Modulight Oyj

OMXH:MODU

Earnings Call Transcript 2022-Q3

[Seppo Orsila, executive]

Good morning, everyone. My name is Seppo Orsila. I'm Founder and CEO of Modulight. I have with me today Mrs. Ancuta Guina, our Financial Director; and welcome to our Q3 webinar.

I will first going to go through the Q3 highlights. Then I'm going to talk about our pipeline. And then we discuss a little bit the progress with the investment, strategy and then answer all the questions that you might have.

So we continued the strategy execution in the quarter by focusing on investments and our growth strategy. We continued to make progress with the pipeline. And actually, we feel that some of the things in the project pipeline progressed faster than we anticipated earlier. And one quite notable progress has been that from several customers in the United States but also in Europe, we got feedback that suggests that we may be able to accelerate our pay per treatment cloud strategy in the short term. We're going to talk more about that in the pipeline section of this presentation.

The amount of projects in the pipeline, the most important metric for our future potential remains solid at 26 projects. And yes, there was still some delays due to go COVID. But overall, I would say that the market sentiment is clearly improving, and we've been able to travel, meet customers, do regulatory work and visit hospitals in the United States. But namely for our suppliers of capital equipment, they still report issues with component shortages.

But then from a financial perspective, revenue was at 1.2 and obviously still far from where we want to be and the result was thus negative, but I would like my colleague, Ancuta, to walk you through the numbers.

[Ancuta Guina, executive]

Yes. Thank you. So as you could have been seen from the released figures, the main profitability indicators are still on the negative side, and that is due to lower revenue and increased costs associated with the implementation of the growth strategy. It was explained in our CEO letter that the revenues were still impacted by the uncertainty in the business environment. Hence, they are 42% lower compared to last year's same quarter.

On the positive side, we were happy to see that the results of our employee satisfaction survey were again very positive with record number despite the fast growth of our team and, obviously, of the challenging financial performance we had this year.

Moving on to the figures for the whole period from the beginning of the year. The first 9 months, we had a revenue of EUR 3.3 million, which was 50% lower than the same period last year. EBITDA and the operating result in January and September were both negative compared to last year, and we had capital investments for this period, 41% higher than in 2021, and they accounted for almost EUR 9 million. The head count increased by 5 full-time equivalents versus last year.

[Seppo Orsila, executive]

Thank you, Ancuta. So as I said, we are currently running 26 projects which projected a significant future commercial potential. I mentioned that we saw an opportunity to accelerate the cloud strategy. More specifically, this would mean that we would monetize our platforms instead of selling the devices to the customers so that they would use so called pay per use or pay per treatment business model.

This has always been in our strategy as we explained in the IPO material. But at that time, we believe that it will take a few more years to be implemented. But there is actually now independent -- independent feedback from customers in different indications that they would like to see this happening already earlier.

And also some customers suggested that they would actually like to use our cloud more generally for their devices and indications, which is obviously a very good signal to us. These are still early things, but I would say that the mentality change is quite big. And I would say that it is also somewhat of a coincidence that this is happening now on several fronts, simultaneously.

Remember that we also hold a patent from a year ago for remote-controlled medical device in U.S. And during this quarter, we were awarded another patent in the same family. We initiated one project in dermatology with an existing customer, and they are actually having a relatively aggressive schedule or at least a desire from customers' top management to have kind of launch of the product on short term meaning next year.

And then one early-stage research project with an existing blue-chip customer was deemed not to have a significant commercial potential anymore. That's plus 1, minus 1, i.e., the total remains at 26.

Then a very important thing in our bladder cancer study, a first patient was treated, and this is considered by customer, which is a U.S. public listed pharmaceutical company, as a significant progress on the milestone. Overall, the number of projects did not increase. But as I'm going to explain now there is actually somewhat more than meets the eye. We have mostly been working to take projects forward, and we still continue to sell, but the progress within the pipeline has been good.

Earlier, we always said that most of the revenue is coming from the early-stage proof of concepts and trials but now some projects, not most, but some are moving towards more mature stage, and we see this is happening next year.

Then what we want to kind of emphasize is that the revenue is unpredictable in the short term due to the early stage of our business. But as we see now, the majority of the projects are growing, and this will improve the predictability of the revenue streams. And this might lead to us being in a position, maybe towards the end of the next year, to start issuing guidance.

Current pharmaceutical and biomedical projects are still mostly at the early stage. But as I said, there are now some of those that are progressing towards more mature state.

This is the breakdown of those customer R&D pipeline projects by type of company. So most are listed companies. And then there are a second category, private companies and a flat amount of research institutions/hospitals. As said earlier, there are several other customers as well, but this is the portfolio which we view having a significant commercial potential in the future.

In detail about the product development pipeline progress. We are in the process of waiting for the FDA approval with major New York Stock Exchange listed pharmaceutical company. And we actually had a meeting with them and their leading clinicians or key opinion leaders as they often called in the industry. These are doctors who are using substantial amounts of that pharmaceutical product with patients.

And in that -- that discussion came up this. Actually, one of the clinicians suggested that could we go to this, what they call classical click fee model in ophthalmology. This basically means that for every single patient that you treat, you make a payment to the provider of the equipment, which in this case is us.

And this, we view as extremely positive development. But as I said, still work needed to be done, but this is something that we were happily receiving feedback, and simultaneously from actually a couple of other customers in different fields, we received the same feedback for the platform and the cloud strategy.

Then the bladder cancer study is progressing well. First patient has been treated, and this is something that -- you may remember that we have another project with this customer targeting eye cancer. And we view that these 2 projects are progressing in parallel. This may in future create additional opportunities with other indications and other organs.

Thirdly, we are working with a publicly listed U.S. medical device company. I believe we announced this collaboration during the spring time, but now the customer has asked us to drive another project with another indication in parallel with a quite ambitious launch time window from their management. But we certainly see this as a kind of interesting development. And one of the reasons why we are saying that some of the projects are moving towards more mature states.

Then if we talk briefly about the update of the strategy. On the investment side, as you know, we have been investing quite heavily since 2019. There have been some delays and some shortages due to various external factors, but we are steadily increasing with our investment plan. And as explained in earlier quarterly calls, also expanded to plan.

But what we are extremely happy to announce today is that now we are really starting to see benefits in the operational level. We see a further differentiation to the competition. We see ability to deliver expanded offering. We see increase in productivity, for example, as a yield improvement, and we see higher production capacity.

Modulight will continue this investment plan according to the schedule. And as said earlier, we have expanded it from the original plan made in 2019.

Yes, there are certain delays with equipment suppliers, but overall, things are looking actually quite nice, especially due to the fact that we are now finally getting some real benefit of these investments in the operational level.

Now it's a very busy time for our operations team as there are more installation teams at Modulight every week than ever before, and we have multiple installations happening concurrently.

Then, as you know, we are in the process of updating our go-to-market strategy or give a strategy update later this year. The project with go-to-market, our work is progressing, and we expect to announce that this year as promised, but also make several related operational announcements.

But in a nutshell, benefits of the production capacity increase are starting to materialize in terms of increased differentiation and wider offering besides the obvious increase in capacity and quality.

Geographical expansion, sales and marketing activity has clearly increased, and this is partly due to the -- partly a reason why some of these new positive developments have been achieved. We don't believe that those could have been achieved. Into expanding product range to other indications and we are receiving now a very good feedback on our new planned product platform, and we expect that to be in production towards the end of 2023 with several customers.

Opportunities for expansion in the cloud side. We have reported earlier about patent applications and way to improve the therapeutic result. This work continues, and as said at the beginning, I'm extremely happy to announce this opportunity to possibly accelerate the cloud strategy, namely the pay per treatment business model introduction.

There are obviously other business models and ways to monetize the cloud. But this pay per treatment is one important one. And I just want to remind you that there were a plethora of different ways that we see that and we are monetizing the cloud already. The first and foremost, it's about delivering better efficacy, i.e., better treatment result, but there are several ways how we can support pharmaceutical companies' operational work ranging from health and safety to, for example, controlling the geographic price differentiation, helping with the go-to-market, selling existing trade installed base to new indications as well as remote support and diagnostics.

But we consider this pay per treatment as a very important step, especially it happens already next year. And we continue the investment in software and laser technology. There have been some delays with machines, as I reported earlier, but we are quite happy that there are these new patents as well. And then this has allowed us to divert more and more resources to actual R&D activities supported by great tools, and we are now doing a clearly more research activity than ever before. And this obviously is one of the core reasons why the pipeline projects are maturing up faster than before.

As before, Modulight is still an early stage company and thus not giving any guidance. No change in policy, but we want to remind about that again in this presentation.

Finally, to summarize, we have had a significant progress in our R&D project pipeline and particularly highlighting the opportunity to accelerate the payment treatments business model, and overall, our cloud strategy in the short term. The pipeline remains solid at 26 projects. Customer activity has increased. So there is obviously a different sentiment in sales and marketing activity than, for example, 6 months ago and we expect that this will result in good things in next year and the year after.

Customer development projects are still affected by COVID-19, but to a less degree and there is still some component shortages, but I'm extremely proud about the work our operations team has been doing, and we have been also heavily stocking items, for example, I believe we have been buying about 500 computational modules for our upcoming systems deliveries. As a result of these changes, we are reviewing the strategy, as I said, and we'll announce that later this year.

Thanks to our strong balance sheet, we are able to continue and accelerate the implementation of the strategy. And obviously, this is a good thing for us as we are very disappointed about our -- this year's financial results, but we believe in us very strongly that the current product strategy makes sense to continue and accelerate, and there is more demand for our products, both macroeconomic wise as well as up from the customer feedback point of view, than ever.

So thank you. And I guess, we'll take some questions.

[Unknown Executive]

Yes. We have online our analysts, monitoring Modulight from Danske Bank, Mr. Lars Hevreng. So Lars, if you would like to ask some questions, we can give you a go-first and then we move on to other questions from the webcast audience.

[Lars Hevreng, analyst]

Okay. Thanks. It's Lars here. I'll take them one by one. I think that's best. I mean to start with this approval you mentioned expected during this year with a new photodynamic therapy for U.S. launch. Assuming that, that approval is going to happen, what will happen afterwards, so to say, in terms of any significant shipments, rollouts, payments, et cetera. Can you just shed some light on that, please?

[Seppo Orsila, executive]

Sure. That's a great question, Lars. As an experienced pharma and medical device tracker, you know that there are strict rules in place by the FDA related to the marketing and sales activities prior to the product launch. We have done together with the pharmaceutical company, so-called budget letter, which is a kind of informal way to inform that in the approval, this is roughly what you should expect documents that they are in need, and we have had no feedback which at least prior to the Covid was a good sign. But we also have to accept the fact that and very humbly admit that we were completely wrong in predicting the approval time line, because based on our pre-COVID experience, we actually expected the approval a year ago.

So it remains to be seen, but we have done the preparations that can be done, in our view, but we will then obviously announce as operational things mature and FDA will probably announce their decision anyway in the open web immediately once they do it.

[Lars Hevreng, analyst]

And this is, again, just to remind us, this is again a device that has -- and there's an existing device on the market, which this one basically over time, will replace?

[Seppo Orsila, executive]

Technically, there is a predicate device, yes, you are correct, but that device has not been available for quite some time. We cannot comment on the relationship between the two other companies, but the feedback we hear from the field widely from all the key users of that drug is that devices are not only available -- they are not available, but they are also not serviceable and pretty much all the devices currently on the field are more than 10 years old and most of them are broken there are lots of issues -- and this is why actual use of the drug is very severely limited according to feedback we received from individual doctors.

[Lars Hevreng, analyst]

Okay. So it's fair to characterize this. From the -- from your partners point of view, it's fair to characterize as a relaunch?

[Seppo Orsila, executive]

This is a wording that they have used in this kind of semi-public events held at scientific conferences.

[Lars Hevreng, analyst]

Okay. I get it. And then could you just remind us about the -- anything about the status of the 3 -- your target of having 3 commercialized products on the market by the end of -- I think you have said by the end of '23?

[Seppo Orsila, executive]

'23. Yes, that's the official target, and we are now reviewing the strategy. And I cannot announce the strategy before it has been done. So in that sense, it's difficult and maybe somewhat illogical at this point to comment on the kind of targets as we are in the process of reviewing the strategy at the moment.

[Lars Hevreng, analyst]

Okay. I got it. And then can you just comment a bit more on this project?

[Seppo Orsila, executive]

Early stage research project related to the drug transport kind of systems, involving a high-end university, involving the customer and us. And as you know, in pharmaceutical projects, the failure percentage is typically very large -- I don't know, 80% or 90%. And in this case, there is no big drama. It was concluded that this is unlikely to have a significant commercial potential in that particular indication and application where we were targeting.

The collaboration with them does continue, and they have expressed other ideas, but those are currently under evaluation but we try to be fairly prudent about our pipeline. And since there is currently no clear big business case for that particular project, we kind of just said that, okay, it is no longer meeting all the criteria to be listed in the number.

[Lars Hevreng, analyst]

All right. I got it. So...

[Seppo Orsila, executive]

Absolutely has no significant impact to our short or midterm kind of projections.

[Lars Hevreng, analyst]

All right. So I guess it's fair to say that this has nothing to do with the collaboration that you have with the device maker of utilization in connection to endoscopic...

[Seppo Orsila, executive]

No. No, this is absolutely -- no, this is a very early stage -- I emphasize, very early-stage research idea that was generated and was deemed as very interesting. But I mean after some research, we're contesting it was deemed that it would not work for that particular application. And I will emphasize that, that customer paid all its invoices and bills, and there are no issues from that point of view either.

[Lars Hevreng, analyst]

Okay. And also in terms of shortage in components, could you give some -- how do you see this -- how do you see this progress? So obviously you have shortages in installations of equipment, but I guess this also affects the supply capacity you have?

[Seppo Orsila, executive]

There is, I would say, some influence, but clearly, the bad experience we had unexpectedly during the summer time, that is over. And our operations team has done fantastic work to buffer things as well as implement more rigorously this kind of design principles that we would use, same or similar components across the platforms. And this has obviously improved the kind of availability.

The fact is that for many components, still you have like half a year or longer lead times. But I mean I'm sure that all the other companies are experiencing with the same supply chain issues. But thanks to our strong balance sheet, we are now in the process of stocking up many components at the cost of increased working capital, but we feel that it is the right thing to do as then that will prepare us for ramp-ups with several of our customers.

[Lars Hevreng, analyst]

Okay. And in terms of the CapEx problem overall, how far have you progressed? I mean you mentioned a EUR 23 million investment program?

[Seppo Orsila, executive]

I think we have spent -- Ancuta, is it close to EUR 20 million?

[Ancuta Guina, executive]

Yes.

[Seppo Orsila, executive]

So we have spent close to EUR 20 million combined. And as we said earlier, we have expanded the project in terms of scope of devices and equipments that we bought. Some of the equipment, and this was the happy side of the corona, we actually got a significant discount as we reported earlier. But thanks to the kind of expansions, we are probably more or less close to the initial EUR 23 million even with the expanded scope.

But of course, this does not mean that we wouldn't do investments beyond that. But -- if you ignore some of the delays in deliveries, we are good with that program and particularly happy that now after more than 2 years of investing, we are now starting to see some real benefits, particularly in terms of differentiation.

And for example, last night, we had a very nice call with one U.S. customer who more or less said that they want to fly to Finland because of some of the results that the guys showed them. And this is one clear outcome of our investment program.

[Lars Hevreng, analyst]

Okay. And is it possible to -- I mean, well, I guess this is work in progress, but is it possible to characterize the utilization rate of your capacity. Is the capacity you have today or a year ahead, but where are you?

[Seppo Orsila, executive]

As we said, we are mostly using our factory for research and development. So then measuring the actual utilization rate is not so straightforward. We moved into kind of 5/24 shift work with our fab more than a year ago or a year ago. And then this is kind of helping us obviously not so much at the moment from the capacity point of view, but mostly that we can reduce the cycle time and the calendar time it takes to take projects forward.

And this is also a significant achievement from our operations team that by kind of doing some things, which typically need to be done in serial, of course, you can do 100 hours of work in 1 week if you are working in 3 shifts. But if you are working in 1 shift, it takes 2.5 weeks. So -- and since our work involves many iterations, which are sequential in nature, this is one of the key things that has helped us to kind of progress with the projects and thus move towards more mature stage. But utilization rate still, I would say, production capacity-wise, very low.

[Lars Hevreng, analyst]

All right. And then just to come back to this photodynamic expected approval -- therapy expected approval, just to be clear, your revenue recognition, will that reflect your deliveries to the marketing company? Or will it reflect the marketing, the sales or the commercial -- the sales for the commercial products in the market?

[Seppo Orsila, executive]

So we plan to recognize the revenue based on the kind of true sales, meaning that when the device is actually in use with the end user. So there will be some revenues generated to us based on certain more technical milestones. But overall, we want to be very careful with this revenue recognition and make sure that it aligns with the actual benefits.

[Lars Hevreng, analyst]

All right. So if it would be a stock building by your marketing partner that would not lead to a revenue -- a significant revenue recognition from your side, the revenues will more reflect when the risk goes over, I'd say, to the end user?

[Seppo Orsila, executive]

Sorry, can you repeat that?

[Lars Hevreng, analyst]

If your marketing partner, if they would build significant stock of inventors of the device during the launch phase, that would not mean a significant revenue recognition from your side?

[Seppo Orsila, executive]

No. We feel that -- I mean, there are these kind of options at the table and some of the people I know for let's say, good or bad reason, use those. But here, the idea has been to be fully transparent and reflect the real end-user demand.

[Lars Hevreng, analyst]

Okay. I got it. And then just finally on the -- you talked about expanding geographic footprint over time. What's the current plans for people on the ground, so to say, in the U.S. market?

[Seppo Orsila, executive]

We have actually -- let's put it this way, that I said earlier that we expect multiple operational announcements during the quarter related to the geographic expansion.

[Lars Hevreng, analyst]

Okay. I got it. I guess that was more than 10 questions. I think that's fine from my side for now.

[Unknown Executive]

Thank you, Lars. And now moving on to questions from the webcast audience.

[Seppo Orsila, executive]

Okay. There's a question. Do you consider it likely that there is a need to raise capital in the short term?

No.

Then -- earlier this year, you made a big write-off due to nonpayment from some customers. How has the situation developed during the year? Have customers paid their bills in due time? Or have you noticed any issues or risks in that respect?

I think we answered this quite thoroughly in the previous call and the call before that we have nothing new to report. Yes, the customers have paid their bills according to the schedule more or less. There are no significant overdue changes and this is the kind of the work that we are doing gets paid. I don't know, Ancuta, if you want to give more scientific answer.

[Ancuta Guina, executive]

I think that this is a good enough answer for the current status.

[Seppo Orsila, executive]

Yes. Obviously, we are not fortune tellers. We cannot say what is the future, but we believe that those problems have been now solved and we are with that particular group focusing on recollecting the money, but definitely no issues that similar at the moment, not expected going forward due to the fact that, as we said, we changed also the revenue recognition with select customers.

Retail investors worry about Modulight sponsoring local ice hockey teams of Tampere. Which benefit for Modulight do you expect from those partnerships?

Thank you for the question. And this week has actually been quite active in that field and not that actually those activities were planned this week, but they were planned a long time ago as a part of our comprehensive collaboration with Ilves and Tappara hockey teams. As we said at the time of the launch, we feel that this is part of our societal response. We are giving back to the society. Modulight has for a very long time, more than 10 years, sponsored children's hockey, little girls' floor ball, et cetera, et cetera, very widely -- has also brought up by several retail investors up in the chat forums.

But what is the benefit to the Modulight? We believe that Modulight is then better known in Finland. It is also right thing to do. We are sharing back. We are giving back to the society. It improves the Modulight's image as an employer and within the team and it drives society into the right direction.

And yes, in some limited sense and in isolated cases, for example, on Monday, when we had the charity game where we offered all the small children of Tampere an opportunity to go over to Nokia Arena and watch the hockey. We actually happen to have some Japanese guests here, and we're taking them to the game as well, and that -- that is obviously something that is not very tangible or easily measured, but we believe that this kind of hockey thing has improved our image and the perception of us as a company with customers, partners. We even took the FDA guy in the last spring into the game.

So this is part of the overall company brand building for employees, future employees as well as customers and other related parties. And I'm very happy to talk about this, but we are fully focused on our business, and that is what is taking 99% of our time, even if the ice hockey is probably quite visible, but that is definitely not something that we use up a significant portion of our time or resources. But thank you for asking.

[Unknown Executive]

And that's all from the question side. Thank you.

[Seppo Orsila, executive]

Any other questions, Lars, or anybody on the line?

[Lars Hevreng, analyst]

Nothing more from my side.

[Seppo Orsila, executive]

Thank you. We also don't see any more on the web. So it is really our -- it's very important to us that we answer all the questions, and now we'll try to make sure that if there are clear duplicates, then those are only answered once. But -- thank you very much for listening to us, and I highly recommend that you keep follow -- or you start following our social media. There is lots of information about Modulight and as some of you may have noticed that we are also stepping up our more formal press releases, and there is a clear recognized need from the investors to provide more visibility into what the company is doing, and we expect to announce later this year additional means how we will provide you more transparency, more visibility, our daily operations.

But thank you very much, and have a great day.

[Ancuta Guina, executive]

Thank you.