Optomed Oyj

OMXH:OPTOMED

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Sakari Knuutti, executive]

All right. Welcome to Optomed Q1 investor call. My name is Sakari Knuutti and I'm the CFO of Optomed. We have also Juho Himberg, our CEO, on the line. Our Q1 results came out this morning and more importantly, previously, we announced that we have now obtained the FDA clearance. The presentation that we go through is available on our IR site. [Operator Instructions].

All right, Juho the stage is yours.

[Juho Himberg, executive]

Thank you, Sakari. Good morning, everybody. So let's run through our Q1 results. The main thing during this spring, also it happened after the closing of the Q1 is that we finally received the FDA clearance for our Optomed Aurora AEYE-DS camera and it's been something we've been waiting for a long time. And now finally, we received it. Its first handheld camera powered by AI, and we are really delighted to be now available to sell it.

Q1 results, all in all, were satisfactory, especially Software segment was lagging a little bit behind. Also Devices segment was flat comparing to last year. And then we announced that we are really working with quite interesting new developments in China for those ones that will be following Optomed, longer period of time China used to be our main market, but since a couple of years, it's been declining and now we are reinventing ourselves in China.

Let's move to the next slide. FDA clearance, we finally got it and the results were really, really good. And this raises the bar for other handhelds entering into the market if they want to compete with us. So sensibility was 92% to 93%, specificity 89% to 94% and imageability 99+% which are really amazing results. And bear in mind that with our Enea Health Solution, it's only a single image per eye. So there are in the market currently, like a combination -- AI camera combinations, which requires 2 images per eye. And with AI Health algorithm, it's possible to just run results with the one image per eye. And this is a much, much smoother comparing to many other competitors currently. It makes the results and the processes much faster. So these were carried out 2 large prospective Phase-III studies and really it demonstrated the best-in-class efficacy and imageability.

Then move to the next slide, our business model. So this is how the business will be conducted now onwards. So it will go into the recurring revenue model where we are having our camera, AI Health algorithm and then our portal. And it's a recurring revenue model, so there will be fixed annual or monthly subscription fees, and we are moving away from the capital sales model. So this is a really nice having recurring revenue model for this business. Customer benefits, it's a really low barrier to subscribe. So there are no initial investments, only monthly rental fee with excellent clinical results. Currently, the reimbursement rate is really high $55 per diabetic patient. And also this is pushed by the insurance companies, and it improves their credit score, and this is the Medicare Star rating. So we are targeting roughly 300 customers and the clinics and next year -- 5 to 10 years, there will be at least 50,000 to 100,000 AI connected fundus cameras in the U.S. market. It's starting to move really fast.

Then let's go to the next slide, key figures. Revenue declined 4.4%. This is mainly due to the Software segment or it is due to the Software segment. Net loss was slightly better than last year and also the earnings per share EUR -0.06 was slightly better than last year. Cash flow from operating activities was EUR -515,000 compared to EUR -440,000 last year. The percentage changes are looking quite big, but still we are talking about relatively small variations.

Then let's move to the segment highlights. Devices segment, it was flat comparing to the previous year. Gross profit slightly below previous year and also the gross margin. Here, the reason for this one is that we sold some smartscopes out of the stocks, which reduced the margins. And the other thing is that we were not that much focusing on the capital sales in the U.S. market as our sales organization was preparing for the launch of Optomed AI Health solution. Currently, we are discussions with the prominent eye hospital in China. It is the #1 hospital considered in the top-tier hospitals in China and a private equity fund to establish a joint venture for the screening services. It will be the first this kind of service in China, and we are expected to sign the agreement during this quarter.

Gross margins a little bit below previous year and as I mentioned before, in the U.S.A., the sales force was really preparing for our AI launch and basically was not focusing that much on the capital as they didn't have time.

Software segment revenue and EBITDA declined versus last year. We had a very strong comparables. And this is due to the fact that last year in the Q1, we had in Finland, this change there were new hospital districts created and there was a lot of billing done due to that restructuring work. But the good news is that we have defensive victory on this Optomed non-healthcare development services in Finland. It's a governmental agent, which is not related to the healthcare. And we flagged last year that if we would have lost this deal, we would have lost EUR 1 million sales during this year. And now the contract will last for 8 years. So this risk has vanished now from our book.

Moving on to the cash flow for Q1. The cash flow was stable. The net cash from operating activity was approximately EUR 0.5 million in negative which was roughly on the same level as last year. Then the cash position that you have to take into account that we actually paid back a term loan of EUR 1 million in Q4, so if you look at our today's cash position as compared to the comparison period, you have to take into account that EUR 1 million loan has been paid back. But nevertheless, the cash position was now EUR 5.7 million against the EUR 7.2 million of last year.

So summary, FDA clearance obtained. It's been the major development, which we've been waiting for years already, we finally got it. And it also cleared -- some disbelief in the market that handheld cameras cannot have it. So -- but we really proved that handheld cameras are in par with the tabletop cameras with the result -- what comes into the results. And we are well positioned for the next phase growth.

[Sakari Knuutti, executive]

All right. We're happy to take questions now, and you can umute yourself by pressing star 6.

[Gustaf Meyer, analyst]

This is Gustaf from Redeye. So first, I know that you mentioned it in the presentation, but what was the reason for the decreased gross margin in the Software segment during the quarter, if you could repeat that?

[Sakari Knuutti, executive]

Well, as it comes to the -- it's kind of a seasonality being last year. There were a couple of license deals that had a positive effect on last year's number. And this year, we didn't have those. So it's the seasonality item.

[Juho Himberg, executive]

It will be flattened out during the course of the year.

[Sakari Knuutti, executive]

Yes.

[Gustaf Meyer, analyst]

Okay. And also about the plans in China. I wonder if you could elaborate a bit more about this joint venture plans and also if you could talk more about the revenue model.

[Juho Himberg, executive]

Okay. So we are currently in the negotiations to forming a joint venture with a large Chinese private equity fund. And we have also engaged #1 Chinese Tier 1 Eye Hospital and this will be recurring revenue model where we will be suppliers of technology. And on our business plan, we will start with like a Phase I with a relatively small number of the patient and the screenings, but it will increase during the course of the year. And why this is different now comparing to many other previous attempts is that we are working very closely with the health care institutions where we are going to get the patients for the screening. And it will be a recurring revenue model.

[Gustaf Meyer, analyst]

Okay. And also, if we look at the U.S. market, when do you expect that you could have the first subscribers in the new model?

[Juho Himberg, executive]

We will have very soon, very soon. And we will tell you more about during the -- in August when we will have a Q2 results sharing.

[Gustaf Meyer, analyst]

Okay. But can you say anything about how many U.S. players that you currently have in discussions with regarding these subscription deals?

[Juho Himberg, executive]

Many, a lot.

[Gustaf Meyer, analyst]

And also, if you talk about staff in the U.S., do you think that you'll need more staff now that you have received the clearance, let's say, for yes, during this year, for example.

[Juho Himberg, executive]

Okay. So this is a new business model, and it's a blue ocean market. So our plan is run between 60 to 90 days like a proof of concept. And then during that period of time, we will fix all the possible shortcomings, and we might need to redefine the processes, and we are really making this process to work effectively. And we will spend roughly 2 to 3 months on that one. So it's a completely new business. There are a lot of things to be done. And then depending on the first subscribers and the volumes, most likely, we will require to hire more people in the U.S.

[Gustaf Meyer, analyst]

Okay. And also just the last question. I was wondering about the employee benefit expenses during this quarter compared to last quarter in Q4. What was the reason for the change? It decreased a bit during this quarter.

[Juho Himberg, executive]

Just a second.

[Gustaf Meyer, analyst]

I think it decreased from EUR 2.4 million to EUR 2.1 million. But what I could see was also that seen number of...

[Sakari Knuutti, executive]

Yes. It's actually -- if you look at the employee benefit expenses, that was in last year, that was EUR 2.2 million and now it's EUR 2.1 million. So yes, the difference is -- it's not that big.

[Gustaf Meyer, analyst]

Yes, that was my last question.

[Juho Himberg, executive]

Thank you, Gustaf.

[Pia Rosqvist-Heinsalmi, analyst]

It's Pia Rosqvist calling from Carnegie. And congratulations, still on finally receiving the FDA approval. I'd offer a few questions regarding that. So in the U.S., if I understand you now correctly, you plan to run during the second quarter now proof of concept with some of your clients. Does that mean that you actually can start recording revenues then from the third quarter onwards?

[Juho Himberg, executive]

It depends how fast we will -- of course, we will have a recording of revenue on the second quarter as well, but the third quarter will be the full quarter when we do have the service available.

[Pia Rosqvist-Heinsalmi, analyst]

Okay. And now what kind of scale of the plans do you have for the U.S.? So what kind of sales levels are you targeting? What kind of contribution should we expect from the U.S. this year given that you stick to your sales guidance of growth in 2024?

[Sakari Knuutti, executive]

Right. So like you stated, we actually really stick with our sales guidance at the moment. And this is kind of -- the reason for that is that like you mentioned that we are facing a Blue Ocean market. We don't really know at this stage what the demand and what is the pace of the implementation are going to be like. So at this stage, I have to say that we are not sure how fast or slow the implementation will take place.

[Pia Rosqvist-Heinsalmi, analyst]

Okay. But can you give us some kind of indication on -- I mean, what kind of uptake, I mean, are you disappointed with is -- or what would you be satisfied with? If we talk about this year.

[Sakari Knuutti, executive]

As it comes to kind of -- at the moment, we think that we should be able to definitely reach the guidance and then it kind of depends on the -- as you know, we are moving to the recurring revenue model. So the invoicing, the revenue recognition will be done monthly. So it very much depends on when the first -- when we complete the pilots and the kind of pivots that we have and when the actual more large-scale revenue recognition of the bigger deals that happens monthly instead of in our CapEx model when it actually takes place when you do the sales or execute the sales when that takes place.

But like you have said is that we are now kind of in a situation that we are in a executing and seeing mode instead of wait and see mode and then we learn lot more about the market and then update the capital markets according to when we know a bit more about the pace of implementation.

[Juho Himberg, executive]

You need to bear in mind that even we have done a lot of internal work. We have done a lot of preparation for the launch. And all our staff has been trained and there are very good plans for that. Due to the lack of the clearance, we couldn't talk to the clients. We couldn't show the prices. We couldn't show the really like the products. We couldn't really do the promotional things. And now it starts. We know that there is a demand, but this we need to bear in mind.

[Pia Rosqvist-Heinsalmi, analyst]

All right. Thank you, then let's wait and see. But another question with regards to the pricing. Can you share anything now about the pricing model which you will start to use?

[Juho Himberg, executive]

The pricing model will be like as we have stated before, it will be like revenue-sharing model.

[Pia Rosqvist-Heinsalmi, analyst]

Yes. Sorry for being unclear. So I meant the price level of this service and can you give some kind of indication of the revenue share model than with your partner, AEYE.

[Juho Himberg, executive]

That's a little bit -- it's quite a delicate situation since revenue share, we need to have like a permission because it's an agreement between us and AEYE Health. And there is a strong NDA disclosing anything. So because we would disclose our share -- then at the same time, we would disclose also AEYE Health share. So -- and this is something we need to share together how we are reporting that.

[Pia Rosqvist-Heinsalmi, analyst]

Okay. But with regards to the price of this subscription-based model, do we talk about EUR 10,000 or what kind of price level are we talking about?

[Juho Himberg, executive]

Yes. So we are talking about, first of all, all yes, the Blue Ocean market. We are obviously waiting for the customer and market feedback to get actually what is going to be the street price for this product. We mentioned before, it was mentioned before that we talked about the EUR 10,000. And let's see if it's going to be that or not. But I suppose that if you think about it, if it's EUR 100 or EUR 10,000, you're definitely more right with the EUR 10,000.

[Pia Rosqvist-Heinsalmi, analyst]

Okay. All right. Then if I have a few questions still, if I can continue on China. So can you, in any way, quantify now the business potential in China? What -- and what kind of investment would be required from you in this joint venture? And what cameras are you selling? Are we talking about smartscopes? Or are we talking about newer cameras and is AEYE involved in any way in this joint venture screening service?

[Juho Himberg, executive]

Okay. I can open that was that we are talking about newer cameras than smartscope -- also is that there might be AEYE involved, but it's something we will not take part at this stage. And we will be the technology partner for this one. The -- this health care institution we worked or we are working currently, they tested multiple cameras, and they found our cameras the best suited for their purpose and they want to have us as a technology partner. So it will be -- our investment will be technology, software and hardware.

[Pia Rosqvist-Heinsalmi, analyst]

Okay. And I hope you can share something about the business potential then later on if and when this joint venture accelerates.

[Juho Himberg, executive]

We will open more once we come more detailed press release out together with our partners.

[Pia Rosqvist-Heinsalmi, analyst]

Yes. All right. Great. And then maybe coming back still to the U.S. model. And then you said your organization is ready to roll out the product. But in terms of your plans to accelerate sales. So do -- should we expect you to need further financing to accelerate sales in the U.S.

[Juho Himberg, executive]

How this works is that we are going to sell different ways. So we will have our direct sales. We are working together with the distributors. And then you need to bear in mind is that AEYE Health, our partner is also sharing. So we are doing it one that works with AEYE Health with Optomed and our distributor partners. And depending on this one, how fast it goes, if there is something we can get more business, investing more into our sales force. It can be that there might be further investments to be done.

[Pia Rosqvist-Heinsalmi, analyst]

All right. And then my final question. Are there any specific risks you would like to highlight now with the change in your recurring or in your revenue model, so moving from capital sales to recurring revenue model? Are there any specific risks that you would like to highlight?

[Juho Himberg, executive]

Not in terms of the model. Obviously, as you well understand the revenue as it now recurred monthly as opposed to the kind of having the full revenue coming in the month of the sale that will affect kind of the best case of our okaying of our revenue recognition, and that's why our revenue for a couple of weeks here, but not specific risks in terms of the model.

[Pia Rosqvist-Heinsalmi, analyst]

All right. That's all for me for now. Thank you so much.

[Juho Himberg, executive]

Thank you, Pia.

[Sakari Knuutti, executive]

Thanks, Pia. We are happy to take more questions, star 6 for unmuting yourself.

[Juha Kinnunen, analyst]

This is Juha from Inderes. A couple of questions. I will just start with a very easy one. Maybe you can comment something. How many active devices are you expecting at the end of the year? And of course, I'm talking about Aurora AEYE in the United States.

[Juho Himberg, executive]

By the end of the year. I can give you a number. It will be 3- or 4-digit numbers.

[Juha Kinnunen, analyst]

3 or 4 digits, all right. That's better than I expected. I mean, in terms of accuracy. Another question about United States and perhaps also the OEM channel. Do you see that this is going to be cannibalizing your other equipment sales, the sales are going towards the Aurora AEYE and other cameras are not so popular or not so much in demand after this?

[Juho Himberg, executive]

It's a different business because our OEM channel, they are buying cameras without AEYE and then they are using those cameras for all possible eye diseases and indications. And Aurora AEYE is -- it's main purpose for that one is for screening of diabetic retinopathy.

[Sakari Knuutti, executive]

[indiscernible] it's kind of the target market for Aurora AEYE that's going to be in the primary care, where -- and then again, if you think about our CapEx sales, the majority doesn't go into the primary care.

[Juho Himberg, executive]

Yes, that's right. So it's a different business, different applications, different customer groups.

[Juha Kinnunen, analyst]

So basically, you don't see a significant change in other equipment sales.

[Juho Himberg, executive]

At the moment, no. Yes. We don't get...

[Juha Kinnunen, analyst]

Excellent. I guess I will just start thinking about the commercial states now. You have sold, I suppose, something like 1,000 cameras, perhaps to the U.S. And I suppose that these have potential to activate AI or you can just say that please take this camera instead and compensate the client. Is there any possibility that you could accelerate using your own client base like this?

[Juho Himberg, executive]

Of course, it is possible, but that is not our intention to do because those clients are different.

[Sakari Knuutti, executive]

Yes, exactly like I said is that it's actually a different market, so that doesn't accelerate in our thinking too much what we are doing here at the moment.

[Juha Kinnunen, analyst]

Understood. And finally, and this was, I guess, Pia already asked about this, basically, about the cash flow. Could you comment on how much working capital? Is this going to tie up and whether you are going to be needing additional financing because at least I understand that you need to make those devices and then you have to do the revenue share. So eventually, it will be very profitable. But in the beginning, I suppose that the cash profile is somewhat lagging.

[Sakari Knuutti, executive]

Yes, it is somewhat lagging as compared to the CapEx model. Yes. But at the moment, it's -- we don't expect the working capital to be issued with regards to the model as we have taken precautions regarding that one. And obviously, it kind of depends on the pace of the implementation as well. If we are getting, let's say, that we got a very big deal that obviously has a onetime effect on our cash profile and the working capital. But we are expecting to kind of to get on cash positive level rather quickly on those deals as well.

[Juha Kinnunen, analyst]

All right. Thank you very much. That's all for me for now.

[Sakari Knuutti, executive]

Thank you. Happy take more questions, star 6 for unmuting.

[Pia Rosqvist-Heinsalmi, analyst]

It's Pia here again. I have another follow-up question regarding this public tender process, which you earlier flagged for, it could have bear EUR 1 million risk on your revenues for this year. So we are well into 2024 now. So have you delivered services to them during the first quarter of this year, I'm just trying to understand the remaining revenues you are expected to now gain for this year. So do we lack 1 quarter of revenues? Or will you be up to speed as this deal is fine?

[Sakari Knuutti, executive]

No, we don't. It was due to this previous contract in the middle of the year, and we have been the third quarter of delivering this service as Q4.

[Pia Rosqvist-Heinsalmi, analyst]

All right. Okay. Good. Thank you.

[Sakari Knuutti, executive]

Thanks. Yes.

[Pia Rosqvist-Heinsalmi, analyst]

Sorry, it's Pia here. Another question popped into my mind with regards to China. And I'm now contemplating, of course, the challenges you have had in China before of really lumpy capital sales. Now you talk about this -- the new business potential in the joint venture of being a recurring revenue model. But do you see any -- or how do you assess the counterpart risk in this new deal given that you still have -- you have payments that are lagging behind from another Chinese partner.

[Sakari Knuutti, executive]

Yes, that will be -- we will be a lot more careful than be our last one in terms of the counterparty risk it will help that actually, if you think about our receivables they will be most likely from the joint venture company where we are actually a shareholder. So that's not -- we are going to be fully aware of the situation all the time so that will help there. So we are not expecting the same kind of difficulties as we have before.

[Pia Rosqvist-Heinsalmi, analyst]

Okay. And sorry, just to make it clear. Regarding this joint venture, you said you will be the technology partner that will you do a cash injection in this joint venture as well?

[Sakari Knuutti, executive]

Yes, most likely, but it's going to be very limited. So I'm talking about in the range of the like number is in the rate of let's say, tens of thousands. So it's going to be very limited for us.

[Pia Rosqvist-Heinsalmi, analyst]

Okay. All right. Thank you.

[Sakari Knuutti, executive]

We still have time for more questions. Star 6 if you want to unmute yourself.

[Pia Rosqvist-Heinsalmi, analyst]

Yes. It's Pia here, again. So regarding the future outlook now and given that you have been able to secure the FDA approval. So what are your plans with regards to, I mean, an update, do you -- do we need an update to your strategy? And how about your long, medium and long-term financial targets, which were presented in conjunction with the IPO, when will you plan -- or when do you plan to update those?

[Juho Himberg, executive]

Yes. Once we get -- we have a lot of going on, it's kind of the same situation as it was before. Before, we used to have the technical risk in terms of the FDA clearance. That's now gone. We got it as we expected to get it -- but at the same time, we are still yet to see how the business really starts to run. So once we have a bit more visibility on that one, and also the Chinese want to with most likely hold the Capital Markets Day and elaborate a bit more our strategy, our targets there.

Yes. And here, I would like to also underscore is that this is not some FDA clearance. It's not a normal FDA clearance because there is already reimbursement. Quite often when companies are talking about FDA clearance, then when they get cleared, then they start to go and look for the reimbursement. There is already reimbursement score for that one. And also, there is this steady score incentive for the health care institutions to starting to use this service. So that is something which puts stars into the right position for us. Then when you talk about short, medium-term our plans. I believe that this is just a start, this diabetic retinopathy to be screened. And when you are looking at what's happening in the market, what kind of algorithms that are coming, it will be quite fast expanded into the other pathologies and other screening programs. And that is something we need to bear in mind that this is not the endpoint for us. This is just starting point for us.

We need to go first capitalize this investment, get the money and starting to look also there are other things. There are technology companies, they need to -- all the time invest money back to the R&D, invest money back to the development and the visioning and we are on the top of this whole business.

[Sakari Knuutti, executive]

Yes. At the same time, it's kind of -- we believe that this clearance is also kind of improved our position in terms of -- there has been some kind of I'd say that there has been question mark with regards to the handheld quality versus the [ desktop ] device quality. And now we have FDA clearance. We have clinical results that speak for themselves. So that will definitely improve our position in terms of first of all with other conditions perhaps in the future and also with regard to the client side as well.

[Juho Himberg, executive]

And the FDA clearance, it's also -- it's a huge merit for us. It can be used in the other markets as well. And it's something we can differentiate from the other handhelds is that we are the one with FDA clearance.

[Pia Rosqvist-Heinsalmi, analyst]

Good. Thank you for the additional color. Then I'm still coming back to your long-term -- or your medium-term targets, but those which were published in 2019. So for example, in the medium term, you have said that you prioritize investments in the organization to support growth and then to achieve an adjusted EBITDA margin of more than 30% in the long term. Is there anything which has changed or are these valid with your -- in your current thinking?

[Juho Himberg, executive]

Well, we are in a pivotal moment at the moment about this. This is a little bit -- when we created the first target in connection with our IPO, we did insert the AEYE model with our recurring revenue model, which we do at the moment. So they might be subject to change. But as mentioned in this call a couple of times. It's kind of -- we are in the same situation as many of you are that we do not have kind of too much information about this Blue Ocean market, how is the last go with regards to our product. But those will be definitely investigated when we have more information about the market and then also when we have the Capital Markets Day once we have a bit more understanding of our new business works.

[Pia Rosqvist-Heinsalmi, analyst]

Great. Thank you so much.

[Juha Kinnunen, analyst]

Thank you, this is Juha from Inderes again. One large picture question, if I may. Like you said, there's reimbursement of ED scores. And basically, all the clients would be inclined to take part on this regulation. But bench-top cameras and AI have been around for quite a long time. And I guess the reimbursement of ED scores have been around for years. So how is the market right now? And has it developed as you have expected?

[Juho Himberg, executive]

The one thing is that to comment on that one is that the ones having the clearance with the bench- top, they have not really been pushing this one. And if you look their workflow, how it goes, it's not a client-friendly and also 2 images per eye, it makes it also very slow. It's something they have not been really pushing. So they'd be more interested in human read or something like this. This is the first time when the company is really coming and pushing this one and -- we believe that those previous things are not good indications on this one at all.

And also handheld -- those cameras has not been pushed or tabletops has not been pushed into the primary health care because those have not been sellable for there. So now this is something completely new and completely different.

[Sakari Knuutti, executive]

We still have a couple of minutes left if you have further questions. All right. I suppose that's it for today. Thank you very much for participating, and we hope to see you again in our Q2 call when we also hope to have a bit more light on how the business in the U.S. has started to rise. Thank you very much all.

[Juho Himberg, executive]

Thank you very much.