Mentice AB

STO:MNTC

Earnings Call Transcript 2022-Q3

[Stacy Hammar, executive]

Hello, everybody, and welcome to the Mentice 2022 Q3 report. Reports will be presented by CEO, Göran Malmberg; and CFO, Gunilla Andersson. My name is Stacy Hammar, and I will be moderating today's call. [Operator Instructions] This meeting will be recorded and available with the report on mentice.com.

I will now leave the way for CEO, Göran Malmberg.

[Göran Malmberg, executive]

Good morning, everyone. Welcome to this webcast. I hope you can hear me well. It was a little bit wobbly with Stacy. So if you have a problem with the sound, please let me know.

We're moving into the presentation immediately. So first, some high-level highlights from the Q3 and the first 3 quarters. So we're looking at the Q3 first, we can see that we continue the overall growth for the net sales is 32% above -- at the same period last year. For the order intake, we are on par with last year. But as you can see in a bit, we are above for the first 3 quarters, but this is not -- nothing that I react to -- Stacy, can you mute? There are some people that are unmuted here.

So anyway, so we can see that the overall intake also overall are moving in a good direction. The order book is significantly stronger, and that's obviously a link between the orders received earlier, we are at SEK 114 million almost. And if you look back a couple of years, you can see this is almost double to what we have used to be. So this is obviously giving a better stability for our business going forward. This is obviously what's going to generate net sales in the next coming quarters.

We have -- for the full year, we talked about that for both the first, second and the third quarter. Now the hospital sales is growing significantly compared to last year and are now back to levels on or even above the period before the pandemic. Same thing with the Strategic Alliances, our business with our strategic partners, Siemens and Philips and Laerdal, also are significantly up both for the quarter and for the year. Related to Strategic Alliances, we had another order for ultrasound equipment or echo in the quarter, which really further confirm our leadership and position in the specific market. We have done an organizational update where we have reformed our executive management team. It's more -- now more focused, smaller group. And we also have consolidated our software development to Sweden for the VIST development for our virtual simulation development. We also, in beginning of October, received a grant from Vinnova, The Swedish Innovation Agency for SEK 3 million for the next 3 years. So I will talk more about that. So that's the quarter.

If we look at the first 9 months, a 27% growth year-over-year for net sales approaching the full last year, we did SEK 185 million for the full year last year, if you might recall. So already at SEK 150 million, 27% growth. Order intake as well, significantly above last year, 23% above last year. Hospital is 100% up for orders, same thing with SA. SA obviously, starting from a lower level but significantly up for SA for the year, which is really, really positive. We have talked about this as one of our largest growth factors. So now in the hospital market getting back to more of a normal. We can also see that is helping the Strategic Alliances business also to move back to more of a normal.

We did complete acquisition of Ankyras, Precision Medicine back in Q2, as you might recall, the Spanish entity that we acquired, very interesting technology. We can see now we announced the first order for those solutions just yesterday. We'll talk about that a bit later. We launched a new application for online simulation, so really an ability to run simulation without hardware in a distributed environment, very interesting technology. That was the first project with 1 company earlier this year. But this is really a whole new application area for Mentice, which will be really relevant and gives a lot of ideas for the future.

Multiple new clients. We see that there was -- the medtech industry is growing both on the imaging side and on the medical device side. So we still have -- I mean, we are obviously growing the overall market, but we can see that we still have a significant market share ability to take more market share. So that's -- we had one just before the -- in the end of Q2, but we see more opportunities there. So that's also very promising. We have an EBITDA for the full year on a lower level than or more negative than last year and we understand that we need to change that trend. So we'll talk about a bit later here, the program we implemented in August, September to really focus on profitability and cash flow. So we will come back to that in a little bit.

Going over to the more detailed financials here, looking at 9 -- the first 9 months. As I said, I mean, strong growth across the 3 business areas, mainly so for [indiscernible] Healthcare Systems, but really across all 3 regions. We see it from the -- sorry, all 3 business areas. For the regions, we can see that the EMEA region, it's really performing very strong compared to last year, while APAC and Americas is just a bit above last year. I think for Americas it's really device-oriented. I think we have -- back to the report. We had a really strong end of last year and a strong 2021 generally, and I think we have a bit of reaction to that. But that's nothing that's really worsening, we have a lot of opportunities there. We think -- we believe we need to recover that in the way.

On APAC, we are just slightly above for the first 3 quarters. But as well there, I mean we know we had some repeated shutdowns in China and so -- over the first couple of quarters, hopefully, that is less of an issue. Where you see general, very strong demand from the APAC region, mostly from China, but also from other parts of the region. So that's overall, I say a good view.

Looking at the order intake, again, very strong rebound for Healthcare Systems market, both for the first 9 months, but also for the quarter. Overall, as I said before -- we have 20-plus percent growth overall for orders for the first 9 months. That's really on par or a slight decline in the third quarter, which is nothing really out of the normal. I mean, we are -- we typically have a bit of a lumpy business between quarters and we had a really strong third quarter last year. So this is nothing that really worries me. I'm really looking at the, kind of, full year's performance and the performance for the first 9 months.

We -- as well with MDI, we had a slightly slower third quarter, but this is really the same comment, it's really related to specific deals. So that's nothing that really bumps out for full year. Yes, you can see on the graph to the right that if we look at the levels we generate now just going back a couple of years or a few years, we are significantly above and we really see -- I'm really looking at the longer trend there. We're moving in the right direction even if we can see some lumpiness, as I said, between the quarters. We can come back to talk a little bit more about the market condition later on. But I think generally, we are in a good position.

All righty then, I will let Gunilla talk about the order book.

[Gunilla Andersson, executive]

Yes. Good morning, everybody. The order book in the end of September was at its highest ever been, SEK 113.9 million or very close to SEK 114 million. This is a growth of 36.2%. We ended last year at SEK 87.1 million. But as Göran was saying before, you could see that if we go back a couple of years, the level would have been like in the 50s or the 60s in the order book. And arguably, one of the very important levers that we have now in our order book is the subscription recurring, which is now up to SEK 34.5 million. And we started our subscription model in 2019 and we've seen this part growing ever since.

We have, of course, then as well, a part of this order book that belongs to the 2022 quarter 4, and that is the SEK 39.8 million of sales that we already captured for this part. And the observant reader would then see that if I add that to where we are year-to-date, we would already be over the SEK 185.1 million that we did in sales last year. We also look at our recurring revenue, or ARR, annual recurring revenue. You can see that we are now at 42%, which is also a record for Mentice. This includes the System. And in that case, it's the rentals of those systems where customer rents the systems from us. It's also software licenses where we then sell the software licenses as a subscription. And this is then the larger piece of the 42%, 25% out of that. And we also now since a while ago, measure MRR, which is the monthly recurring revenue, and this is now at SEK 3.5 million at the end of September.

And if we just continue on the next slide, you will -- slide, you will see that we also gradually shifting our revenue to sort of from CapEx to operational expenditures with our customers. And if we look at the total sales in our products, we have Systems, we have Software and we have Services. And Systems is still the highest of our total, SEK 86 million out of SEK 149 million. Software is SEK 42 million and service and support is SEK 21 million now at year -- end of September. And here, you can see that SEK 36 million out of this is now then the recurring piece, and that is growing very strongly, 136% in the quarter and 105% in the sort of end of the quarter or end of the 9 months. But we can see that we have a bit of decline from the software licenses' perpetual CapEx, which then is just moving between that line and the subscription line. So that's not a real decline in itself.

We already spoke about net sales. We have growth in the quarter. We also grew in year-to-date. It's a little bit less of a year-to-date growth than we had a year ago. So in September last year, we grew a little bit higher, but very close to the same level. And we talked about last year as a really high-growth year. So we are on par with our 2021 growth. We have with this good order book that we talked about. But what I want to highlight here is also the good gross margin that we've been able to achieve this year. We kept the really high and strong numbers for quarter 3, SEK 86.6 million compared to SEK 86.3 million last year. But we are also more than 1 percentage point higher year-to-date than last year.

And this is, of course, then really important as we continue to sell software and the higher margins on software. So a really strong performance. EBITDA, as we talked about, is below and it's actually worse than last year. It's really high cost in travel. It's, of course, increasing personnel cost. We have more people this year than last year, but we also do less of capitalization of development costs, which is an accounting feature, you could say, meaning that we are not putting the balance sheet as much investment as we did a year ago.

And if we look at cash flow, it's still negative, but it's better than last year. And we are instigating this program that will focus on profitability and cash flow, which includes higher increase, we reduce use of consultants and use our own personnel. We also consolidate software development. We had that in Denver in the U.S. before, and we're now consolidated into Gothenburg to get a more focused software development team. But on top of that, we have also changed the executive team as such, focused it and also did some change into our organization to get a better focus on profitability.

[Göran Malmberg, executive]

Right. So moving to a little bit more of an overall strategic topic. So I think it's important that I come back to this. But let's reiterate where we are from a market position. If you have listened to us for a couple of years. We talked about the Virtual SIM market being about SEK 40 million. It's not an exact science, obviously. But I think it's interesting to see that we are executing on our idea to build our vertical. We added the Physical SIM application or say, markets approach 2 years ago. And that is, in our mind, the market may be right now of upwards of SEK 10 million, but it could easily will be significantly larger.

And then with the Ankyras application or acquisition from this spring, we added the predictive simulation or the precision medicine for neurovascular, which is now probably a smaller market, maybe SEK 5-or-so million, but that is a rapidly growing market. So with this, we are really expanding what we refer to as our serviceable market. So instead of SEK 40 million, we are now looking at SEK 60 million to SEK 80 million eventually. We're still obviously focusing on the market share we have in each of these areas. And we think we can capture market share in the Virtual SIM area still, but really interesting to see how we are building the broader market for what we do in our vertical.

Obviously, we continue talking about the 3 main areas: medical device, our largest business. It will be slightly less dominant this year. If you recall, last year, we were over 70% for medical device. It probably will be between 60% and 65% this year, which is way more healthy. I think that's where it should be. Healthcare Systems and Strategic Alliances is obviously coming back and take a larger part of what we do, which is really where we wanted to be as well.

If we look at the market uncertainties, I mean, we obviously operating in a completely different market, we really need to be our toes, it's nothing unique for Mentice, but just to know, we see a lot of things happening around us where we have challenges with logistics and challenges with material supply issues, regulatory delays so forth. We obviously need to maneuver around inflation, increased salaries, significantly increased freights, things like that.

All of that we need to deal with, the inventory requirement for us to increase inventories for our products to really remove issues with kind of deliveries and things like that. It's also what we have been forced to do. So it's really a completely different environment, which we need to deal with. I think we're dealing with that in a good way. The pandemic impact is fading away, I would say. I don't think we have seen the last shutdown in China. But it seems like we're getting into a more stable environment where most of the Asian region is now again open.

For Ankyras, the acquisition from the Spring, Spanish company, where we're now opening a Mentice Spain, this autumn here. It's really an interesting technology, really good opportunities where we yesterday announced the first deal there, only a couple of months after the acquisition, it's close to $1 million, SEK 9 million-ish 3-year commitment from this German company, Acandis. And really interesting to see how they have really implemented Ankyras as a strategic part of the go-to-market program and how really they see the use of the Ankyras software as a critical component of their getting -- them getting positions used to their products and being able to safely to deploy a product. So this is again a really good example on how we move vertically into our area coming closely into the general practice and the daily clinical environment where the Ankyras tool, a regulatory approved product is now specifically helping experienced physicians to assess how they're going to use a device in a specific patient really, really relevant and interesting. So we see more about this fantastic opportunity.

We talked about this echo, the ultrasound order we got in the quarter. I can't unfortunately talk about the company and the name of the company. But there's -- it's another imaging company in this field that have added or moved to Mentice ultrasound solutions. So this really -- again, I talked about this before, but this is an application area we initiated some 3 or 4 years back. And we have completely taken over this market, I would say, from the point with integrated solutions for these advanced procedures where you use both x-ray and ultrasound in the same way. I -- we don't believe there's any other products in the market that can do what we do, that can have the ability to simulate or emulate an advanced device simultaneously both in echo and -- or echo and x-ray, sorry. So that's really, really encouraging. I think we will see more of these kind of orders coming.

I mentioned the Vinnova project. This is the Swedish Innovation Agency. This is a 3-year project, SEK 3 million. It's really an ability for us to work together with multiple organizations, 17 organizations across these countries to really focusing on enhanced rendering, extracting and -- but also really, ability for us to work on our physics engine, which is really the core of -- one of the core parts to what we do. So this is a good opportunity for us to really set aside and focus more on the core research together with a multiple of the leading companies in Europe, really, really relevant and important.

Last comment really, you should go in and check our new website. It's sort of a promotion here, but we're real proud of this. We have worked quite a bit over the last year to try to up the website really to focus on the fact that we are a vertical provider into the image-guided therapy area, really focusing on what we can help our clients with in different areas. So we believe this site is another step in the direction proving that we are really focusing on a much broader set of applications. We are not just a simulation or just a training company anymore. So I would encourage you to check the new website out.

That was pretty much it. That's what I had. So I guess we open for questions, Stacy.

[Stacy Hammar, executive]

Göran. I hope my sound quality is better this time. [Operator Instructions]

[Göran Malmberg, executive]

I guess everything was so clear, so no one have any questions. I think that's really good. Yes.

[Stacy Hammar, executive]

Yes, there's no question.

[Unknown Analyst]

Hello, can you hear me?

[Göran Malmberg, executive]

Yes.

[Unknown Analyst]

Yes, it was very clear. But I still have a few questions -- can we -- maybe you mentioned new digital area, for cloud and online simulation with Medtronic. Can you maybe give us a bit more details on those new -- on this new business area?

[Göran Malmberg, executive]

Yes, a little bit hard time hearing you, but I believe you asked if you can explain more about the online simulation and the cloud-based simulation. So yes.

[Unknown Analyst]

Yes.

[Göran Malmberg, executive]

No, I mean it's really -- I mean in the traditional way of running a Mentice simulation session, you need to be in a physical room, you have a Mentice simulation hardware, a Mentice device. And then you have a group of people around you and then you have maybe a proctor or run a case together with people in front of the -- that specific simulator.

What the online simulation does, I mean, obviously, first, we have built over the last, say, 3, 4 years, the basic cloud environment that really allows for our client to log in via the cloud to really prepare their session on an iPhone or an iPad or similar and really also to keep track of where you are in your development, keep track of your cases, keep track of your data.

What this online simulation piece is really adding is the ability as well for -- so if you are a physician or maybe a device company and you want to run a session, you want to go through a specific case or prepare for a specific task, then you can start a simulation session in our cloud environment, you can invite multiple other people, really knowing interestingly, having a group of 10 people that are dispersed over multiple sites. And then you can run a simulation session exactly as you used to do in the physical environment or on the actual physical simulator, sorry. Then you can run this completely in the cloud and you can also hand over the control on that session.

You obviously don't have the ability then to navigate the actual clinical devices in the hardware. But what you do instead is that you have handles on your screen, you can use your mouse pointer to really navigate the tools and rotate the tools and what have you. But you can have a really interactive session with, say, 6, 8, 10 people or more, and any one of the participants in that group could take over the control of the simulation. You can discuss a certain deployment or already complicated anatomy of what it is. So I believe that this is a very good complement and maybe a segue into someone eventually running a full case on -- in -- on an actual simulator, but really gives the ability for physicians and device professionals to really access the case in a much more -- in more lightweight environment from your phone or from your laptop or similar.

So we really believe this is a way to spread the use of our technology in a much larger way and also increase the share of software for our business. But I think today, it's the threshold for hospital to start using our solutions is also they need to have a hardware. But if you run it this way, you can -- you actually don't need the hardware to really experience what we can do. And then when you get excited about what you can do, you can then, as a next door or a second or third step, get to simulate it to your hospital to run the actual case. So sorry for the long answer. I hope that answers your question.

[Unknown Analyst]

Okay. Good. That's very clear. And in terms of revenue, if you compare it with sending a simulation systems, I mean, how big it could be?

[Göran Malmberg, executive]

Well, it's really -- it's hard to say, it's really dependent on how we sell the access. And we're looking at -- I mean, the first couple of projects we run, we actually have a charge per session and a charge per user. So that is really based on volume. And that's -- if we look at the Spanish company, there we also charge per case. But typically, what we do is that we have a volume or a volume commitment for cases per year or things like that. But I would say that the -- I mean, just roughly, if you have an average selling price for simulator with software to hospital, maybe in EUR 80,000 to EUR 100,000 range, I mean if you have a software only, then maybe you're talking about EUR 15,000 to EUR 30,000 on an annual basis.

But then as I said, it's depending on if we charge an annual fee or we charge per usage but that will give you a rough understanding. But we open up for a significantly larger market by offering this in addition to the traditional hardware and software.

[Unknown Analyst]

Okay. Very clear. And maybe last question from my side. So about the program to focus on profitability and cash flow. Is it because you see a slowing growth in the market that you want to implement such plan? Or you -- it's more in the long-term perspective of reaching a certain level of profitability that you mentioned in the past, maybe?

[Göran Malmberg, executive]

Yes. I mean I will give my view and have Gunilla, correct me if I say something she don't completely agree with. But joking aside, no, I mean I think it's clear. I mean we can see that we continue growing. We see -- we don't see a significant change in the demand of our product. We still see strong demand of our products. But we can obviously see, as everyone else, that the condition in the financial market is completely different from what it was a year ago. So it's clear from our Board and our owners that regardless of how the market looks, we need to be cash positive, we need to generate positive cash. So we can't allow to continue to burn cash as we have done for the first part of this year and also during the pandemic. So that's still the requirement.

We don't yet see a slowdown really, but we have all said we need to be prepared for that. I mean we have -- it's not my mission to talk about the conditions in the market. But we have decided we need to be prepared for a slightly tougher 2023, even if we don't see that yet. But the main focus is really here to make sure that we are taking care of our cash position in a better way, considering how the financial market looks.

Want to add anything to that, Gunilla or?

[Gunilla Andersson, executive]

No, I think it was spot on.

[Göran Malmberg, executive]

Thank you. Finally, I got it right. So did that answer your question?

[Unknown Analyst]

Yes, yes. Thank you. Perfect.

[Stacy Hammar, executive]

We have one other question that's coming from the message feed from Catarina. And she just asked if we could please elaborate on the newly initiated program to refocus on profitability that we've alluded to?

[Göran Malmberg, executive]

You want to talk a little bit about our focus on that, Gunilla?

[Gunilla Andersson, executive]

Yes. I think it's a short-term focus but it also lingering on more long-term perspectives because what we are doing at the same time as we're now sort of putting our hiring fees together, and we are pushing some consultants and so forth. We are also running efficiency programs through the company to secure that we sort of take use and good use of the people we have and that we actually work more efficiently and have better and more streamlined processes.

So it's a short-term, I would say, push to get us to activate all of those good initiatives we have in the company to become more efficient and more productive. So this is a program that initiates to focus on the short-term cash flow, but it will also have a good and very strong impact on the future, both on profitability, but also on cash.

[Göran Malmberg, executive]

We can also see that since we added the physical simulation, Vascular Simulation business from U.S. -- Long Island, U.S. is that we also have increased the order amount -- the number of orders, sorry.

[Gunilla Andersson, executive]

Number of orders.

[Göran Malmberg, executive]

We've more than doubled the number of orders over the last 2 years. And that also meant that the average order size is going down. So we need to work on automating those kind of smaller order items. I think there we have opportunity to improve our efficiency generally and also going into the software-only, the online opportunity to sell our solutions. Obviously, we need to have that automated to a much higher degree. But the opportunity here is, obviously, if we can automate that, which is not a technical issue.

We also can see that the product mix will continue to improve. We can have a higher degree of software, which will also help us to be more profitable, but also our ambition is really to increase the revenue per employee. That's one of the key KPIs that we are working on.

Was that enough Catarina or you want some more details?

[Stacy Hammar, executive]

Okay. Yes, Göran, there is a response from Catarina saying, perfect, thank you.

As of now, there are no more questions in the message feed.

[Göran Malmberg, executive]

Thank you so much for that. We will meet you again in about 3 months. So thanks for that.

[Gunilla Andersson, executive]

Thank you.

[Göran Malmberg, executive]

And have a good day, everyone.

[Stacy Hammar, executive]

Thank you. Goodbye.