Elekta AB (publ)

STO:EKTA B

Earnings Call Transcript 2018-Q3

[Operator]

Welcome to Elekta Q3 Report. [Operator Instructions] I will now hand over to Johan Andersson. Please begin.

[Johan Andersson, Director of Investor Relations]

Thank you very much, and welcome to Elekta's conference call following the publication of our report for the first 9 months of fiscal year 2017/'18. My name is Johan Andersson, Head of Investor Relations, and I will be the moderator for this call. Here in Stockholm, we have Richard Hausmann, our President and CEO; and Gustaf Salford, CFO. We will start with presentations by Richard and Gustaf, and then conclude with a Q&A session. [Operator Instructions]Just a reminder, some of the information discussed on this call, including our projections regarding revenue, operating results, cash flow as well as product and product development contain forward-looking statements. These statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in the statements. With this, I hand over to Richard.

[Richard Hausmann, President & CEO]

Thank you, Johan, and thank you all for participating this morning. This is Richard Hausmann, CEO of Elekta. This quarter Q3 has many elements that show that we are improving our business and moving in the right direction as we continue to strengthen our platform for further profitable growth. Let me give you some insight and some highlights. First of all, as you can see in our numbers for the quarter, we are delivering good order and revenue growth while further improving our cash flow as well as our margins. On top of this, we are continuing to improve our processes and reducing the complexity in our organization with positive effects on various ends. Another important key indicator is our installed base of treatment solutions, which is up 6% year-over-year. It is a cornerstone and key value driver for securing a high-margin, long-term stable revenue stream from our service business, which has overgrown in the quarter. We are on track for CE Mark before -- for Unity before end of June, our largest development project so far in company's history. Finally, I'm also happy to report that we are advancing with Elekta Digital, our software offering and development program. We are working with many activities, where one concrete outcome is the harmonization and upgrading of our installed base of treatment planning software with a good result. Also important to mention is our collaboration with IBM Watson Oncology, which was announced in Q3, where we will help bring artificial intelligence directly into the treatment room. So based on these developments, how do we perform? As you know, we have already delivered on 2 of our 3 targets set in 2015. We are growing at that quite strongly, and our activities to improve cash flow has been successfully delivering a good level of minus 6% net working capital to sales. Looking at our margins, I'm proud of the improvements that we have made so far, but I'm also not completely satisfied yet. The long-term trajectory shows an increasing demand for advanced cancer care worldwide and, combined with our upcoming launch of Unity, we will continue to grow our margin going forward. I remain committed to reach a margin of over 20%. However, that said, for this fiscal year, we now expect to deliver an EBITA margin of around 19%. The adjustments for this year they are related -- are related to 2 factors. Firstly, a less favorable currency effect. This will impact us with about SEK 40 million compared to what we have forecasted earlier. And secondly, the impact from the previously communicated delay of Elekta Unity. We are fully focused on finalizing the Unity project, and we are investing heavily in this commercialization. So it has cost us a bit more than originally planned, and we have also achieved lower revenues and corresponding EBITA compared to the plan by some short delays. It's our biggest development project ever and, for me, the choice is clear to invest in it to be able to make the most out of this opportunity. Let's look at the some of the details of the quarter. As said, our business is performing well, with a strong development in Q3. Order intake was up 9% in the quarter and 3% in the first 9 months. And with that, we are strengthening our market position. We will always have a bit of a volatility in our order intake, and we had some good large order now -- orders now in this quarter. Net sales grew by 7% during the quarter, and 13% in the first 9 months. We had strong delivery volumes for linear accelerators and a continuous positive trend for the Leksell Gamma Knife. Please remember that the produce-to-order project was completed in Q2 last year so that this Q3 is now fully comparable with Q3 last year. At the same time, the EBITA margin in the quarter increased over 6 percentage points to 18.3% compared to last year, clearly reflecting our strong development in this aspect. Cash flow was up with over SEK 580 million for the first 9 months. We are improving our earnings while maintaining a low net working capital level. I currently see a market that is growing at a healthy rate. The underlying demand for cancer care is steadily increasing, and with our leadership position in emerging markets as well as the commercialization of Unity, we are very well positioned to capture a good share of this growth going forward. Some further color on the regional development. Starting with North and South America, order intake increased by 15% in the quarter. The performance in our U.S. operations continue to improve during this quarter. Pete Gaccione and the team are doing a fantastic job. A great example of this was a major order secured from the Ottawa Hospital in Canada. Our activities in South America have recently also started to gain momentum, with orders in Brazil and Peru as well as a significant order in Bolivia that we will back now -- book now in the fourth quarter. Over to Europe, Middle East and Africa, we performed nicely in, for example, Spain and Italy as well as in the U.K., where we won a major order from the National Health Services, NHS. Middle East and Africa operations had a good momentum during the period; and in Russia, we begin to see growth in the market. Total orders in the regions declined 5%, but that should be viewed in comparison to an extremely strong third quarter last year that was up 116%.In Asia, the Chinese market was strong and we have expanded our market leadership there. Notable is that the Chinese reimbursement levels have increased and growth is strong in the private market. We also see momentum in our services and aftermarket business in China. The Japanese market is stable, but at a historically low level due to limited hospital investment. All in all, we had a strong quarter in Asia with order intake increasing by 33%. Some comments on our growing service business. Since about a quarter, I have a new Global Head of Services in my management team, Paul Bergström. And we are currently setting an ambition agenda for this important part of our business. This includes a focus on processes and efficiency as well as enhancing our overall offering and service levels. We see a good potential for further leveraging here -- leverage here. Services represents about 40% of our revenues, and we have seen a growth of about 6% year-to-date, the same as the growth of our installed base. We are driving growth both in established as well as in emerging markets. Looking at Elekta Unity, I'm very pleased that the interest is steadily growing. We booked 2 orders in Q3, Townsville Cancer Center in Australia and Sun Yat-sen University Cancer Center in China. And just after the end of the quarter, Memorial Sloan Kettering Cancer Center in New York acquired an MR-linac research system. It is one of the leading cancer centers in the world, as you know, and a completely new customer for us, proof that Unity can help to -- has to break into new accounts and expand our market share. The deal will be booked in Q4. As you can see on the map now, the systems booked so far are relatively well distributed, with 7 research systems in North America, 8 systems in Europe and 6 in Asia Pacific. I'm pleased to say that the commercialization of Unity is on track. I have spent a lot of time the last couple of months with the Unity team, and, as I said in the beginning, we are on schedule for the CE Mark before the end of June. In the meanwhile, the focus of the MR-linac Consortium is currently on MR imaging with the volunteer patients. The results of this MR imaging was that it shows extremely good diagnostic quality. Also, we are learning that our MR-linac is much closer to the detailed characteristics of the Philips Ingenia 1.5 Tesla than might have been expected given its modifications. This is resulting in more sophisticated imaging sequences being able and available sooner than expected. This also means that customers will have access to additional imaging sequences at the time of CE Mark, such as functional imaging and opportunities. I'm also happy to report that we recently have also started the installations in Odense in Denmark and Uppsala here in Sweden.Looking at our latest advancements regarding Elekta Digital, our focus on oncology informatics. We were very happy to announce our partnership with IBM Watson Oncology during the quarter, a possibility to provide an expert pathway system to our software solutions right in the middle between the tumor boards and the execution of the plan of care. This is a great opportunity to combine our advanced cancer treatment and management systems with the expertise in artificial intelligence and machine learning from IBM. It makes us the first radiation therapy company to offer a solution that combines conventional health information systems with artificial intelligence and deep learning algorithms, which is very exciting. And I'm sure that we will have reasons to come back to the corporation -- to this corporation as we go forward. Finally, before handing over to Gustaf, I would like to welcome you all to ESTRO and our booth there of course, in Barcelona in April. The talk of the show will, of course, be around Unity, new insights from the MR-linac Consortium as well as all the possibilities around artificial intelligence. So please let our IR team know if you are going so they can secure that you get the opportunity to meet with our specialists and management representatives. And with that, I hand over to Gustaf.

[Gustaf Salford, CFO & Executive VP]

Thank you, Richard. Hello, everyone. This is Gustaf Salford, CFO of Elekta, and I'll provide some further comments on the financials.From my perspective, I see today's report as a clear sign that we're building a stronger company with a more balanced business model and improved processes as well as the reduced complexity throughout the organization. So let's move on to some details for the quarter. Overall, we had a good growth in net sales, improved gross margin and a healthy 6 percentage points improvements in EBITA margin year-over-year. Net sales is up 7% in the quarter and 13% for the first 9 months. Gross margin came in at 42%, which is 2.3 percentage points compared to last year. This is driven by higher volumes and COGS savings. I would have liked to see a higher number, but we have more volumes from emerging markets in this quarter and we also have some costs for closing and completing outstanding projects. Going into the final quarter of the year, I expect an improved gross margin compared to both -- to this Q3 and to Q4 last year. EBIT grew nicely by 81% to SEK 366 million. Operating expenses were relatively unchanged compared to Q3 last year, and we had the best result from exchange rate differences. Amortization is up slightly year-over-year. This is because we have started to amortize on the first research version of Elekta Unity during the third quarter last year. When we have the system CE Marked, I expect quarterly amortizations to increase by approximately SEK 30 million. Let me move over to our operating costs. All in all, operating costs decreased by SEK 29 million compared to the second quarter. This is the right direction, but in our original plan for the year, I expected even lower levels. We have a strong focus and we're driving further activity to continue to prove our cost efficiency and cost awareness across the company. We're investing in the commercialization of Elekta Unity which drives both selling and R&D expenses. In line with that, R&D capitalizations are up versus the second quarter. We usually measure R&D costs in relation to net sales, and here, we expect levels of around 11% for the year. Admin expenses are slightly up. Here, we are focusing on driving further efficiencies and process improvements in our shared service center. So turning to the EBITA bridge for the 9-month period. The positive volume effect compared to last year was some SEK 300 million, with the majority from higher linac and Leksell Gamma Knife volumes. We are gaining SEK 107 million from efficiency and COGS savings, mainly through procurement. In here, we also have some one-off costs for closing and completing outstanding projects. Investments in the commercialization of Elekta Unity, higher R&D and selling costs resulted in a negative SEK 142 million effect. As I've said before, admin expenses are slightly up and we'll continue to focus on efficiencies in admin where we transfer processes to our shared service center in Poland. Exchange rate differences are positive with SEK 35 million, and amortization and bad debt with SEK 61 million. All in all, EBITDA is up 36% or SEK 315 million. As you are aware, the new tax reform in the U.S. became effective from 1st of January. In general, the corporate tax rate in the U.S. was reduced to 21%. In the third quarter, we, therefore, had a one-off positive SEK 50 million tax benefit. This is related to revaluation of deferred tax in the United States and linked to previously capitalized R&D. This resulted in a tax rate of 7.5% for the third quarter or 16% for the period. For this full fiscal, we now expect a tax rate of some 20%, including this one-off effect in Q3. For next fiscal, we see normalized tax rate of some 21% to 22%. Turning to cash flow and net working capital, we ended the quarter with a net working capital position of minus 6% to net sales, well below our target of plus 5%. During the quarter, the main movement has been accrued income, which is down SEK 368 million. We continue to reduce the lead time from start of production to final payment, and we're completing outstanding projects at the faster pace. We are now close to our target of accrued income to net sales of 10%. Looking ahead, I foresee that net working capital will increase slightly, but forecast that we will end the year on a negative level. Cash conversions for the rolling 12 months is strong and at 132%. Let me go through some additional comments on currency. We have had quite some currency swings during the last quarter, most recently a weakening of the U.S. dollar. It's still volatile and the assumption we have today are based on currency rates as of last week. In the third quarter, we had a negative currency effect on sales of 4 percentage points. On EBITA, we had a positive SEK 30 million EBITA effect. When modeling the currency effect for the full year, we now assume a positive effect of some SEK 110 million on EBITA compared to last year. Year-to-date, we have realized SEK 10 million. So we're assuming good contribution in the fourth quarter, however, lower than the SEK 150 million we assumed when we presented Q2. The positive effect primarily related to the reversal of the negative exchange rate differences from Q4 last year.Now moving to the backlog. Total backlog is up some SEK 200 million compared to Q2. Every quarter, we do a detailed analysis of the shipment and installation plan for the remainder of the year, and we now forecast that we can ship approximately 15% of the backlog in the final quarter of the year. This equals to approximately SEK 3.3 billion from the backlog, and if you recall that figure from a year ago, this year's number is slightly lower. With all operational improvements we have made since last year, I'm confident that we have a higher quality and predictability in the backlog. It's also important to state that with our more balanced business model, we're now starting to see a more even revenue distribution between our quarters. So to summarize, we have a full focus on continuing our profitable growth and EBITA margin expansion also in the fourth quarter. There are 4 main drivers now compared to what we achieved year-to-date. Compared to Q3 year-to-date, where we were on an EBITA margin of 16% or 17% on a rolling 12-month basis, the largest driver is volume, and we continue to see good momentum both in solutions and service. With higher volume, we get better leverage on our operating expenses. Secondly, our continuous improvement and COGS saving efforts will generate efficiency and cost reductions. We saw results of this in Q3, and we'll continue to drive improvements in the final quarter. Thirdly, we'll continue to invest in programs driving future growth, for example, Unity and Elekta Digital. And finally, we foresee a positive EBITA effect from currency of around SEK 100 million in the fourth quarter compared to last year. As I've said, less than we expected in Q2, but still a good contribution. All in all, we're executing on our plan to reach an EBITA margin of around 19% this fiscal year. And as Richard said, we remain committed to achieve over 20%. So thank you very much, and I hand over to Richard for final remarks.

[Richard Hausmann, President & CEO]

Okay. Thank you, Gustaf. So as I said in the beginning, this quarter has many ingredients which show that we are improving and moving in the right direction, and we had overall good development in the last quarters. We are delivering good order growth, revenue growth, further improved cash flow as well as improved margins. We are rigorous in our execution and we are creating a strong Elekta for long-term profitable growth. I also clearly see a strong market with growing demand for both treatment systems and service. I'm expecting continual margin expansion also in Q4. Also, importantly, I can confirm that we are on track with Elekta Unity and we have 3 new customers since the last report. So overall, I'm looking forward to completing this fiscal year and continuing developing the company going forward. Many thanks, and I will hand over to Johan to start the Q&A session now.

[Johan Andersson, Director of Investor Relations]

Thank you very much, Richard and Gustaf. And we will now open up the Q&A session. [Operator Instructions] So please, operator, let us start the Q&A session.

[Operator]

[Operator Instructions] We have a question from Kristofer Liljeberg from Carnegie.

[Kristofer Liljeberg-Svensson]

My 2 questions, and first, Richard, did you say Odense and Uppsala will be completed -- the installation completed this year and do you expect to book in the revenues from there? That's the first one. And then for Gustaf, you comment about amortization. Does that include -- is total amortization included in the M&A-related ones? And does this mean we could expect next fiscal year around SEK 520 million or so? And will that level then remain or will it continue up in the following years?

[Richard Hausmann, President & CEO]

Okay. I'll take the first one. It's a simple answer. The installation will be completed, of course, when the software is completed in June, finally, and so we don't expect revenue this year.

[Gustaf Salford, CFO & Executive VP]

Yes, and then on the amortization question, it includes both M&A-related and capitalization of R&D expenses. And if you look at the per quarter number, that when we go after CE Mark how much we'll add, it's around SEK 30 million per quarter. And then the remaining parts of the amortization will be quite stable.

[Kristofer Liljeberg-Svensson]

Okay. So the base you're using is the SEK 98 million you had this quarter and plus SEK 40 million, so around SEK 140 million per quarter?

[Gustaf Salford, CFO & Executive VP]

That's the logic.

[Operator]

We have the next our next question is from Hans Mähler from Nordea Markets.

[Hans Mähler, Director of Healthcare]

Hans Mähler here. Two questions, if I may. First, if we talk about book-and-bill in your business, could you quantify how much book-and-bill you had in the third quarter and how much that typically deviates between the quarter and what we should look for in the fourth quarter? And then my second question is about Unity. When you talk about the added functionality, does this mean that you will have a software solution for tumor response in the initial release or is that the functionality that will come over time?

[Richard Hausmann, President & CEO]

Okay. Thanks, Hans. Let me take the last one first. The -- yes, it's right. We will have the diffusion weighted imaging in the product, yes, and the customers can use it. And that is a tool, as you said correctly, for seeing the hotspots in the tumor. And then also...

[Hans Mähler, Director of Healthcare]

And it's also will be completed also when you have the product out, it's fully functional.

[Richard Hausmann, President & CEO]

Yes, it's true. We will deliver it in June, yes, yes.

[Gustaf Salford, CFO & Executive VP]

And then, Hans, on the book-and-bill question, we see lower levels compared to historic numbers on the book-and-bill ratios, more from the backlog in the quarters. And we see less volatility on the book-and-bill ratio between the quarters.

[Hans Mähler, Director of Healthcare]

So to get a feel for it, how much book-and-bill did you have in this quarter?

[Gustaf Salford, CFO & Executive VP]

It's not a number we talk about or disclose.

[Hans Mähler, Director of Healthcare]

Okay. You had some of these numbers out for last year then it was a number that we should -- if you go back and look in the previous reports, we assume it's a bit lower than that. Or could you quantify the deviation compared to the historical numbers you had published?

[Gustaf Salford, CFO & Executive VP]

The trend we've seen is lower than historic levels. But of course, it's all about what orders come in and of the quality of those orders and the timeliness of those. And if all -- if they tick off all our order booking criterias, we will book them.

[Richard Hausmann, President & CEO]

I would add, Hans, basically, that the -- since we are more stricter in the book-and-bills, of course, we will have some book-and-bills. But compared to the years before, you have to expect it less.

[Operator]

Our next question is from Sten Gustafsson from ABG.

[Sten Gustafsson, Lead Analys]

Sten Gustafsson from ABG. Just want to hear what you say about Unity when it comes to what steps you have taken so far and what's left outstanding in order to get this completed and what makes you confident that you will actually launch on time.

[Richard Hausmann, President & CEO]

Okay. Yes, I mean, as I said, I'm deeply -- personally deeply involved. First of all, because since I like this product so much and, secondly, because I think it is -- I can add a little bit to it from my own experience in the past. So I'm very deeply into it. And what gives me the confidence is that, first of all, we are on track with the project in itself and the project milestones. What is -- by fixing the issue, which I reported on last time on the treatment control unit, and now what is in front of us is still is to kind of finalize that within the next few weeks and then do a solid 2 months of testing of the total system, which is happening then in April and May to prepare for the CE release.

[Sten Gustafsson, Lead Analys]

So you will have 2 months of sort of validating the system, is that correct?

[Richard Hausmann, President & CEO]

The complete system, yes, towards the customer requirements, the usual process in all of those system developments, yes.

[Sten Gustafsson, Lead Analys]

But the -- so the issues you had with the validation earlier, is that solved now?

[Richard Hausmann, President & CEO]

Yes, that's fixed. We have modified it and we are now in the component testing phase of those things, which will take, as I said, a few more weeks. And then with this milestone, then we go into the complete testing of the system.

[Operator]

Our next question is from ended like from Annette Lykke from Handelsbanken.

[Annette Lykke, Medtech Analyst]

Yes, in terms of installation plans for next fiscal year, how many more systems are you expecting? And in particular, I have some interest also in China, as I know these installations plays a role in the regulatory process, so maybe you can update on that. And at the same time, maybe share a little bit of a timeline for a potential approval in China.

[Richard Hausmann, President & CEO]

Yes, okay. Thanks for that question. You probably mean Unity, right, you didn't mention it but I am sure.

[Annette Lykke, Medtech Analyst]

Sorry, sorry.

[Richard Hausmann, President & CEO]

Okay. So as I said, we are now in the face of installing Odense and Uppsala and also Tübingen. And the plan is now, for the months to come, to install -- to start installations of one system a month. So that's the plan. One of them -- and a few of them, actually, in total it's 3 until end of this calendar year, will be going to China and will form the -- and one is the Sun Yat-sen, which I mentioned is a new order in the Q3, and will form the basis for the application -- or the clinical testing for applying for the China release, regulatory release later on. The timeline typically for such a release is, yes, depends a bit on how synchronized those sites are working on this study. But I would say half a year after the -- or half year to a year. So we expect this release in the course of next calendar year in China, yes.

[Annette Lykke, Medtech Analyst]

Okay. In China. When we are talking regulations, how about Japan? What is sort of the plan here?

[Richard Hausmann, President & CEO]

Japan is a basically one other country to apply in parallel -- more or less in parallel to the FDA application. So we do the necessary regulative work towards -- after CE labeling in the course of this calendar year. But it will certainly also take until second half of next year calendar year to get the release there.

[Operator]

Our next question is from Johan Unnerus from Pareto Securities.

[Johan Unnerus, Analyst]

Two then. First, it seems like your legacy business, let's put it that way, your business without Unity then, of course, is improving now over several quarters. And the growth rates is clearly above your guidance going forward. I'm not thinking about the effect of the saving program, that clearly obstructs the quarters before Q3. And so what can you say about that, the outlook? Is this fair to expect that you have a period of continuing overperformance or are you -- still expect somewhat less growth? That could be the first. And the second on Unity and the pipeline and visibility and the activity there. Is it -- are you confident about the release and your objectives to 2020?

[Richard Hausmann, President & CEO]

Yes. So let me answer the first question. You're right in your understanding. We see a certain strengthening of the auto market. We guided for 3% to 5% of the market, we see that more on the upper end of this range. Now -- and yes, we are performing well in the market, as I pointed out, in basically all the regions with our linac and Monaco and MOSAIQ business. And it's also on a solid basis that we have very clear and strict rules to take orders in, it was clearly -- that you have to have all the documents, et cetera, et cetera. So it's a good pipeline, what we have, and it's also a very validated pipeline and we win in the market, which is right. And then in terms of Unity, so the pipeline, yes, if you ask about the 75 units until mid of 2020, that is what we confirm. The pipeline is quite positive. And we are really looking forward to the CE labeling because that will open up new opportunities and further growth in the pipeline.

[Johan Unnerus, Analyst]

And a follow-up there on services and software. You clearly put more attention to the -- with the collaboration and the investment support. When can we expect to see traction from that? To some extent, we've already seen that, of course. But on that side, you have had periods of underperformance. Before [indiscernible] successful there, there should be clearly potential ahead.

[Richard Hausmann, President & CEO]

Yes, we see good momentum in the service and software business. It's up, it's growing. And I can also report clearly that our treatment solution, Monaco product, is going well. So that is now accepted to be the best standard in quality, and also, the speed is really what the customer would like to see. So that's good momentum there.

[Johan Unnerus, Analyst]

And does that include the U.S. North American market?

[Richard Hausmann, President & CEO]

That also includes the U.S. market, yes, yes.

[Operator]

Our next question is from Kit Lee -- is Kit Lee from Jefferies.

[Nyeok Lee, Equity Associate]

This is Kit Lee from Jefferies. I have 2 questions, please. So the first one is on your U.S. organization. Clearly, the performance this quarter has improved steadily. So where do you see the organization now? Do you think it's on stable footing or do you still need to invest more in your turnaround asset in that market? And then just secondly, on the 3 new orders you secured for Unity. Please, can you talk about the prices you're paying for these orders? And if you can just put that in context with your guidance of $8 million to $10 million that'll be very helpful.

[Richard Hausmann, President & CEO]

Yes, okay. So there are -- first on the U.S. organization, I think the change in management have -- has had a very positive effect not only you see it in the numbers, but we also see it in the satisfaction of our own employees and the motivation of the team. We have done a major effort on the process improvement on the sales processes. We can still do more and will do more. And in particular, we see also a huge opportunity, now with Unity getting into the market that we -- as we have done on the Memorial Sloan Kettering account, get into that competitive accounts with just a completely convincing technology. And I think that will be an opportunity for the future as well. But I would say the -- from the organization point of view, from people, I think we are on a good way and I don't see necessities of further changes right now. But of course, improvement in processes will still happen as we move forward. And the other question was about the pricing. I -- we don't talk about the individual pricing, but our target is -- they are in the target range of the $8 million to $10 million as we have communicated.

[Operator]

We've got another question from Kristofer Liljeberg from Carnegie.

[Kristofer Liljeberg-Svensson]

Yes, 2 additional questions from me. Maybe this one is both of you. When it comes to reaching then the 20% margin, what's the pathway to reach that? Is it most about decreased volumes or should we also expect R&D costs coming down next year? And administrative costs now -- when you have opened the shared service center, I was a bit surprised they remained a bit high in the third quarter. So that's the first question. And then maybe a bit too early to talk about that, but balance sheet is getting stronger here for every quarter. Do you see any opportunity to start exploring M&A again, which hasn't been so much focused on in recent years?

[Richard Hausmann, President & CEO]

Yes. Okay, so thanks for the questions. So for -- on the EBITA, 20%, so we see clearly that under the course of next fiscal year, looking at 12-month rolling basis, we will reach 20%, larger than 20%. That's basically clear. And then there's a good momentum in the base business -- we call it base business, although I don't like this expression, so our linac and our software business as well as, of course, Unity, will help us in this direction. Related to the percentage on R&D, we believe that we have 11%, 10% to 11% over next year because there is a need for innovation and moving this field forward. And I'm a strong believer in that because, at the end, the patients will really benefit from that.

[Gustaf Salford, CFO & Executive VP]

And then, Kristofer, on the admin expenses in Q3, I was not happy either with those numbers. Then we had some one-off costs for legal processes that we're currently in that hit the quarter, and explaining most of that gap versus Q2. And then on the capital allocation question and opportunities in more inorganic growth, of course, we are looking and we're also seeing the balance sheet being strengthened, so we are monitoring that very closely and looking for further opportunities for growth in relevant segments.

[Kristofer Liljeberg-Svensson]

Okay. Richard, your comment about reaching 20% margin next year, was that for the full year or during some point?

[Richard Hausmann, President & CEO]

During some point. As I said, over a 12-month rolling. So we are not -- I can say we are in a good track with EBITA, if you see that in the past 3 quarters, and there's no reason to believe that this trend is not continuing. So we will hit it in the course of next year with -- on a 12-month rolling average base.

[Operator]

Our next question is from Oliver Reinberg from Kepler.

[Oliver Reinberg, Head of Med Tech Equipment & Services Research]

I think you probably just answered it. So basically what you just said is for the next fiscal year, you're committed to a 20%-plus margin just to confirm that. And then can you also talk about -- that was a yes?

[Richard Hausmann, President & CEO]

Yes.

[Oliver Reinberg, Head of Med Tech Equipment & Services Research]

Perfect. Good. And is there any kind of idea in terms of what are your new midterm targets now you're actually getting close to the ending of it? So can we expect new midterm targets with the release of the full year? And then the second question is on the service business. Can you just provide more details what exactly is [ win ] to this kind of excellent initiative? Is it more push in terms of bringing it to the emerging markets? Or are there any kind of new service models you're going to launch and will you also provide any kind of data how we can track that -- the target to move it from 40% to 45%, anything that is externally trackable?

[Richard Hausmann, President & CEO]

So the related to targets, new communication of longer-term targets, et cetera, yes, we will be more explicit in Q4. And we are also planning a Capital Market Day during this next few months, yes, more towards the fall. And we will kind of disclose more on our mid- and longer-term targets. And then the second question about the service, well, this is an effort on various -- in various directions. I mean, first of all, we still see an opportunity to cover our installed base with our service contracts more completely. There are still pockets or countries or regions where we believe we can increase the coverage, which means really securing and continuous revenue stream with our installed base. Secondly, we grow our installed base. This is another very positive effect. We have grown it 6% compared to last year, simply because we really win a lot in the new sockets, which are the emerging markets, in particular. So this is another positive effect. And then we're really looking now into the processes, how we deliver our service in case of escalations or preventive maintenance or whatever, and synchronize that in -- on a global basis, which will create some productivities as we can see already in the -- with the first efforts. So that is another way to move forward.

[Gustaf Salford, CFO & Executive VP]

And Oliver, to clarify, it's Gustaf here. I think it's important to look at the actual growth for the service business rather than the percentage between solutions and services because our ambition is, of course, to also grow the solutions with a good number.

[Oliver Reinberg, Head of Med Tech Equipment & Services Research]

Sure. And if I may follow-up, can you just update us in terms of your emerging market business, where is there currently the service share percentage of revenues?

[Richard Hausmann, President & CEO]

Well, we don't have now all the -- I don't have it all in my head now, the percentages. But for example, in China, we are relatively high already. But we see an opportunity to grow that. And there are some more smaller countries where we, I think, can grow further.

[Gustaf Salford, CFO & Executive VP]

And then, Oliver, I think it's, as Richard is saying, growth opportunity in distributor markets, it's primarily the distributors doing the service. And we have been taking over those types of contracts in agreement with the distributors. So like in Turkey, in Mexico in the past, and we see further opportunities in that area as well.

[Oliver Reinberg, Head of Med Tech Equipment & Services Research]

Okay. Because the bigger one further question is if you are seeing above-average growth in emerging markets where the share of service sales is lower, I wonder if that has a dilutive impact on the service sales as a percentage of total group sales.

[Gustaf Salford, CFO & Executive VP]

Yes. So that's one of the reasons, I think, it's more relevant to look at actual growth number in absolute terms rather than the percentage as a percentage of the total net sales number.

[Oliver Reinberg, Head of Med Tech Equipment & Services Research]

Great. And any idea where that could move to?

[Gustaf Salford, CFO & Executive VP]

Our ambition is to have them fully serviced with service contracts.

[Operator]

We have another question from Annette Lykke from Handelsbanken.

[Annette Lykke, Medtech Analyst]

It's in respect to the question asked about the Unity system and how or whether you have sort of fixed the technical issues. And I -- as I understood, you have so far and you're doing component validation right now. My question is that my impression last time when you were surprised about not reaching the point where you were ready to do the CE Mark filing once when you had the overall testing, and it was something I recall about the beam control unit. What are your insights at this stage before you do the final testing or final validation that you have actually fixed this problem now? Is that stronger than you had in the past?

[Richard Hausmann, President & CEO]

Yes. Definitely, it is stronger. The team -- we have implemented all the different processes to report the early warning signs, et cetera. So yes, it is more positive. As I said, it indeed is still the same topic and there's nothing additional or something in this topic, you're correct about it, it's absolutely right. It's in the component test phase now, and we are looking forward to integrating that now and do the final complete system test.

[Annette Lykke, Medtech Analyst]

I know it's is a tricky one to answer. But do you see any risk of having further delays? And if you have further delays, would that be a few months or would it be mean that you had to do some redesigns?

[Richard Hausmann, President & CEO]

Probably -- we are pretty confident on the June date.

[Operator]

We've got another question from Hans Mähler from Nordea Markets.

[Hans Mähler, Director of Healthcare]

Yes, I have a few follow-ups. So if we talk about the market growth, where do you see the market currently growing? And do you believe that the introduction of MR-guided therapy will have a meaningful impact on the overall growth for radiation therapy going forward? And then the second question, when you talk about service, historically you included software in that share of your business. When you talk about 40% of the total, is there any software included in that pie?

[Richard Hausmann, President & CEO]

So I'll take the first one on the market. We guided for -- we see the market growth between 3% and 5%. As I said before, answering another question, we see right now more towards the 5%, the upper range of this interval. The good dynamics in the market, partially, of course, driven also by the idea that the MR-linac is an innovative technology. And I think we will see -- as you correctly stated, we will see some more dynamics on this one, so we expect a little bit higher growth because with -- these new technologies typically drive the market as well.

[Gustaf Salford, CFO & Executive VP]

And then on the software question, Hans. So for the software, the new sales of software linked to our devices are linked to the solutions. And then you if you have an ongoing service license on the software, it's included in the services.

[Hans Mähler, Director of Healthcare]

Is it possible to quantify how much of the software that is -- of the service that is actually related to some kind of software? And what is sort of pure hardware service?

[Gustaf Salford, CFO & Executive VP]

We don't have that number here, but we can look into it and come back.

[Operator]

We've got a question from [ Reinhold Filler ] from [ Anaconda ]. [Technical Difficulty]

[Unknown Analyst]

Two quick questions. Could you update us on the -- hello?

[Richard Hausmann, President & CEO]

Yes, we hear you.

[Gustaf Salford, CFO & Executive VP]

We hear you. Hello?

[Unknown Analyst]

Hello, can you hear me?

[Richard Hausmann, President & CEO]

Yes.

[Gustaf Salford, CFO & Executive VP]

Yes.

[Unknown Analyst]

Yes, can you update us, please, on the Ion Beam corporation? Yes, could you update us please on the proton therapy with Ion Beam? And also, do you have a view on an emerging technology, which is...

[Richard Hausmann, President & CEO]

Okay. Let us start...

[Unknown Analyst]

And do -- the line is very bad, I'm sorry. Do you have also a view on high-frequency ultrasound in oncology?

[Richard Hausmann, President & CEO]

Oh, yes. Okay, good. So IBA -- our collaboration with IBA has basically 2 aspects. One is that we do, in the sales process, we do some lead sharing and we basically help each other in -- with our products in the main bundle deals. And that actually works quite nicely. And the second part is that we are in the process of finalizing the software development or collaboration agreement with IBA on software for the therapy planning and MOSAIQ so that we can provide software for that -- so that we can also support or will support the proton therapy application in -- with our products. And then the second question was on focused -- high-frequency focused ultrasound, I would believe. It's a good question because when my time at GE, General Electric MR, I was -- we were basically integrating this technology into an MR scanner. And I would say it is an interesting technology, pretty much similar although using a different methodology to our Gamma Knife, but it's by far not at the level where I would say it's an overall broad application to be used for cancer treatment. I remember we saw good -- some good results on an experimental basis for essential tremor, for example, but less so for the typical forms of cancer.

[Johan Andersson, Director of Investor Relations]

Okay. Many thanks for that answer, Richard. And as we see, we don't have any further questions at the moment here. So if you have any further questions or comments, please get back to us in the IR team, and we will accommodate and answer them as quick as we can. And with that, with thank you all for participating today. And have a nice Friday. Thank you very much.

[Richard Hausmann, President & CEO]

Thank you very much.

[Operator]

Thank you. You may now disconnect your lines.