Optomed Oyj

OMXH:OPTOMED

Earnings Call Transcript 2021-Q1

[Lars Lindqvist, Chief Financial Officer]

Thank you, Seppo, and hello, everyone. I will not go into details, while you have availability to the interim report for the first quarter. Just some highlights, and equity ratio of 64% compared to 66% last year, which we believe reflects a strong balance sheet. Total borrowings of EUR 6.4 million versus EUR 6.6 million. Last year, EUR 3.2 million was repaid in the first quarter. And we think we have a good balance between equity and loan. Net working capital of EUR 3.7 million versus EUR 3.5 million last year. And finally, interest-bearing net debt of minus EUR 3.4 million versus minus EUR 5.6 million last year. Let's move to Slide #15, where what I only highlight that cash flow was pretty close to zero and it's minus EUR 2.9 million last year. And the reason for the high outflow of cash last year was because of the deferred payments related to the successful IPO in late 2019. So back to Seppo.

[Seppo Henrik Kopsala, Founder & CEO]

All right. Thank you, Lars. So overall, we could conclude that we are back in a growth track as the market recovers and data proceeds. COVID is nowhere near being over, but now we see that these new telemedicine projects and demand on that side is fully compensating the lack of traditional sales opportunities. So I think that favors a lot of our type of products, and we are seeing that now during this year in a growing sales. Probably, also, these traditional sales channels, OEM channels and sales to eye clinics, the recovery will continue. And we see that side recovering as well later part of this year and then continue the next year. So at the moment, we are in a very good position at the moment. And there are a lot of exciting new opportunities in the market, and we are in a very early stage. So just in a market entry state. And vast majority of the clinics, eye clinics and other clinics have yet never even tried our products yet. And every quarter and every year, handheld cameras are getting more attention. And at the same time, AI is getting wider acceptance in the market. So all the mega-trends continue supporting us very well. So we are -- we remain now very optimistic.

[Sakari Knuutti, Chief Legal Officer & Secretary of the Board]

All right. Thank you, Seppo. And this concludes the presentation phase and takes us to the Q&A phase. [Operator Instructions] And we are happy to answer your questions now.

[Pia Rosqvist-Heinsalmi]

It's Pia Rosqvist calling from Carnegie. I have a few questions. If we start by discussing sales. So in -- when you talk of, first of all, about software solutions and particularly Software sales and solutions deliveries, that was a positive surprise during the quarter. When you have these so-called onetime solution deliveries, will those solution deliveries lead to recurring revenues in the longer term? Or are these really kind of onetime lump sales?

[Seppo Henrik Kopsala, Founder & CEO]

They lead to the recurring revenue. Part of the Software deliveries we make on SaaS basis, then there is not a significant upfront payment. But in this case, what happened in the first quarter, there was bigger installations and onetime payments, including the licenses and installation work. And then, we have a recurring revenue based on the usage volume coming in a later quarter. But in this case, this was one of those larger projects that we have had in the pipeline for a while and finally, we got them implemented. And from now on, yes, they run on recurring revenue.

[Pia Rosqvist-Heinsalmi]

Okay. And have you now emptied the pipeline? Or do you still have a lot of these kind of larger projects?

[Seppo Henrik Kopsala, Founder & CEO]

There are a lot of these larger projects in the pipeline. Currently, we can only do the installations effectively in the markets where we can travel. But there are a lot of such projects that have been on hold for a year now after COVID started. We have such projects, we have earlier announced that we have in some of the European countries, some of them are in Middle East and some in Asia, which have not materialized yet because of the COVID.

[Pia Rosqvist-Heinsalmi]

All right. And in the solution sales or the software projects, do they also include artificial intelligence?

[Seppo Henrik Kopsala, Founder & CEO]

Quite many times, yes, like in this case, but -- okay -- yes. So they do include quite often AI and more and more. However, the revenue in terms of absolute euros is not a significant contributing factor on our Software revenue yet. However, that being said, it is still the fastest-growing revenue type, what we have in the Software. But absolute euros, we -- it is not significant yet.

[Pia Rosqvist-Heinsalmi]

Okay. So just for clarifications -- or clarification, in the future, when you start to increase the share of AI revenues, those will be registered or booked under Software, not under Devices?

[Seppo Henrik Kopsala, Founder & CEO]

Yes. All the Software and all the AI revenue is written in a Software segment revenue and then vice versa. In whatever way we sell or rent our devices is taken to the Device segment. So all the hardware goes to the Device segment and all the software goes to the Software segment. AI goes to the Software segment, even though quite often we sell them as a combination or in the package, but in a revenue booking, they are separated in their own segments.

[Pia Rosqvist-Heinsalmi]

Okay. And then to the Devices, part of your business. During last year, you launched several new products. You launched the -- and you have also launched the Aurora IQ and in China, received a CFDA approval for the Aurora camera and for the EY80 camera, I think. What can you tell us about the penetration in the market of these new products? So how big a share of your sales now comes from these new products? And what is the reception among clients?

[Seppo Henrik Kopsala, Founder & CEO]

In the -- in Western markets -- maybe divide the markets in 3 categories: U.S.A., China and rest of the world. It starts from the rest of the world, meaning Europe, Asia, Middle East, Africa, Latin America, a vast majority of our sales in cameras is new Aurora camera or Aurora IQ nowadays. That's the majority -- vast majority. And in the U.S., it's about 50-50 of all sales -- okay -- in the U.S., our own -- through our own sales team, what we sell directly, that is mainly new Aurora IQ camera, but some of our partners, resale partners and telemedicine partners, they still sell our previous generation Smartscope PRO quite much. But U.S.A. is turning quite strongly to Aurora IQ now as well. In China, vast majority is still our previous generation product Smartscope PRO, and Aurora is still a small part of that. But reason being that in China, Aurora just got about half a year ago, the CFDA registration and allowance take some time.

[Pia Rosqvist-Heinsalmi]

All right. Then, if I still may continue with a question on gross margins in Devices. If I heard you right, you said you aim to keep the gross margin at the current level. And I'm thinking here about -- I mean, potential mix shifts or shifts in sales if and when the OEM channel again, activates what kind of -- I mean, I assume the effect on gross margin then is negative, but still you now say you aim to keep the gross margin at the current level. Did I understand you correctly?

[Seppo Henrik Kopsala, Founder & CEO]

Yes. In our own-branded product, sales in China and the U.S.A. has been in very positive growth trend, and that is the higher margin revenue for us. And as combined, these 2 markets, they are so much bigger than our OEM business is nowadays. So that even as our OEM sales, as it seems now, starts to recover as well. We believe that it should not change the gross margins from the current level that much.

[Sakari Knuutti, Chief Legal Officer & Secretary of the Board]

All right. Any additional questions?

[Gergana Almquist, Equity Analyst]

This is Gergana Almquist from Redeye. I just had a question about the -- you said you will invest more in R&D. And what exactly will you develop more in terms of product?

[Seppo Henrik Kopsala, Founder & CEO]

We are currently -- yes, we are currently running a major development program for new generation products. They are retinal imaging products, but we do not yet disclose what type of retinal imaging products and the timeline. But currently, what we are seeing as our R&D investments, they are major developments. The second part of the development, what we are doing is building -- continue building our AI service. So there are coming significant amount of new algorithms for diagnosing different diseases, including different eye diseases, but also cardiovascular and neurological diseases. And that's the second part of the development investment, what we are doing.

[Gergana Almquist, Equity Analyst]

Yes, that's very interesting. And the second thing I would like to know more about is the collaborations in the U.S. You say that you have new distribution collaborations. And could you elaborate on that, please?

[Seppo Henrik Kopsala, Founder & CEO]

In the U.S., we have, as a distribution partners -- actually, the channel is going away in the U.S., that we have a few large national distribution partners there now. And some of these distribution partners also provide software -- their own software and telemedicine services as well. So you could basically -- I don't know, if you consider -- in our point of view, they are like distributors for our products, combining their services and to our cameras. And then, we occasionally provide them some software components from our Software segment as well. But you could also see them as almost like an end customer since they also provide us good screening services. So that's one part. Then, there -- another -- what we are building is a network of independent sales reps. They are usually smaller companies operating in one state or one city region, employing maybe between 5 and 20 people in a typical case. So that's a complementary -- usually, these channels complement each others that -- in order to have a good coverage in the U.S., you need both. You need large national distribution partners or strategic partners and then sales rep network. And that's what we are building there now.

[Gergana Almquist, Equity Analyst]

Okay. And when it comes to the hospitals and the primary care?

[Seppo Henrik Kopsala, Founder & CEO]

We -- in hospitals and this traditional fundus camera market, meaning optometrists and eye clinics, we can reach 2 ways. We reach through our -- traditionally, we have reached through our OEM channels, for example, when they buy bigger solutions and our cameras go as part of that. Then, our sales rep network also reaches those hospitals. And we do some direct sales to hospitals and eye clinics as well by our own sales team in the U.S. But for primary care, we work with these strategic partners who also offer [ grading ] service and software platform.

[Gergana Almquist, Equity Analyst]

So in your mind, how strongly will this pick up in the coming months in the U.S. figure -- dollars?

[Seppo Henrik Kopsala, Founder & CEO]

During this -- when we started this year, we didn't exactly know yet if the U.S. market is ready to open. So the Q1 response from the market was more positive than we expected. We clearly see that the U.S. market is now opening faster than what we earlier expected. And as a result, we had a good revenue in the Q1. We think that, that trend will continue, so that as the vaccinations proceed quite fast in the U.S. and the economy is opening up. So probably, in the coming quarters, we believe that we continue growing strongly in the U.S. market.

[Unknown Analyst]

This is [ Ami ] from EQ. I would have a couple of questions. First, on the possible logistics or capacity constraints. Have you seen any, for instance, components shortages in the market?

[Seppo Henrik Kopsala, Founder & CEO]

That is -- since the COVID started, that has been the constant concern. We are monitoring that actively. We are tackling that issue by occasionally purchasing some additional components to secure the situation that we have no shortage. So yes, component -- key component lead times have extended, not only because the COVID, but we are using the same components. Like every camera manufacturer, we are using the same companies but, for example, electric car industry is using and they are sucking a lot of components now in accelerating phase. So we are quite small player compared to the Tesla, and we are occasionally competing against the same components. But we are using the large EMS companies as a manufacturing partners. And additionally, we are purchasing the safety stocks of the key components. So, so far, we have had no shortages, but they are, of course, possible in the future, but hopefully not for too long periods. We are not foreseeing such major problems at the moment.

[Unknown Analyst]

Okay. That's good to know. And then, another question on your OEM channel and the role of it going forward as your own branded products will continue growing quite strongly, as it seems. So how do you see that going forward?

[Seppo Henrik Kopsala, Founder & CEO]

Our goal is to support both channels equally, our own branded and the OEMs. There are many -- we have a very -- we are very lucky to have a world-class OEM customers and partners selling our products. It's very important in order to make handheld cameras in general, widely accepted products. If it was only Optomed-branded cameras available, it would be a hard battle to make market to see and learn about handheld cameras that's fast. But now when there is a Carl Zeiss and Topcon and other leading OEM customers of ours, also promoting our technology and telling to the market that handheld cameras are now really serious alternative to desktop cameras, that helps a lot. So for that reason, we do everything what we can to continue supporting our OEM channels. On other side, of course, when we sell our own branded products, we make higher margins and also make it possible for us to get more recurring revenue when we sell our own software solutions and AI services on top of that. That software and AI service sales, we do not get currently from our OEM customers. So that's the limitation of the OEMs. But in a big picture, it's very important that they sell our products, and we really want to continue supporting them as well as we can.

[Sakari Knuutti, Chief Legal Officer & Secretary of the Board]

All right. Thank you. We still have time for additional questions. So please ask away. All right. I guess, that's it for this quarter. And I thank everybody for participating, and I hope to see you again after summer when our Q2 results comes out. Thank you very much, everyone.

[Lars Lindqvist, Chief Financial Officer]

Thank you.

[Seppo Henrik Kopsala, Founder & CEO]

Thank you all.