Modulight Oyj

OMXH:MODU

Earnings Call Transcript 2023-Q2

[Seppo Orsila, executive]

Good afternoon. Welcome to our first half '23 webinar of Modulight. My name is Seppo Orsila, I'm the Founder and CEO, and I'm here with our CFO, Mrs. Anca Guina.

[Ancuta Guina, executive]

Hello.

[Seppo Orsila, executive]

So what is Modulight is about? We fight cancer with science and technology. We're a biomedical company that designs and manufactures lasers for treatment of cancer and ophthalmic conditions. And same lasers are being used in some other high value-add applications such as [ Quantum ] computing.

Well, first, I'm going to talk about the highlights of the first half and the second quarter as well as then give you an update about our U.S. progress. Anca will then talk about the numbers, and then I will continue with more detail on the R&D pipeline. And we believe that now we are able to share some insights, economics and the business model that you requested during the Q1 and end of last year. And we'll recap by reminding you about the revenue model and the customer base development and repeat basically our outlook statement of no outlook. And we'll obviously be very happy to discuss all the quick questions you have. Our first half continued with the positive development as well as the Q2. Our product development was progressing. We made several good progresses in our pipeline projects. And what we have been extremely happy for the entire spring is that the level of customer activity has been significantly higher than last year. In fact, 5 out of 6 months during the first half, we had more customers visit us here in Tampere than in the previous year total. And in the past, at least, this has been a good sign for the future. We developed our SaaS-based business model, namely pay per Treatment and made progress in several areas in that, as we will discuss in a moment. And we have been able to kind of develop our U.S. local operations in accordance with the strategy announced in November 29 last year. Revenue, EUR 2.6 million and EBIT, minus EUR 3 million for the first half. R&D pipeline remained at 27 projects, which we reached last winter. And progress we reported after Q1 continues and we see significant revenue potential with some of the projects in short term. About U.S. launch. In January, we received the PMA approval from the U.S. Food and Drug Administration and we have been now working with that. First patients, I should say, have been treated with the product, visits to the hospitals have accelerated new business model, pay per treatment, is progressing. We are doing a lot of work with customers on various administrative things from information security to reporting and billing and other things. We are quite encouraged by the fact that even if this information security reviews are quite time-consuming, all the customers seem to be dedicating up significant resources on their side to complete those. And last, but not least, local organization is being developed, and we expect to announce interesting news about that later this year. Anca, if you take the numbers?

[Ancuta Guina, executive]

Yes, sure. Thank you. So Q2 revenue increased by 122% compared to last year, same period. And that was mainly due to the delivery of the existing customer projects. Hence, the profitability for the same period improved. Operating cost is slightly higher than last year, same period due to the cost strategy implementation, which we announced every single webinar. As we also mentioned earlier, due to completed investment program, we expect that our cost and capital expenditure will decrease. Our risk management activities we implemented over the time proved to be efficient, and we benefit from the mitigations we have in place and not only us, but also customers. And as an example, with reference to the trade war between the powers. China is restricting the export of important materials, sorry minerals and some of them actually which we have to use in our manufacturing process. Modulight secured the need for some of these materials for 2 years or so. So basically, this helps us making sure that we don't see the supply of certain products to our customers. First half of the year, the revenue was 23.8% higher than the previous year, with slight improvement of EBITDA. This was reflected in all other profitability measurements. Same as for the quarter, we expect that the costs and CapEx will decrease indeed due to the end of the implementation of our investment program. So if we go to the key figures, I just said that the revenue and profitability of the company improved. And the free cash flow from the operations was actually heavily affected by the acceleration of the investment program and also in the growth acceleration program. The company has a strong balance sheet, and at the end of the period, the cash in hand was EUR 32.6 million. Net debt was minus EUR 25 million and gearing ratio of minus EUR 39.4 million, equity ratio 87% -- sorry, gearing ratio was minus 39%, not million, and equity ratio, 87%.

[Seppo Orsila, executive]

Thank you, Anca. So just to recap, the company announced November, last year, five strategic programs and these are the kind of operational guidelines to us against which we execute. I already touched upon the U.S. local operations, which is a key development area in our first program, sales, marketing and operations development. The service team in U.S. continues to gather very good customer feedback, and we are making progress on establishing a commercial operations in Stateside permanently as well. Cloud technology and cloud-based service development, key activity here, obviously, deployment and put in place the new business models, activating the pay per treatment and all the related work. And we are extremely happy that customers are developing significant resources after the work. And this, in my mind, is the strongest sign of their commitment to our technology and to our therapy.

Third, product platform devices for various indications and applications. Our technology continues to be accredited as leading technology, especially in digitalization but also in basic laser technology. And one of the examples of this is that a leading dental company in the world have announced as recently that they want to become user of our technology as well. This is not a project yet in the sense of commercial rollouts, but could end up being one after a more mature state of the project. Technology development. Obviously, we're extremely happy about the investments progressing and helping us. And for example, the before mentioned customers specifically mentioned that they became our customer because of our capabilities. I'm mentioning even by name some of the individual machines, which were part of the acceleration program put in place in late 2021. In the area of ESG, we are making progress and are a bit ahead of our plans, which are becoming carbon neutral and also have obviously developed after board composition and the management composition to be even more in line with diversity principles. So employees, leadership and the Board all now at 40% of the less represented sex. And we hope that our reporting and transparency continues to improve, especially now that there are three analysts tracking Modulight and thus providing more transparency and more wider analysis after the investors. Our R&D pipeline remained solid and at a record level of 27 projects. As we reported, in several projects, we made good progress, and we see significant revenue potential in the short term. Positive development in the cloud technology is mainly related to the business side -- I mean, business models, service and customer needs, but also on the scientific side, related to brain cancer, bladder cancer and some of the others that we find very important to the implementation of our strategy. Studies and patient recruitment have been resuming from what they were. And as we reported earlier, some of the studies had really -- were really suffering from the COVID. But now, these studies and patient recruitment has been resuming and progressing, which is obviously very good for all of those projects. I would also like to mention our subsystem development, which has been progressing. And here, one of the important points from the company point of view is that when we are selling subsystems to some of the existing customers, it is expected that the commercialization lead time is shorter than with the full clinical trials and related systems. Most importantly, for our pipeline, we have completed -- we developed external health, an extensive study of economic analysis and combining medical analysis, this is based on open source material as well as lots of customer inputs. And this is something that we are feeling to validate quite well some of the assumptions that we have earlier reported. That work has been also instrumental for us, driving the pricing negotiations for the pay per treatment. Our customer base continues to be solid and unchanged with the proportion of the bigger listed companies are continuing to increase. A little bit about this economics modeling and pay per treatment. Last year, we completed a strategy revalidation project with KPMG and have now since extended that with further studies as well as customer information about the potential feasibility and ability to accelerate the new business models, aka pay per treatment. Our analysis makes us to estimate and expect that the single treatment will be priced between EUR 1,000 and EUR 10,000. As said earlier, this is a significant progress in terms of timeline and a change more towards SaaS-based or earnings-based business model from pure CapEx sales and service charging that we were earlier anticipating to be the majority of the business at this time. And to give you a little bit idea what this means, we're obviously focusing almost solely on the U.S. and thus, the figures may be different in other markets. But at this time, we have almost exclusively focused on U.S. And there, these prices would represent between less than 1% to slightly less than 10% of the total cancer treatment costs according to extensive interview with related specialists and centers done by the external consultants. Implement of the pricing model is expected to have a financial impact in the short term and we are meaning that there will be more proceeds. Just as a reminder, our revenue model, we are still gathering most of our current revenues from the early-stage trials, but the revenue curve is improving and maturing and we expect our predictability of the revenue to become better as the projects mature. And as said, we see a significant potential and progress with some projects. And I would like to add that these projects ranged across several indications and customers. Modulight has not issued any outlook for revenue or profitability, just a note on that. In summary, we see positive development, continued R&D pipeline progress. I'm particularly happy about the customer interaction increase and especially that big customers and significant decision makers choose to come to Tampere. We had also an exceptional -- our participation to Tampere yielded an IPA conference held in early July. We're going to talk more about that in the third quarter release. But as there is a lot of that in the public media, it can obviously be referred here as well. And this is a conference of leading scientists and the feedback about our company and our team was nothing less than overwhelming. Discussion with the partners and new partners are progressing. And as said, number of customer meetings continue to grow. Product development pipeline stayed at the record level and several projects progressed towards commercialization. Saas-based business model, a startup of U.S. local operations are progressing well. Economic analysis implies positive expectation. In nutshell, we believe that our actions are in line with our growth strategy and our commitment to long-term investment program now is already showing several benefits, as we already reviewed in Q1. But as said, for example, as a one example, it appears that one very significant customer is coming to us only because of the -- our technology and expanded our capabilities. Finally, just to recap what Anca mentioned, we expect operational costs and CapEx to decrease.

Our goal continues to be, as stated earlier, to grow and return to strong profitability. That's all, yes. Thank you and happy to take any questions that you might have.

[Unknown Executive]

Okay. So we have our analysts online and I would like to welcome Mr. Lars Hevreng from Danske Bank, and you have the first question. Please go ahead.

[Lars Hevreng, analyst]

Can I just ask about the phasing of the CapEx program. You mentioned them in the remarks and the presentation about the phasing here. But should we assume a sharply lower spending now in the second half compared to the first half? Is that how we should see it?

[Seppo Orsila, executive]

I don't know if we can add project numbers, but obviously, when you are taking and use these machines, you try to verify as well as possible that everything has been put in place and is in good shape before you want to make the last payments.

[Ancuta Guina, executive]

Yes. No, without any numbers we already announced in the year-end that we see a decrease of the CapEx in this year. So let's see by the end of the year. I'm afraid I cannot give you an exact number.

[Lars Hevreng, analyst]

Is it possible to say anything about the utilization rate you have at the moment, given all the investments you have done in the past couple of years? Is that possible to quantify in any way?

[Seppo Orsila, executive]

Yes. I mean, we already answered that question indirectly a long time ago that we see that the capacity of the, back then, machinery is way bigger than our current business at that time. And obviously, our current business is now half of what it used to be 2 years ago. So I think it's a clear conclusion that with additional investments, we have now a significantly larger capacity than is the size of our business today. And additionally, I mean, we continue to develop the pricing based on value-based pricing principle. So I think it's -- all the data points are there to conclude that the capacity utilization currently is very low.

[Lars Hevreng, analyst]

Okay. And then just on the U.S. market launch by your partner. You have said you had the first patient treatment. So that's on the pay per treatment basis. So I mean, any revenue impact now in the second quarter? That has been minimal, I assume.

[Seppo Orsila, executive]

Yes, the revenue impact from the new therapeutic devices is obviously minimal. As usual, there was not a big change yet. So that's, I guess, clear from the numbers.

[Lars Hevreng, analyst]

Okay. And this is the kind of launch where you see -- I mean, the level of sales potential, as you have stated before, is this one of the...

[Seppo Orsila, executive]

It's difficult to estimate, the future, but we announced that we see a significant potential in many projects. These [indiscernible].

[Lars Hevreng, analyst]

Thank you, Lars. Antti, do you want to go next? You have a handful, at least, I see.

[Antti Siltanen, analyst]

Sure. Thanks. If I'm not mistaken previously in Q1 report, you mentioned significant revenue potential in several projects for 2023. And now I think you may be omitted the year. So can you explain a little bit the background on this. So are these potentials delayed somehow?

[Seppo Orsila, executive]

There is -- I mean, we are now realistically already quite close to the end of the year, and we're not kind of issuing guidance. That's also something we said earlier. And I mean, while we expect our business is maturing, we are still at a relatively early stage and thus it would be unwise to ignore the history with fluctuations and changes. There is a lot of work that needs to be done. It's available at even public records. We are pursuing all kinds of reviews and actualizations to get started in many hospitals in the United States. It takes certain amount of time. We're not commenting how much of those will happen this year and how much will happen later. But definitely, we expect to make progress on the short term in several areas, including the existing recently approved therapeutic device.

[Antti Siltanen, analyst]

Okay. You refer in this report to pay per treatment revenues, I think, in cancer applications of 1,000 -- from EUR 1,000 to EUR 10,000. So I just wanted to clarify that is this Modulight revenue or shared revenue with the API owner?

[Seppo Orsila, executive]

This is net revenue after all kind of possible sharings with outside parties. So it would be net-net to us.

[Antti Siltanen, analyst]

Okay. And one more question on revenues. You had this big project of $3.9 million that was realized during the past last 12 months. So Q2 similar to the previous quarters in this regard?

[Seppo Orsila, executive]

Yes. I mean, deliveries to several customers have continued, but in some cases, they have slowed down. And these are the type of fluctuations that we see. And thus, we try to be quite careful and try to base our way of the future for a number of different projects.

[Antti Siltanen, analyst]

And final questions. You have many seasonal workers and on average, you have 67 employees, if I'm correct. So does the 67 employees kind of reflect the growth rate that you are seeing in number of personnel?

[Ancuta Guina, executive]

We announced earlier this year that we have a plan to hire up to 20 persons for this year. We need follow the plan. It's not maybe exactly the expression, but I would say that we are trying for now with the workforce we have. And then you see the seasonal differences because of the students. We have working here part-time who usually work full time from June until end of August. So then you can see a much higher number average actually in Q3 because they are working basically almost 3 months full-time.

[Seppo Orsila, executive]

Okay. Kimmo, please, go ahead. Maybe you should have me first because you joined the conference first.

[Kimmo Stenvall, analyst]

There are no worries. No worries. Room for everybody to ask the questions. Maybe getting back to the CapEx levels and also on the cost base. So more than EUR 6 million CapEx in the first half. So it will come down quite heavily as you stated in the later part of the year. But just to be curious, what the number to put there? And also the cash is burning quite heavily at the moment. So -- and you, at the moment, EUR 25 million net cash position. So just trying to figure out what are your own this kind of estimates and thoughts? What is the year-end level to end up with these metrics? I know that you don't give you any specific numbers, but just to hear your thoughts on the topic.

[Seppo Orsila, executive]

Maybe I'll give my view and then Anca will give you the facts or how was it. But we run the business 20 years without any external funding. And we have charged the strong balance sheet ever since we started to accumulate that in 2017, '18 or so. Definitely, I'm not going to give up that and that is very important to us.

[Ancuta Guina, executive]

Yes. And indeed the fact that I'm afraid I cannot disclose any estimations as you already mentioned. Yes, we do know that the CapEx would go down because most of the equipment was already ordered long ago. Not all of it was delivered due to reasons we mentioned many times earlier, but yes, the investments will go down. Nevertheless, every time we make a decision on investing in something, we do properly assess that investment. And if its short-term opportunity, we always consider twice if we shouldn't take it or not -- we should take it or not. So I will not tell you now that, yes, we will stop all the investments, of course, we take into account the opportunity.

[Kimmo Stenvall, analyst]

Okay. Okay. Of course. And then a second question on these kind of same topics that you are ramping up the U.S. organization and of course, it is a big market and very important market for you. So it's totally understandable. But -- so on net basis compared to H1 cost base, so you had -- meaning that the cost base is coming down despite the fact that you are ramping up the U.S. organization at the moment.

[Ancuta Guina, executive]

Yes, that's correct.

[Seppo Orsila, executive]

I would again emphasize what we said early this year that ramping up some of these new tools are extremely expensive. And we also chose to accelerate some of those activities because it seemed like a prudent business decision. And the continuing costs of these molecular reactors, et cetera, is by no means a fixed cost that we will continue to run always. These costs are very substantial even compared to our personnel costs, et cetera. And this is the basis why we say that our operating costs will come down even if, yes, there are certain increases. But I believe we also said in the past that in 2022, 2023, we will invest more into marketing than we perhaps traditionally have, but we wanted to make sure that we come out of this all work turmoil, and it will not at least be due to the fact that we saved 10% by doing half as little marketing. And now we have this year, verified fairly well some of the assumptions that we made earlier. And I believe we will also see significant operational efficiencies in marketing going into the future.

[Unknown Executive]

Okay. Thank you very much. We have question from the audience following the webcast about interest rates, how the increased interest rates had any impact on our customers, actually, and what is our estimate of the higher interest rates affecting our customers' activity in the future.

[Seppo Orsila, executive]

Yes. As we talked about last year, certain customers had challenges, not per se due to the interest rates but overall tightening of financial markets. I said earlier today that our customer base continues to converge towards larger customers and they have not mentioned interest rates or difficulties in financing this year. Thus, their -- in nutshell, we see limited impact. But I guess it's prudent to acknowledge that overall increase in interest rates is not something which generally benefits the industry, but there must be some impact. But this is not a topic like some of the financing turmoil was 1.5 years ago.

[Unknown Executive]

Okay. And yes, we have another question from the webcast floor. So there's a positive effect of EUR 2 million from advance payments in the cash flow statement. And could you elaborate on what this is caused by?

[Ancuta Guina, executive]

Basically -- okay, this is a matter of how the advance payments related to equipment are recorded in accounting. So basically, they should be coming together with the equipment. And the time you receive it, basically that advance payment would become positive cash. It's not cash out anymore because it is -- we call it as back in the assets -- in the value of the equipment. So please look at it as a full number, equipment and advances. They should be counted together.

[Unknown Executive]

All right. Thanks. And there are no further questions.

[Seppo Orsila, executive]

Thank you, everyone, for joining, and we hope that you have a great weekend, and we look forward to an active autumn and happy to meet you at various Investor events and have visit us when our schedules coincide. Thank you. Bye-bye.

[Ancuta Guina, executive]

Thank you. Bye.

[Seppo Orsila, executive]

Thank you.