Optomed Oyj

OMXH:OPTOMED

Earnings Call Transcript 2023-Q1

[Sakari Knuutti, executive]

All right. Good morning, and welcome to Optomed's Q1 investor call. Our release -- Q1 release came up this morning, and the investor presentation -- or Q1 presentation that we will present with Seppo Kopsala, is on our IR site available. My name is Sakari Knuutti. I'm the CFO of Optomed and obviously, we have also Seppo Kopsala, our CEO, on the line. [Operator Instructions] All right, Seppo, please go ahead.

[Seppo Kopsala, executive]

Thank you, Sakari. Okay. Let's go through our first quarter results in the presentation. Going to Slide #2, highlights of the quarter. So first of all, it was again another very strong quarter for Software segment. So 20% growth track, also good profitability on that segment. So we are pleased for that development.

For the Devices segment, that was a very weak quarter. There was no OEM orders this quarter and also the Chinese business remained at a low level. So that caused about a bit less than EUR 200,000 decline in the revenue. I think this kind of, like represents the transformation that OEM or the Devices segment is going through, meaning that the business has been, the last couple of years, shifting more towards owned branded products and less OEM sales. And then after the COVID, the business has not recovered in China yet. So it's more about the Western market business at the moment.

Regarding the clinical trial. So we initially had a slower start than we were expecting for additional data collection. We had meetings with FDA and discussions about the data collection protocol. And then we got started a little bit later and then the sites got ongoing a little bit later. So -- but right now, it has been moving on as planned since the -- since a little bit slower start. It caused a certain delay at the beginning. But anyhow, no hiccups at the moment and the data collection is proceeding as expected, currently.

We keep our guidance as is. So Optomed expects revenue to grow this year as earlier forecasted.

Then going to Slide #3, and Sakari will go through the key figures of the quarter.

[Sakari Knuutti, executive]

Thank you, Seppo. So starting from the top of the P&L, the revenue, we had a revenue increase to EUR 3.5 million from EUR 3.2 million, and that is an increase of 8.2%. The growth was driven by our Software segment, as mentioned. And the growth there was 21% and driven by our health care solution sales. And lastly, sequentially thinking the driver, it was the same as in Q4. So the performance continued.

Devices segment declined. As Seppo mentioned, we had a disappointing quarter over there. But on the bright side, moving on to gross margin, we had a gross margin improvement on both of the segments. And we saw gross margin of 71.2% as compared to 68% of last year. And it's good to note a small detail there that, as you can see from the slide, we had a grant of EUR 40,000 in the comparison period. And that boosted the comparison period's gross margin by approximately 1.1%. So if you think about clean numbers, the growth is actually 4% instead of 3%.

Moving down to EBITDA, which was roughly minus EUR 0.5 million. And we can see a clear improvement over there as well as the EBITDA was last year, EUR 940,000. If you think about the capitalizations, first of all, they are pretty much on the same level on both periods. So there is no effect there. So the improvement is actually driven by positive items like the increased gross profit and decreased OpEx on actually on all of our segments.

And moving on to segment highlights and Seppo on Slide #5.

[Seppo Kopsala, executive]

Thank you. Okay. Going to Slide #5, the Devices segment, first quarter. So as mentioned earlier, the revenue declined 16.5% about a bit less than EUR 200,000 and that was due to the lack of OEM orders. So that has been the trend in recent couple of quarters that we haven't had OEM deliveries as we used to have about 1 and 2 years ago. So this has been a little bit of a trend that our sales is more on our own branded product sales and more and more the direct sales in certain markets such as United States to end customers. This means higher gross margins, but at the same time, a little bit less revenue once the transformation is ongoing.

China market still remained very weak. However, it may be that now after lockdowns are over in China and also the COVID funding mix seems to be behind in China or affect of that. So we do believe that this could be the year that China market could gradually start recovering. So that's an upside opportunity for us this year and next year.

We also have couple of -- or actually quite many now larger tenders ongoing where we are participating. So if those materialize during this calendar year, they have a significant upside effect potentially on the Devices segment business and also the Software segment businesses. In many cases, we are offering complete solutions, including devices and software.

U.S. and distribution sales channels on our own branded products, they continued performing well. So that's according to our strategy, and we are pleased for that development. But weakness in the OEM business at the moment is affecting negatively on the revenue overall. Going to Slide #6 and Software segment in the first quarter. So that was, again, a very strong quarter. Our health care system deliveries has recovered very well within last 1 year, and the trend has been strongly up. It means more solution deliveries and increased recurring revenue base from the existing customers. So that is reflected as increased revenue and higher gross profits and eventually higher EBITDA. So that has been a very positive trend for that segment at the moment.

So this is kind of like our base and revenue and cash flow generating machine. What we need when we are investing heavily all in the U.S. market and bringing these new AI solutions and cameras to the market.

Coming to Slide #7 and cash flow at Sakari will continue.

[Sakari Knuutti, executive]

Thanks, Seppo. So as you can guess from the improved revenue and profitability, we obviously had also improvement on the cash flow side. So the net cash from ordering activities, it improved to EUR 440,000 from EUR 700,000 negative last year during the comparison period. A good note there is that if you think about it on a year-over-year basis, this is now sequentially, the fifth improved quarter in terms of net cash from operating activities. So the trend is good. The numbers are -- there's, let's say, room for improvement there. But the trend, that is something that we are happy about.

In terms of the cash position, the burn was EUR 1.3 million during the quarter. Last quarter -- I mean sequentially, last quarter, so Q4, the burn was EUR 1 million and during the comparison period. So it was EUR 2.2 million. So that is also a good, strong trend that we can see over there.

And moving on to Slide #8 and back to Seppo.

[Seppo Kopsala, executive]

Okay. So this is basically, again, a reminder of the big picture, what we are building here. So our main goal is to bring our cameras connected to diagnostic AI solutions to the market, and U.S. is the key market. And so we are very much investing in getting our camera along with the AI health solution, AI algorithm approved by FDA. And once that's done, then the whole business is expected to transform quite much, becoming a recurring revenue type of business from the big market. Europe is coming a little bit behind the U.S. We are starting to see in Europe also the first AI implementations in a level that we haven't seen before. And now I think overall, it's looking -- comparing the U.S. and European markets, it seems that Europe is coming maybe 3 to 5 years, maybe behind U.S.A. in AI takeoff. Approvals are starting to be there in place in Europe, but almost all European countries are still lacking reimbursements. So once the reimbursement starts coming to Europe as well, the same way as they are today in the U.S. market, then we do expect European markets to start gradually opening also for AI or diagnostic AI. So this is what we are heavily involved, and this is our main ambition.

Going to Slide #9. So this is several years, this has been our main directions where we are pushing the business. So investing in opening the new geographical markets, especially meaning United States and certain other key countries like in Latin America and Asia. Opening the new customer segments, especially meaning primary care, some other niches are pediatrics and emergency medicine. And then bringing this AI integrated health screening to the market, meaning our cameras connected diagnostics area.

So these are the key investments where Optomed is investing millions of euros every year at the moment. And this is still keeping our cash flow currently on a negative. But we do believe that these investments will create significant growth and the cash flows in coming years. So that is the case that we are building.

So that was the Q1 numbers. I think as a conclusion, I could say that personally, I am pleased with the results, especially that the Software segment continues that strong performance. On the Devices segment, it's only a question of 1 or 2 OEM orders, and we would have a different type of numbers, but they didn't happen in this quarter. So that's the -- what the effect, what we see here. But overall, a pretty good quarter, and I do think we will have a quite good year this year.

Now happy to take questions.

[Pia Rosqvist-Heinsalmi, analyst]

It's Pia Rosqvist calling from Carnegie. Can you hear me?

[Seppo Kopsala, executive]

Yes, I can.

[Pia Rosqvist-Heinsalmi, analyst]

A few questions. Firstly, I think you alluded now to the device sales weakness, saying that you kind of lacked 1 or 2 larger device orders from OEMs. But looking at the numbers now in the second quarter, to me, particularly looking back, it seems like it's the lowest level -- the second lowest quarterly device sales since the listing. So I'm now just trying to grasp, is this a sign that the handheld market continues to be a very niche market with limited growth opportunities? Or are you still confident that the OEM market will be a driver in addition to your own strong then development in direct sales?

[Seppo Kopsala, executive]

Starting from the overall handheld devices market, it is still a very early stage niche market and the niche product category as it has been. It seems -- not only Optomed, but everybody who is projecting the devices' growth volumes in different product categories are still predicting that handheld product category will continue growing faster than the rest of machines. That seems to be the trend. And we do believe strongly that once the AI gains popularity, then the growth rate will accelerate significantly because then the primary care can really do the examinations effectively, and that rise the handheld market very much. But yes, it's very, very early stage. Regarding the trend in our OEM business, that kind of has been last couple of years that the trend has been down on our OEM channel sales while the sales of our own branded products and distribution channels and direct sales has been growing. OEMs used to be so big chunk of our Devices segment revenue along with China. So those two, when they have become lower, we are seeing the effect of negatively in our revenue at the moment in the Devices segment. So you could consider Devices segment is in middle of this type of transformation where business focus has been shifting from, first of all, from China towards U.S. and Western markets and secondly, from OEM products to own branded products.

And still this own branded product business through distribution and U.S., they started a couple of years ago from very low numbers. So even if the percentage growth is high, they have not fully covered the drop in these two other sales channels. But we will probably see in a couple of coming quarters, how it is that we can start showing the positive numbers again.

[Pia Rosqvist-Heinsalmi, analyst]

All right. Then coming back, you talked about the delays regarding additional data collection. So can you give any more color on the reasons what caused those delays and what kind of delays are we talking about in time? So is it weeks or months?

[Seppo Kopsala, executive]

Initially, we had a couple of months slower start, what we expected. And mainly the reason is that there are many parties involved in the trials. There is us and our CROs and the AI health as a partner and then the clinics who actually do this additional data collection. So -- and FDA also, which we asked for clarifications or confirmations for our data collection plan. So all this together and the timing of those things, they created this a couple of months delay at the beginning. So -- but now all the staff sites, what we wanted to collect this data, they are running now finally as expected.

[Pia Rosqvist-Heinsalmi, analyst]

All right. And can you give some kind of estimation on how long the data collection will continue?

[Seppo Kopsala, executive]

It will -- yes, I have to repeat myself, what I said in February that in a couple of months.

[Pia Rosqvist-Heinsalmi, analyst]

Okay. So, yes. And then FDA needs, well, anything between, what, 10 to 90 days before we can expect to get an answer or a decision?

[Seppo Kopsala, executive]

Yes. Once the application and this updated application and the data is submitted and it's a normal processing time from FDA, but we have not speculated that on our communication.

[Pia Rosqvist-Heinsalmi, analyst]

Okay. All right. And then you talked about the upside opportunities for 2023 saying that a possible recovery in China is in the cards and several significant potential solution deliveries. So can you quantify these upside potential in euro terms? So what kind of magnitude are you referring to?

[Seppo Kopsala, executive]

Well, compared to the pre-COVID levels, our China business is about EUR 2 million lower level than currently than what it used to be earlier. And the need for this type of products has not gone anywhere in China. And there are a lot of large private screening operators and AI companies who provide these solutions. So we do believe that there is a fair chance for us to find a large new strategic partners in China to recover the China business towards the earlier volumes.

But will it happen this year or sometimes later, this is something I cannot know yet what will be the time line. But the need is there. We are not going anywhere from China market. The business unit is downsized in a level that it's not too much negative profitability at the moment. So it's not burdening the company. So basically, the revenue is sufficient to cover the current -- almost the current expenses. So -- but we are ready to take the opportunity once it arrives.

And this larger solution deliveries, they can be -- many times, they are hundreds of thousands, sometimes in the range of EUR 0.5 million to EUR 1 million deals, what may happen. But the sales cycles are -- they vary a lot. The sales cycles can be from 0.5 year to several years of sales cycles typically in these type of large national tenders in different countries. So it remains to be seen when they happen.

[Pia Rosqvist-Heinsalmi, analyst]

Okay. And two more questions, please. Your sales guidance for this year still is unchanged. You're looking for growth. So my question is what is your visibility on software solution deliveries in 2023? Are they standing for the expected growth implying that Software sales could decline in 2023?

[Seppo Kopsala, executive]

I'm not sure if we have given the outlook specific there. We have not given the outlook regarding the segment level. Overall, yes, we do expect the revenue anyway to grow this year. But -- yes. But how much the Devices and how much Software segment is driving the growth, yes, I cannot comment, unfortunately.

[Pia Rosqvist-Heinsalmi, analyst]

Okay. And then finally, your -- regarding your manufacturing setup, is everything running as expected and planned, so no changes in your outsourced manufacturing in Thailand?

[Seppo Kopsala, executive]

No changes. It runs smoothly. Maybe within recent few months, the sourcing issues have maybe become even a little bit easier than it used to be some time ago.

[Sakari Knuutti, executive]

And we are happy to take further questions. [Operator Instructions]

[Anne Brusila, analyst]

It's Anne Brusila from eQ Asset Management. I have a couple of questions on China. First, on the accounts receivable, it was stated in the report that you have accounts receivable almost EUR 3.5 million. And you were referring to a Chinese client that has a big account receivable. And could you open up a bit how big portion of that EUR 3.5 million that Chinese customer represents?

[Seppo Kopsala, executive]

Yes. Maybe Sakari can comment on the details. Meanwhile, I can give a little bit background in case everybody has not followed in earlier quarters. So the history of this receivable dates back to maybe more than 1 year, maybe 1.5 years. And it was caused that one of our large customers or safe channel was diabetic retinopathy screening operator that both cameras from us and resold that as a part of their services -- screening services to health care sector in China. And once the COVID and lockdowns hit the China very hard, that caused their business to shut down almost for almost 2 years during the lockdown periods. And that brought the company in a difficult position, and we were left also with the large receivable.

That single customer or sales channel represented majority of our China sales in several years. And that was an unfortunate event. And -- but the company is alive and they are expecting to come back. And every month, they have been repaying those receivables to us. We have not supplied them more products in more than 1 year. But Sakari can comment the details about the actual receivables.

[Sakari Knuutti, executive]

Yes. So as Seppo mentioned the background as it is. And as it comes to the amount of the receivable, it's now a bit less the -- the actual receivable is now a bit less than EUR 2 million. And we have made a credit risk accrual there, which is 30%. So on our balance sheet, you see, well, less than EUR 1.5 million in our balance sheet but we are expecting or we have been receiving payments every single month. So eventually, our belief is that we receive the whole almost EUR 2 million back eventually. However, there is also risk so there is still 30% credit risk accrual on our balance sheet.

[Anne Brusila, analyst]

Okay. This clarified the situation. Then getting back to the Chinese activity. I mean many other companies have also stated that the sort of pickup in the Chinese activity after the lockdowns have ended, has been a bit more slower than anticipated. But have you noticed any changes between the various months? So for instance, has there been more activity in March than, for instance, in February during the Q1?

[Seppo Kopsala, executive]

Yes, usually, February is very slow month in China because the Chinese New Year holidays, et cetera. We haven't seen yet the speedy recovery as some were predicting. We have been conservative regarding our Chinese expectations. So -- but majority of the people in our industry do believe that the China market will start a clear recovery trend during this year. So it may be that sometimes towards end of the year, we are also starting to hopefully see increased revenue. But Optomed is not counting on that. And our forecast is not -- or outlook is not based on that.

So basically, we are conservative regarding our China expectations, but we are ready and we have a team ready in place once the market starts recovering.

[Sakari Knuutti, executive]

Yes. And just to build a bit on what Seppo is saying is that in terms of also capital allocation, we are really concentrating in the U.S. at the moment. So China is not in our focus areas at the moment due to the fact that we had a couple of, let's say, not so nice experiences over there.

[Gustaf Meyer, analyst]

Seppo and Sakari.

[Sakari Knuutti, executive]

Hello?

[Gustaf Meyer, analyst]

It's Gustaf Meyer here from Redeye. Many of my questions have already been taken. But I wonder if you could give some update about the preparations in the U.S., if it's anything new there? And also what about contacts with different clinics? Are there many that will start with your offering directly after potential approval?

[Seppo Kopsala, executive]

We do believe that there is quite soon, there is a demand once we get the FDA approval. How it will probably build up is that this many customers, which are large chains or they are organizations with tens or hundreds or even thousands of potential primary clinics, they will take few cameras probably at the beginning. And then they test it for a while and then the scale up begins. And that there are tens of organizations like that who have initially expressed their interest to start doing the screenings. However, I must emphasize that we have not done, and we are not allowed to do any commercial discussions with the potential customers in the U.S. because the regulatory reasons before we have FDA approval. So we do not have contracts or commitments from any of the customers. That's not allowed. But of course, we have been selling our cameras to these organizations for several years on our own and through our OEM channels. So we do know what are these clinics, and we do know what they expect to have. So that's how it's expected to start.

At the moment, we have a team of roughly 10 people in the U.S. selling just our cameras and selling every quarter more and more direct sales. So gross margins go higher. But the big thing -- big scale-up will only start after FDA approval. That's what we foresee.

[Sakari Knuutti, executive]

We still have time for more questions. [Operator Instructions] All right. I suppose that was the final, final question. And that means that this concludes our Q1 investor call. Many thanks for participating, and we hope to see you again in August in our Q2 call. Thank you very much again.

[Seppo Kopsala, executive]

Thank you.