Mentice AB

STO:MNTC

Earnings Call Transcript 2023-Q1

[Operator]

So welcome to this earnings call for Q1 with Mentice. The company reported a very robust start to 2023 this morning. The speakers will be the CEO, Göran Malmberg; and CFO, Gunilla Andersson. My name is Kristian Li, and I will be the moderator of the presentation. So, welcome Göran and Gunilla, please begin your presentation. Thank you.

[Göran Malmberg, executive]

Okay. So, I'm going to start by going through some of the highlights for the first quarter. So, starting with order intake, which is, I mean, a leading indicator of what we do, historically, very strong first quarter. The people that follow us, but remember that we had a very strong quarter as well, first quarter of 2022. But despite that, we managed to beat the previous year. And again, people are following us for some year can see that Q1 is typically a weaker quarter. If we go back a couple of years, we were probably more in the $30 million level than what we are now. So, that's a very nice start. Very strong order intake for the medical device industry. I mean 63% up compared to the first quarter last year. which is also very nice. And I mean, last year, it was a bit of a slow year for medical-wise on the back end on a very strong '21 not to make it too complicated, but this is really good and promising for 2023. We had a couple of major orders from large manufacturers exceeding SEK 30 million in the quarter. Net sales at a record high, 22% growth on or year-over-year. Reducible currency effect is 15%. So that has an extraordinary strong start of the year, SEK 65 million. Order book maintained at the same level as when we came into Q1, SEK 126 million, again, comparing that with a year back or a couple of years back, a significantly strong order book, that obviously building for the future. Half of that is scheduled for 2023. And then very important that we can maintain a positive operational cash flow for the quarter, even if it's slightly lower than last year. It's really a good position as well for the year. Net income slightly negative, but significantly better than last year. And most importantly, starting off with a very solid EBITDA margin for the quarter, 11% of our net sales for the year compared to negative for the first quarter last year. So, this is all in all, something that we're very, very pleased of our wind for the first quarter. Some details on the order as I said, I mean this Q1 is really only surpassed by some of our recent Q4 Medical Device Industry, as I said already, up 63%. And medical device order intake is actually on the same level as Q4, which is unheard, Q4 was a good quarter, but we maintained that is Q1, which is really really good. Health care system is to take the line slower, but we see the basic quarterly variations. And we see that there's a continued strong demand from that so, that's nothing that we need to worry about. Net sales 22%, 50% organic, Americas region, obviously, there is a strong link between medical-wise and Americas. So both that is very, very dominant for the quarter. EMEA as well, a good very good quarter. They had a fantastic quarter for Q1 last year. So a strong order intake there and slightly lower on net sales, but still solid. APAC is lower than last year. I would say mainly due to we had, if you remember, the Siemens Corpo Corindus order in the first quarter that sort of skewed that result a bit. Overall, we see a good demand from the APAC region as well. We also see that all 3 of our -- sorry. So we can see, as I said before, if you look back 3, 4 years, we have a significant increase in the first quarter. And this is what I was going to say. Then if you look at the business segment, which is system software and services, we can see that we have a growth across all of those 3 and as well a significant bump in the annual recurring business. Gunilla, maybe you do this?

[Gunilla Andersson, executive]

Yes. You already spoke a little bit about the order book. This is giving you a little bit more detail on the order book. We can see then that we are EUR 126.2 million. And in the graph on the right-hand side, you see that this is spot on the level we had at year-end as well. But of course, it's a huge growth compared to 91.4%, which was the end of Q1 2022. We see that NOK 66 million of this is scheduled for 2023. You can also see then that we have quite significant amount in the software subscription, and this is then where we take ourselves into the annual recurring revenue as well. So this is for us, really important as the growth. So, 50.3 million in there. There is also including the Ankyras. And if you look at the graph on the right-hand side, it's about SEK 9 million that is the Ankyras of the software subscription. And then about 2.5 million of the EUR 11.4 million is then for Ankyras during 2023. We have a solid, stable development order book of NOK 11 million, and services then on the range of SEK 30 million and SEK 27.1 million. Coming to annual recurring revenue. We are really on a strong path here. We are now at SEK 61 million at the annual recurring, and we have a monthly recurring now surpassing SEK 5 million. It's really both the system and rentals that we do as annual recurring, which is then growing NOK 15 million compared to Q1 2022 and then another SEK 14 million for the software licenses. So, a solid performance, and we see very limited churn on these contracts as well.

[Göran Malmberg, executive]

Good. Thank you. So, you want to continue here?

[Gunilla Andersson, executive]

Yes. So, conclusion on the quarter, we can really see the 23% growth, which is then 15% organically. It's really our strongest first quarter historically. We have also 1% of this, that is the Angers acquisition inside the 2022 or 22%, sorry. It's still a very strong continued gross margin. We see that we are now above 85%, which is then very much more than we had a year ago in Q1 2022. But if you look at our reports for the second half of the year, last year, you will see that we were up against these levels, 84 million, 84.5%, and 55 during the second half of the year. So this is a continuation of that. We've already seen that we have positive EBITDA for the quarter, positive SEK 7.3 billion, and we had negative 1.3 million a year ago despite that we were really strong on sales in that quarter as well. So this is then, of course, two folded reasoning for that. It's first of all, that we get more gross margin or gross profit from the extra sales that we have. But we also have cost levels where we continue to save on the external expenses, and we keep the personnel cost increase to SEK 5 million in the quarter. This, as you can see, consists of, of course, increased salary levels compared to the 2022 level, but we need to remember as well that the adjustment for salary for 2022 was included in its entirety in Q2 last year. So, there is an impact there of about SEK 1 million comparison. We also did capitalize a bit more of expenses from personnel costs a year ago, SEK 1 million on that. And then we have, of course, then our variable personnel cost level, which is in our world called commission that is higher as well because of the higher sales. Again, back to cash flow as the last point, I think it's really positive to see that we kept the cash at the end of the period at close to SEK 46 million. We ended the last year at EUR 47 million. So this means on the real cash flow level, taking everything into consideration, we were just negative of about SEK 1 million. But we have positive cash flow from the operating activities and very much so from the profits that we are making, falling through in the cash flow. And then the change in working capital is really from liabilities. So, we generated a positive cash flow from accounts receivables in the quarter.

[Göran Malmberg, executive]

Great. Thank you. So, just to have a bit of reflection on the business areas, medical device, I mean, as you see, very strong in the quarter, but just again, a reflection that we see really good acceptance of what we do. We see a lot of opportunities to scale with our larger clients. When we see the larger clients and divisions with larger clients scaling in systems significantly, which obviously helps our margin as well. We're already now in Q1, we have two clients that already have passed SEK 10 million. And historically, I mean, a large client for Mentice is mainly SEK 15 million, SEK 20 million. So, this really gives a good view full for year generally for what the medical visit do. On the health care side, hospital side, we had a slower order intake in the quarter, but a lot of good activities, a lot of good support. And I mean, clearly, we're continuing from what we said in the end of the last year that we are really through the pandemic, obviously, but really, we see a strong general demand from health care operations of our Astral systems across the world from all of our regions. So this also bodes well for the year. Static alliances, I mean, we have a lot of interesting discussions around the activities in China, but both Siemens and Philips generate a lot of interest across all the 3 regions as well done with the Siemens robotics side with a corporate GRx where we know that they really use our technology in every single situation where they interact with their client. So, that opens a lot of interest in the market for our products. So we really feel good about that mix between these 3 business areas. So last, yes, I mean I already said, I mean, we had from these 2 largest clients in the quarter, around SEK 30 million in orders, which is obviously a fantastic start of the year. Lastly, here, we established a fully-owned subsidiary now in Spain. We are fully integrated in Spain and the Ankyras business is now in events fully owned subsidiary. And this is obviously very relevant for the Ankyras business. But I also want to make a point, and I think I can do that when we did the acquisition a year ago that we also see Barcelona has a very strategic position for us or a strategic location for us from a point of sourcing talent. And so, we really see this as an additional development hub for Mentice. Generally, Ankyras is generating a lot of interest from different markets. We're obviously still in the process for getting FDA approval in the U.S., and it's unclear when that's going to happen. So I can't really say anything about that. But it's a lot of activities around Ankyras. And I think the combination of our 3 main legs here between Ankyras for precision medicine, the physical SIM from the New York-based business and the legacy versus nation products really provide a portfolio of products that serve our clients very, very well.

[Operator]

Intended to say, actually?

[Göran Malmberg, executive]

Yes. Yes. Thank you.

[Operator]

Thank you, and a very good presentation and very informative giving us good guidance for where you are heading at. So, let's open up for questions if we have anyone online that wants to start. Okay, Rikard Engberg, please go ahead.

[Rikard Engberg, analyst]

So, my main question is, could you please elaborate a bit on the development in the gross margin and the reason for the quite high number? Is it a mix?

[Göran Malmberg, executive]

It's a mix, obviously, Gunilla, you want to take the first one? I can --

[Gunilla Andersson, executive]

Yes, it's a mix. The more we sell off software-only, Ankyras is one of those products, for instance, but also that we have more sales on the sort of development side, which is also a higher margin on. But I think that what we need to take into consideration as well is that we have some currency impact as well inside our gross margin. So, I would argue that it won't go to the heavens and would probably stop here around 84%, 85%, or something like that, our view.

[Göran Malmberg, executive]

I mean I clearly see that the product mix and the scale we see with some of this client that acquire more systems and more software in relationship to the amount of development to do with us. That obviously helps the margin, and we can move more and more into software-dominated or even software-only solution will also help the margin such as Ankyras but also on the Visside. So it's a combination. But I mean to Gunilla point, we probably have a couple of percent that is kind of currency related. We don't present that, and I don't think we have that number exactly, but that's -- but 83-ish level is probably a available level, which is better than we had a year ago or where we were around 80... Yes, correct. On that. I was thinking about the supply issues that you had before it seems to have eased and you have better access to components and so forth. Is that supporting your gross margin as well... Not really yet. I mean, we are working with revisions of our products that will help cost to reduce costs, but we haven't really leverage that yet. So that's still to come, I would say. So I can't reveal when we can start selling that updated Russian. I think we have managed the supply-related issues in a good way, but we live in the new area and new world. So, I sort of learned -- been taught that does not going to stop. We're going to have more of those coming up as we go, and we need to deal with them each and everyone as we go. So, yes.

[Operator]

All right. Do we have any other questions?

[Rikard Engberg, analyst]

In the meanwhile, I can continue. The order intake for medical device industry was quite strong in Q1. And while the health care systems and strategic alliances were a bit slower. You mentioned that it was due to quarterly valuations. So, would it be fair to expect a stronger development in Q2 already?

[Göran Malmberg, executive]

That will be fair. Yes.

[Rikard Engberg, analyst]

You reported sales growth of 22% in Q1, of which 15% organic that is quite strong in my view and your financial target is to grow by 30% to 40% per year on average. Is this feasible in 2023 given the good start to the year?

[Göran Malmberg, executive]

I cannot really say too much about the forward-looking statement there. And I still think that we still operate with an ambition to improve the profitability and improve the efficiency of what we do. So, we are not scaling the organization at the speed we did before. So generally, I think that the expectation to be upwards to 30% to 40% is going to be a challenge. But I think with the start we have had in the year, it's not in any way impossible. It's still possible. That was sort of navigating that answer, but that's what I think.

[Rikard Engberg, analyst]

Thank you. And I was thinking about China, which is opening up again and still APAC underperformed in Q1. Could you please elaborate?

[Göran Malmberg, executive]

Well, we had a core disorder in Q1 of 2022 of NOK 8 billion, SEK 9 million. So that's obviously skewed the numbers a bit for this year. Generally, the business on the device side was okay in the end of first quarter, and I think that we expect a good second quarter in APAC. So, that's again, I mean, we finished very strong in Q4 or the end of last year for APAC as well. We took a couple of orders in that maybe were expected in the first quarter. So, that works the other way then we have something that slipped over. But for APAC was actually the other way around that we had a strong end of the year. So, I would really relate this to quarterly variation on months mainly.

[Rikard Engberg, analyst]

Sure. Could you please give us an update on the delivery of the or in this order, they haven't received any regulatory approval for corporate DRx yet?

[Göran Malmberg, executive]

True.

[Rikard Engberg, analyst]

So could you please give us some -- where we are...

[Göran Malmberg, executive]

Yes. I mean -- and that obviously means that they have delayed the start of the project for us as well. But I mean, we -- the dialogues we have is extremely positive. And I mean, as for the rest of the world, the leaders in Siemens in China really see Memphis as an integral part of their other go-to-market strategy. It's probably premature to say when they will get approved, but the indications we have heard is that, that's going to happen during the second quarter. If that I mean it's always very hard to forecast that when it comes to China and how their regulatory processes or the government process work. But that's the belief that that's going to happen in Q2. And we know that they already have a backlog of mature projects or even orders that will make as soon as they get the approval, I think we can get going fairly rapidly.

[Operator]

All right. Okay. So let's take questions from Christian. Please go ahead.

[Christian Binder, analyst]

Two things regarding Ankyras. Can you elaborate a little bit more on -- as you said, you don't know when you could get FDA approval. But after the approval, can you elaborate a little bit more on how do you expect orders and sales to ramp after that? And then the second aspect, can you elaborate on shifting some development resources to Spain? How much do you plan to shift over time? And for example, what is the difference in labor cost, for example, for software developers?

[Göran Malmberg, executive]

Always very detailed and good question, Christian. Thank you. So, on the first question on Ankyras and what will happen when we get approved, I would say that the nature of the Ankyras business is that we believe we can take early orders but as for the order we presented end of last year or Q4 of last year, we have an order intake, but then the revenue is distributed over time because the revenue is really allocated when the customer utilizes the product or use cases, licenses related to cases. So, I think that we will be able to get an order intake, hopefully, relevant order intake fairly rapidly. But I don't think that will have a net sales effect limited in 2023, if any, and then that will be delayed into 2024 and onwards. So, that's the characteristic of that business. But with that said, we already obviously have started dialogs with many of the main advice companies. So they are already in the block, so to say, to get going. So we have an aspiration of being able to move fairly quickly as soon as we get the approvals. On the Barcelona thing, we don't have any concrete plan to move or relocate development at this point. It's just when we can start to initiate growth, again, we believe that it's viable to increase our organization down there. And we think that there's a lot of technology that I think it makes sense to do that. For instance, we're talking about cloud and similar, that is, a resource that is relatively easy to find. I don't think we would distribute our best or legacy product, the Vachi assimilation development to Barcelona. We sort of after months or years decided last year to consolidate what we had in U.S. to Sweden from a developed point of view. So, that I think we will continue to drive from Sweden from Gothenburg, but then add on to new technologies, new applications and also maybe things like the cloud or similar. So that's the idea. In terms of cost levels, it's hard to say exactly. I think the main thing is that there is a lot of talent in Barcelona, it's easy to source talent in Barcelona. The cost of living in Barcelona is much lower-- I mean, significantly lower than the U.S., obviously, but also lower than Sweden. If you compare to U.S., I would say, the cost of an individual is probably half, and Sweden and Spain is a little bit maybe 25%, 30% lower to be relevant. So just to give you rough numbers, don't hold me accountable for those numbers, Christian, though.

[Christian Binder, analyst]

All right. Got it. That was all for my side, thanks so much.

[Operator]

A follow-up question on Ankyras. If you could please comment on the demand, if you compare the demand in the U.S. versus European markets.

[Göran Malmberg, executive]

U.S. is by far the largest market, as we know. I mean, and there is absolutely a market in Europe with a large company in this space. I mean, all of the big blue ship ones in that market for neuro. But U.S. is significantly larger. And a lot of the decisions since most of those companies are U.S. headquarters, the decisions are originating in U.S. in many cases. So, I think a lot of these synergies will be driven from the U.S. We have a couple of them that do separate projects with us in Europe and starting reviews in Europe and so. But I think a lot of this will be driven from the U.S.

[Operator]

Jumping back to the Q1 report, and you reported positive EBITDA of more than SEK 7 million in Q1. And you have never shown positive results in Q1 before. So, is this the beginning of the new events? Are you now about to reach a high round of profitability?

[Göran Malmberg, executive]

I will let you answer that Gunilla, then I could, if I need to add to follow up. But, yes.

[Gunilla Andersson, executive]

Yes. I think, as they say about the flies on summer, I'm not sure that I would want to be more than celebrating, of course, that we made a positive result. We have really changed our mindset to profitable growth rather than just growth, which I think is now walked through the whole of the organization. So, yes, our ambition is high. I still would want to say this about the fly. Don't expect this to be summer yet.

[Operator]

Yes. Sure. But it's still far from reaching your short- and medium-term target for an EBITDA margin of 30%. So what can you do to accelerate reaching this target? Are there any more initiatives that you are considering other than those you have already implemented?

[Göran Malmberg, executive]

No. But yes, absolutely. I mean we are working with an internal project where we -- you look at all different areas of our business, and we also look at the interface between the different parts of our business. So it's sort of a, say, lean production exercise that we initiated in the beginning of Q4 of last year. So we have a lot of these things. I mean, one example is that we are implementing now in kind of an e-commerce platform to move the low-ticket items over to an e-commerce structure that would make our order and delivery process more efficient. I mean, allowing for people to order using a credit card, for instance. So those are things that we are working on and implementing over the year. We also have a lot of IT and system-related things that we can improve the way we do things, avoid doing a double input of the same information in several systems there. Clearly, we have had ways to do. But then as I think we talked about during last year, I mean, for me, it's really thinking about productivity per head per person. And if we can scale in terms of -- I mean we can maintain a higher gross margin. If we can sell more software, we can have send more system per dollar of development. We can maintain that top-line relationship with the number of heads that we need to deliver that. So, it's really a mix of that. And so, in Norway, we have stopped that activity, and no way we have done it. We have a lot of things to do, and I think we just scratched the surface of the opportunity we have to be more efficient, really.

[Operator]

Sure. And I also noticed that you increased annual recurring revenue quite significantly in Q1 and up 93% year-over-year and now accounting for more than 26% of rolling 12-month sales. So, what is the ambition for annual recurring revenues going forward? And will this support higher EBITDA margins?

[Göran Malmberg, executive]

I mean, definitely, it will support higher margins if we can continue. I mean, you know I think everyone on the call here knows that there is a sort of a breakeven point between perpetual and a SaaS model around a year or even two years. And obviously, if we can show and we've been operating now with this since end of 2019, so really 2021, '22, 3 years. So, we are at that point now that we should start benefiting from that bump. So absolutely, that is the idea. As you know, we have not moved yet for the medical advice industry to a SaaS model. That's something that we carefully need to do. And eventually, I want to move there, and I think we should get more scalability. But my ambition really is to, I mean, ideally, I think I joked about that before, it would be good for my heart at least, that we can come into a year with maybe 60% down. So we know what we have to land coming up coming into Q4 and need to generate 40% of our orders in our revenue at the end of the year. So if we can come into a year in, say, a couple of years with over 50%, maybe 60% of our revenue already allocated for the year, that's still where I want to be.

[Operator]

Excellent. And another question from my part. The cash flow is one of your top priorities, of course. And given the positive start to 2023, do you feel confident about showing positive cash flow for the full year? And what will be key for that?

[Göran Malmberg, executive]

I will start, and you can follow on Gunilla. That's absolutely our main ambition. It's very clear, and we made a statement on both Mega data boards. That's the primary focus this year. We know that that's the expectation of the Board and the owners, that we can generate positive cash flow. And that's also why we are so focused on not increasing cost levels before we know that we can support that. And we also have a continued focus on making sure that we get paid in time. We had a lot of scrutiny on how we take orders and how we get paid and all of that. So, all of that is, I would say, our highest priority across. I mean we want to grow. We want to demonstrate that we can organically grow in 2023, and I think we will. But I would say that positive cash flow for the year is prior to one, and I'm certain that we can manage that. Gunilla, would you want to add something about to add something on that, Gunilla?

[Gunilla Andersson, executive]

Yes. I think we did a really high effort during the Q4 to really get paid for some of our really old receivables. So that extra bump that we did in Q4 last year, I don't expect to get this year. But at the same time, I think we will be generating cash flow more over the year rather than so much focus on it in Q4. So I echo Göran's mind here that, yes, we definitely need to be profitable or have positive cash flow at the end of the year.

[Göran Malmberg, executive]

More related to our actually running business than last year.

[Operator]

Yes, I have one final question and is regarding the competitive landscape. I mean, there have been some moving parts since Surgical Science acquired this in Bionix. So, are you still gaining market shares? Have you seen any changes to the dynamics of the market? And have you seen any other competitors emerging?

[Göran Malmberg, executive]

We see some smaller competitors emerging, especially in the emerging markets, if I can call it that way. I mean China and the Asian market, where we see some smaller startups coming mainly focusing on the hospital market. We have since before a couple of others focusing on Eastern Europe and the Russian market and so, nothing that's really changing the landscape in a significant way. A lot of them have a very academic focus or have an academic focus, and they also approach the market similar to what CAE and circuses i.e., to become or to be a one-stop shop for an academic training center. As I've said before, that's not our focus. And if you look at the European and the U.S. market, there is, I don't say a bit more mature. Our interaction with hospitals are almost entirely through the specialty department. So we are not really talking to a client that wants to have simulation equipment in other areas. So the competitive landscape thus is a bit different. With that said, I mean, obviously, service science clearly is the strongest competitor in the market that require bundles that you build a new hospital in China or in India or wherever and they want to have everything that you need for the skill center. Simpson Bionics and service science is a very tough competitor there. They have good solutions. There are a couple of other companies, CAE, Bill and a couple of others. And we don't really compete there, and we really can compete there. Still, we can circle out the neurovascular part of the tender. We are doing that or successfully doing that in a lot of cases. Then we compete on the merits of our products. we're pretty confident that we have a strong position. If I'm acting not to be arrogant, but I think we have an extremely technical position. In the industry side, we have some incumbent clients with these two main competitors that we try to get our products to replace in a common player. With respect to new clients, we rarely see competition to that level. And I think that what I usually say, and that's been true for a number of years that if we have a client with experience of what they need and maybe use simulation before, I would say we will be the selected vendor in most of the cases. And we see that, obviously, in some of the larger deals we presented last year, beginning of this year come from clients that have moved from another vendor to Mentice. And we see a lot of opportunity for that both this year and in the coming couple of years to replace some of these common players. So from a competitive point of view, the hospital side, is absolutely less so on the device industry side.

[Operator]

Okay. Very good. I don't have any more questions. And it seems like your presentation was crystal clear. I don't have any more questions online. So, thank you very much for coming here and answering all our questions. Pleasure being with you.

[Göran Malmberg, executive]

Thank you. Bye, everyone. Thank you.

[Gunilla Andersson, executive]

Bye-bye.