitor pediatrics. We secured a win with the most prestigious hospital system in the U.S. where we supply their robotic surgery departments with the TetraGraph system. We were awarded a Veteran's Affairs contract as part of a public tender win. We also signed our first GPO contract, which is a group purchasing organization where we are the sole vendor of our type of technology to this large health care system. And we also were awarded a new European patent, which helps to additionally approve and provide barriers of entry for others because it really -- this specific patent provides insights and evidence to our noise canceling technology and helping to improve the accuracy. So one of the most perhaps important accounts that we won was a children's hospitals in the U.S., which is considered the most leading pediatric or children's hospital in the world. And here, this was a win that was subject to a very comprehensive clinical and competitive evaluation, and we came out as a winner, and we're now supplying 40 of their operating rooms with our TetraGraph technology. Okay. So just to mention a few research and study highlights going on. There was a published paper that came out in the prestigious anesthesiology journal in May, which was showing and intending to show what are the differences between these types of technology for monitoring neuromuscular blockade. And AMG has been typically the conventional technology since the 1990s. And we have been pioneering EMG, which is a different type of more digital, more direct way of measuring the evoked response, the direct response in the muscle because of -- as a result of the drugs provided to the patient. And this graph is just showing that these AMG-based devices have a substantial variation in their data and variability, meaning that there's a big discrepancy of what is right or wrong, while the EMG-based devices. So this is also looking at some of our peers in the industry. We have a very, very tight correlation, which is only 0.3 versus AMG being very discrepant. So this just proves that the EMG is the technology for the future. And just to give you another perspective on that, there was a paper just published also where they used specifically EMG based technology in a larger study in the U.S. with about 200 patients to really understand, okay, if we use this type of technology, what happens and what they did was they eliminated all kinds of postoperative complications, thanks to the technology. And they also reduced the drug spend with 70% because you can instead monitor versus titrating with drugs. So the last part of this, so there's a lot of underlying momentum. I would say the third one here is more guidelines to come. We have guidelines today for adults in the U.S., in Europe and many other countries. And it was just announced that the European Society of Anesthesiology and Intensive Care is forming a task force to publish pediatric guidelines in May of the next year. So we're looking forward to that. Okay. And then just to finalize some numbers. So our gross margin was slightly lower this quarter. It's a function of, I would say, high growth in the U.S., a high portion of instrument sales. So we're really pushing that out in the market. And also, if I compare it to last year, last year, we had the license revenue, which was 100% margin, which was a little bit comparable. But the margin is taking some short-term hits here, but I think long term, we are to be above 70%. And also, if I look at my cost base, it is a little bit dependent on currency, but the cost is a little bit higher this quarter, which is a function of us moving. We've scaled up our production to larger premises in Uppsala, north of Stockholm. And we have -- we also launched a new product line of sensors where we have had some kind of onetime effects on our expenses. So I anticipate expense levels to be slightly lower where we are going forward. Okay. So in parallel to the report today, we also came out with kind of an assessment. What do we believe in the market, what are we seeing, what is our guidance and how can we help educate where we're heading. So back in the fall of '22, the company did a very rigorous and detailed analysis of where are we heading? What are the numbers? And at that point, revenues were substantially lower. The first set of guidelines were just out and hospital systems were still a little bit affected of post-COVID effects. But what we've seen is if we look at those numbers that we presented, we are today ahead of the curve in the U.S. and in Asia because it's been very fast adoption to our technology, and I'm really satisfied with what's happening there in the market. The European market is moving, but in a substantially lower pace. And it's really just hospital systems who are not converting in the speed that we want to. We're seeing it happening, but it's going to probably take another year. So what we did was we extended our short-term guidance. So instead of reaching in and around SEK 300 million in sales by '25, we see it's going to take another 12 months. And also now when we did the math and the analysis, we have a totally different set of inputs, learnings, we know the market than we had over 2 years ago. So our other big major bullet here, we're going to be the major leader in the -- the undisputed market leader here in this sector and which we're very clear we are. We're winning market shares. I didn't note any loss in the quarter to competition, especially in the U.S. So I'm very, very thrilled, and I believe in this long-term number that we're going to reach as a next milestone SEK 1 billion in sales, and that's where we're heading to. And we also came out with some numbers to help guide the market and understand how do we do the math here. And again, we know so much more today than we did 2 years ago. Okay. So just to back up again where we have some phenomenal institutional shareholders backing up Senzime. There hasn't been much change in the ownership since I showed this a quarter ago. But I'm very fortunate to have the Crafoord family, the Segulah group and some of the most prestigious Swedish pension funds backing up the company long term. Okay. So last slide, just concluding comments. I mean we're in an exceptional growth journey. We are going bang bust in the U.S., fantastic results over there, true inflection point in the market which is powered again by the guidelines. Our technology is certainly becoming gold standard. In the U.S., it's all about EMG. It's jumping over AMG and that's the new de facto standard. Phenomenal commercial team in the U.S. that we've continually trimmed and grown and built over the last couple of years, but we really have a phenomenal team in place. And I believe in a strong pipeline, Q3 has started in a good pace, and I'm very excited for the future, and we're building the next big Swedish global medical device export success company. Thank you very much.

Thank you so much, Philip, and looking forward to the follow-up of your journey. But now I have some questions also and maybe we should start with updated financial outlook that you are releasing this morning. And especially if we could start discussing a little bit about your sales estimates. Your range has been broadened a little bit, if you could perhaps talk us through the lower part of the estimate and the higher part if you -- if it's possible to share the information.

Yes. I think -- I mean, we've done -- so like I said, a very rigorous in-depth analysis of the market here. And we made the range a little bit wider because it's hard to determine exactly where will we be. But we believe based on the outlook, based on the pipeline and the customers we have, that this is where we end up. I think we will be in the middle of this. I think the ambition here is, of course, to overachieve this, but just giving a bit of a wider guidance. There's no other direct kind of compromise to making a wider range in that.

And to better understand that, how important is, for example, the U.S. market to achieve this goal compared to....

The U.S. market is extremely important. That's where we have 50% our operating expenses, that's where we're investing, that's where we have the direct sales team, and that's where the market is shifting fastest. And I really see that the large hospital systems are now trickling down to the mid-tier segment. That's where it's happening. So it's -- right now, it's a very strong U.S. play.

You have won a lot of new hospital contracts in the U.S. as you mentioned. But how fast are they to adopting this technology at the operating room? Are you satisfied with the tempo so far?

Yes, I am. Now I am. I mean, before, what we sold 2 years ago, it was often an early adopters and professor who brought this in. Today, it's very rigorously driven by the management team of the big hospitals, implementing protocols, mandating everybody to monitor. So we're seeing a faster uptake in the new accounts that we have. And I would say that the time from start to higher utilization levels is shrinking from perhaps 9 months down to 3, 4 months instead.

So the new customers that you have won in Q2, do you expect like at year-end or in early next year, they will be up and running...

Yes. I mean as an example, we announced what was our largest deal to date in March, a large Texas health care system. So we had to kind of adhere to their schedule, but we did the whole full implementation during summer. So we've shipped half of the volume to them so far, and it's already running in full speed. So that probably took about 4 months from order in to actually up to scale volume.

Okay. And you mentioned also that all the evaluation processes that you have been in that you have won all. But yes, to better understand how much of your sort of customer inflow is evaluation process? To better understand, I mean, your competitor can win a lot of contracts [indiscernible].

Absolutely, yes. So I'm just saying the ones that we're seeing. And I truly believe that there's a lot more business out there we're not seeing. But from previously being 100% always rigorous clinical evaluations, now we're seeing that probably single digit today is just ordering right away. If I look at this GPO contract we signed in May that came into effect 1st of June, we already have orders coming in. And then there's no evaluation because that's already been evaluated at one of the hospitals within the system. So that's going to increase over time, making the sales processes significantly shorter.

And just to better understand also, have the dynamics of the competition developed during the last year, would you say you can give some sort of [indiscernible]?

I mean I'm proud because I believe that we are winning. I think we're gaining market shares because I'm seeing these big hospital systems coming to us and choosing us. We are the preferred vendor when there are big installations, we're a trusted publicly traded company, we have the 40-year backing on this. But of course, competition keeps us on our toes, and there is a lot of market out there. There's -- we defined it in the press release, there's 15,000 hospitals that we are chasing to convert. So I need my peers in the market to help make this drive and change. So it's good to keep there.

And the last on competition then, the integrated solutions from the large 3 companies like General Electric -- GE HealthCare, it's called, and Philips, who delivers the patient monitor system, do you win such a contract as well where they already have some sort of a solution?

We do. We do. Without mentioning names or so, we won a significant contract during the quarter where they already have -- they had the modules from one of these integrated technologies, but we're not satisfied with the type of technology and wanted our portable separate solution. So that's happening. And I didn't really mention today, but we're driving an intense partnership work as well as innovation work. So I foresee that this market is shifting from a very portable world today, it will shift to a very integrated world going forward. And you can see the success -- the early success with our Japanese partner in Fukuda, who is driving this modular TetraGraph inside type of a business case where we supply the sensors and we supply the know-how on the IP.

Let's return to your financial -- the new updated financial goals. You mentioned also when you're in context to the sales guidance that you would be cash flow positive during the year. I guess if you are reaching SEK 250 million, it will happen a little bit later. And the SEK 350 million transaction would be a little earlier or you would be positive in both cases?

Exactly. That's why we said during the year, which could be, yes. Are we on a higher phase, it could be January 1 if the trajectory is just taking a little bit of time longer, it will be -- so we're safeguarding ourselves a little bit here.

And just a few -- also could give us some indication why you do not have this profitability goal.

Yes. So before we had a -- when we go back to 2022, we were stating like this is where we're heading. And we gave then a guidance to say long-term the ambition is to reach a 40% EBITDA margin. So in this guidance, we said we are in a growth phase, so focusing on growth. And we said, okay, the target here is to become SEK 1 billion revenue company. And because we don't really know exactly what the product mix will end up to be and which regions, et cetera, we said it's hard to define. We'd rather come back. Once we are profitability, let's come back and really dig down into these numbers. But if I do the simple math, and if I keep the company at the 70% gross margin level, and I double my operating expense level as of today, if I did that, we would be at 40% EBITDA margin. So if the number is going to be 37.5% or if it's going to be 46.2%, let's get there. What we're saying here is that we're building something and as a result of the business model we have, there is an exceptional opportunity to create high-level margins.

And this longer-term ambition to reach SEK 1 billion in sales, I mean how confident -- I guess, it's difficult to be very, very confident at this point. But what is this -- if you could just give us some clue what's behind this?

I mean there is, of course, a very complex model and intelligence behind this. But I've iterated before saying that, okay, getting to SEK 300 million is having 300 hospitals with an installed base of 30 TetraGraphs per hospital and a decent utilization rate. Getting to SEK 1 billion, if you do the same type of math, I mean we probably need around 1,500 hospitals as customers. And we are in a nice growth trajectory on our hospital wins and 1,500 hospital versus a market, that's probably about a 10% market share, and I'm confident we'll get there.

Sounds very good. And then I -- just -- we jump over to the Q2 report. And how satisfied are you with the numbers.

I am overall decently satisfied. I am a 3-digit growth guy, which I wanted us to get to. We are a 3-digit growth rates if you look at the product sales and exclude the kind of onetime effect of last year. So I think U.S. did phenomenal. Europe is, as I said, a little bit still flat, hasn't really taken off yet. We have accounts, but it's just not converting. So it's a little bit outside of our hands in the speed they're converting. But overall, I am pretty satisfied we're moving in the right direction.

And then I just wanted to go back to the Q1 report, where you said you were on a trajectory of like 100% growth January to April, I mean, have you seen a slowdown? Do you really remain [indiscernible].

No, but it's just -- bumps very much month-over-month. So that's why I also made a comment here in the CEO report that we had an exceptional July, which meant that -- then we're up to this 3-digit growth rate again. So it's a little bit of a function of delivering large quantities of monitors, installing them, getting them up and running and as we're in this kind of growth phase, the curve isn't perfectly smooth. It is with classics model, EMG curves on the way.

How does the demand for sensors look like? Is this also like very large orders coming in? Or is it more of a less...

It is. It's coming in. And previously, we've reported utilization rate in our reports. Just to understand how much are these monitors working. But it came to realization, it's a very hard number to track because we can only track what we're shipping to customers, not the true utilization. And some of my customers are buying in bulk because they want to have a safety stock and some others are buying just in time and some are buying an excess amount of monitors because they want to have excess security monitors. So it was difficult for us to get a true number. So we said let's wait with that number, but I can see that it's continuing to improve. And we're moving in this direction where I want us to go is using the TetraGraph every day in the operating room.

And you also mentioned that you have a great pipeline going forward. And if you could just -- is this -- would you say you have more customers in sort of inflow? Or would you say it's larger customers you have discussions with? Or is it a mix?

I would say it's a mix. I would say, yes, big, large hospital systems, IDMs, et cetera, but also trickling down to the mid-tier segment with typically faster decision processes where they're looking towards, okay, what are the top 10 tiers do in the U.S.? What do they buy? And how are they doing and what are they succeeding? So again, the pipeline is a mix of -- but we are focusing on what we define as A and B type of customers, which are the larger ones where we get the fastest scale.

Great. And I also have a question that to me -- made me and that was a little bit about your production facility today and how is your capacity to meet demand.

Yes. So in 1st of June, we moved into new scaled-up production facilities in Uppsala with a very sustainable strategy within this scope. So we have there huge capacity. We have capacity to meet our next 10-year plan where we can move this to larger, so we have shift and efficiencies. So very confident and very well-run operations internally.

Perfect. And yes, I have another question about your financial goals then, and you want to become the market leader. And I guess if you are heading for 10%, it's not based on market share or how should we interpret it?

I think it's -- the question is here how fast will the market convert. And when I made the example of 1,500 hospitals as a 10% the 15,000 hospitals, it's more being conservative of how many of these hospitals have then convert to this type of technology. The market share that we want to achieve is far, far greater than 10%. So the question is just what is the market 10 years from now or 5 years.

So the market-leading is to be the #1 and not just the best product.

Be the #1, be the preferred supplier and be the solution that every single patient, the 100 million patients a year who are undergoing anesthesia, it needs to be safely assured that they get the right dose of drugs and they're woken up at the right time, those should be using the TetraGraph.

It looks like a little bit like you had some price pressure on your sensor business during Q2. Just a few -- have you any comment about it?

Yes, I wouldn't say so. What we did during Q2, we had a significant product launch where we launched a new line of sensors and a new line of connectors. So we improved the way the simplicity for the connector and the way you do it. And as part of that kind of transition, we actually supported some of our clients to help just swap out inventory. So we took some onetime hits in expenses because we took back and then we changed and we made it easier for customers. And that probably affected a little bit both sales, but also onetime expenses. But I don't see any price pressure in the sensors. I do note there's been a little bit of a price pressure in monitors in the U.S. just because in effect of larger volumes procure -- professional procurement buyers who are good at negotiating. And -- but again, the business for us in these hospitals is the 6- to 10-year cycle of run rate revenues. So that's where the money is.

And just going back to the cost side then, you are indicating that you will be having the same amount that you have reported the last quarters for a couple of quarters more. But how should we look at that? Is that -- I guess this is for 2024, I guess, is somewhere in this in this journey, you need to...

Absolutely. No, no. I think that we have a well-established kind of base of back-office operations, development, et cetera where we will eventually need to kind of grow is probably more salespeople and clinical support perhaps predominantly in the U.S. market. So again, my plan is to try to stay as flat as we can during the next couple of months -- next couple of quarters, sorry. But next year, probably lifted a little bit up, but not very much. And then very important plan to continue to work in parallel with partners because we can't get to this all by ourselves. We need these partnership deals, and we continue to work very tightly with the industry that we are aligning with.

Okay. And that could be partnerships also perhaps including the U.S. market or is...

Absolutely, all types of markets where it's partnerships where I define as integrating our technology into other types of monitors, co-marketing initiatives, so there's various. I'm not really talking about some type of distribution deal. It's a broad variety of partnerships.

And then my question would be your collaboration with Masimo has changed anything?

Still slow. We are still waiting, but we're doing a lot of other good things while we're waiting. They've come back to us and said that they are reviewing again and realigning their priorities. So it's more waiting for them to come back to us.

And let's sum it up then. What should we look forward?

I think it's going to be a very exciting fall. The growth journey continues. We have some exciting news coming out during the fall. So we're going to continue to lead this transition. And we're doing it for the patients, we're doing it to really build the future here, and it's a very exciting company and a brilliant organization to be part of. So thank you.

Thank you so much Philip. And thank you for listening.