Mentice AB

STO:MNTC

Earnings Call Analysis

Quarterly Performance Overview

In the third quarter, the company experienced a notable decline in net sales, reporting SEK 58 million, which reflects a 10% decrease compared to the same period last year. This decrease was influenced primarily by softness in the medical device industry (MDI) segment in the U.S. and Europe, where sales dropped by 19%. Conversely, the APAC region reported a modest growth of 4%, reaching SEK 40 million.

Product Segment Insights

Sales performance varied by product, with strong outcomes from Physical Sim and Ankyras, achieving a 26% increase year-over-year. However, sales related to the VIST product line, closely tied to the MDI segment, declined, contributing to overall lower sales figures.

Order Intake and Book Analysis

The total order intake for the quarter was SEK 61 million, a drop from SEK 65 million in the same quarter last year, resulting in an annual year-to-date total of SEK 170 million. The company’s order book decreased by 9% to SEK 117 million at the end of Q3. Of this, SEK 37 million is expected to generate revenue this year, highlighting that the majority of the order book is projected for delivery in 2025 and beyond, with some orders extending as far as 2029, related to software and subscription revenues.

Profitability and Financial Health

The company reported negative EBITDA of SEK -6.2 million for Q3, an average breakeven performance for the year-to-date, compared to previous years where EBITDA was close to 22%. Despite this quarterly setback, operational cash flow remained positive year-to-date, although negative for the quarter, resulting in cash reserves of SEK 46 million at the end of the period.

Growth Ambitions and Strategic Initiatives

Management reaffirmed their long-term growth targets, aiming for annual growth in net sales between 20% to 30%. They also aspire to reach an EBITDA margin of 20% within the next three years, driven by strategic investments in their sales and technological capabilities. The company anticipates that transitioning to a Software-as-a-Service (SaaS) model will mitigate sales volatility across quarters.

New Product Launches and Market Reception

The launch of NV Connect, a subscription-based product portfolio in the neurovascular sector integrated with Ankyras, was well received. This move aims to standardize offerings and enhance client engagement, signaling a strategic pivot towards completely integrated medical device solutions and a consistent revenue stream through subscriptions.

Market Position and Competitive Standing

The company maintains a strong market presence, evidenced by their participation in major medical congresses, with a favorable response to their leading simulation technologies. Their commitment to evolving their offerings places them in a strategic position to capitalize on future healthcare needs, especially in the neuro and cardiovascular segments.

Earnings Call Transcript 2024-Q3

[Rikard Engberg, analyst]

Good morning, and welcome, everyone. My name is Rikard Engberg. I'm an equity research analyst here at Carnegie. With me, I have Göran Malmberg, CEO of Mentice; and Ulrika Voksepp, CFO of Mentice, who are going to present the third quarter. Welcome.

[Ulrika Voksepp, executive]

Thank you.

[Göran Malmberg, executive]

Thank you, Rikard. So nice to be here. So I will dive right into the presentation. So yes, Göran Malmberg, CEO; and Ulrika, CFO.

So dive in. So the third quarter, not entirely where we wanted, but still, I mean, slightly below last year. But we should also remember that this is on the back end of a record high second quarter. As a consequence, on the top line, obviously, the profitability is also lower than expected where we had a negative EBITDA in the quarter, but a breakeven for the full year so far. We also have a positive cash flow, positive operational cash flow for year-to-date, while negative in the quarter.

And we should also remember, we'll talk about that a little bit later, I mean we have a variation of business and had a back end of a really strong last year, especially strong in U.S., where we had a growth of 60%. We started off the year weaker, and that's still what we are -- a bit impacting our results. If we're looking at the 6 quarter -- last 6 months, sorry, we have actually been in line with what we expect, and we have had about 15% growth for the second and the third quarter as a combination.

So a bit about the business. Generally, Americas and the European region is still behind for net sales for the year based on our target. But we -- while APAC or Asian region is significantly above last year. If you look at the total, we are on par with last year's net sales for the first 3 quarters. Continued very positive business development generally with medical device. We also see a good development with all of our key device industry clients. We can also see that we have a very strong third quarter from a hospital business point of view, where we are 30% above the same period for last year.

So from a product and marketing point of view, we just launched in the last week here 2 products, which sort of are related or combined. The first one is NV Connect, which is a subscription-based portfolio of products for the neurovascular area, which then also launched together with our first integration with the Ankyras business that allows you to do a full simulation in the VIST environment based on the simulation you have done in Ankyras. And then we'll talk a bit about the conference activities we had over the last couple of months, which is really nice to see, the impact we have in the market.

So first then talk about NV Connect and the Ankyras, [ talking ] about reversal for -- rehearsal for this. So NV Connect is a way for us to really standardize our offering in each area. And NV Connect is the first in a series of products we expect to develop that really, in this case, all of our offerings in this space, it's 4 or 5 products in that area that we're building into one environment. And we will continuously develop one product for this field that will be a benefit for all stakeholders here. So we believe that's going to change this market clearly.

The subscription-based transition, we've already done that for hospital generally. But in this case, it's also going to move industry to a SaaS-based model, which is important. This will also then -- since we have the same structure for all clients, this will also provide an infrastructure for industry to actually leverage our hospital client base to accelerate their adoption on new medical device. So this is very nice to see, and we got really good feedback on that.

So my second discussion is on medical conferences we participated in over the last 2, 3 months here, starting with SNIS, which is a neuro congress in Colorado Springs; ESMINT as well, neuro in Europe; CIRSE for radiology and cardiovascular; and then we have another neuro conference; and the last one is TCT, which is the world's -- one of the world's largest cardiovascular congresses.

And you can see that we are here pretty much the only simulation vendor that participate in these conferences. And last week in TCT, we can see that we had something like 40-or-so systems across the congress floor and very few other competitive systems in the market. We have -- more than 90% of this simulation technology in that field comes from Mentice. So we're clearly moving in a good direction here.

One really nice thing here is that, I mean, I think we -- from a simulation based, in a lot of cases, we -- simulations has been used traditionally, mainly by unit physicians for basic training and so on. And this is from the event in New York here, neuro event where we had on stage, the main stage in front of hundreds of people, we had all of our technology on this stage with the VIST virtual simulation, virtual reality simulation. We had our physical simulator and Ankyras.

And this was set up as a kind of as a competition, as a kind of Hunger Games lookalike, where 6 of the best physicians in the world, real rock stars in this field, competed; one European team, one U.S. team and one team from Asia. And these 3 groups, 2 on 2, competing with each other and challenged each other on our simulators.

So I think the importance of having the best physicians in the world really using our technology as a means to challenge each other and talk about the best practice and things like that and also discuss the difference in treatment techniques between the different regions, so super, super interesting. And I think it's very important for me to see that the most experienced physicians in the world actually leverage from what we are doing.

So a bit of a sidestep maybe, I will go back to the numbers with Ulrika here. Yes?

[Ulrika Voksepp, executive]

Thank you, Göran. So as Göran started saying, this has been a challenging quarter above all in the MDI segment and the Americas. And this leads us to a net sales of SEK 58 million, which is a decline of 10% compared to the third quarter last year.

So basically, within the U.S. region related to the MDI industry and also in the EMEA region, we've seen the decline with 19% compared to last year. And as Göran also pointed out, the APAC region had a good quarter with a sales of SEK 40 million, which is actually an increase of 4% compared to last year.

Looking at the net sales per product area, we see a strong performance of Physical Sim and Ankyras. And just to remind everyone, we did an acquisition of Biomodex products last year, end of last year. That's included in the Physical Sim product area. So we see a solid growth in these 2 areas with 26% compared to the same quarter last year. And the sales of VIST is very tightly connected to the MDI segment, and that is why we see the decrease during this quarter. And as I hope you've all seen, we have announced 2 large VIST orders after the end of the period, and they are related to the MDI segment and the VIST products.

And the order intake, I mean, the net sales is related to the order intake. And as we've said a couple of times in different combinations, we have a variability in our business and a variability between the quarters, between the years. And what we see is actually, as also Göran pointed out, after a very strong quarter, which we had in Q2, we often see a bit slower quarter following.

And looking at the order intake, obviously, we see the decrease in the MDI industry, and we also see an increase compared to last year with healthy 36% in the Healthcare Systems with the hospitals. And there is also a decline in the Strategic Alliances. So the total order intake, SEK 61 million this quarter this year -- the third quarter this year compared to the third quarter last year. That is a decline of 6%. And as you can see on the right-hand side on the graph, the order intake on a rolling 12-months basis is more or less the same compared to the last quarter.

And the order intake, obviously, is reflected in the order book. And end of Q3, we had a decline in our order book from SEK 129 million to SEK 117 million, which is a decrease of 9%, which shows the order intake, the net sales and the order book, the decrease is in line with each other. Of these SEK 107 million (sic) [ SEK 117 million ], SEK 37 million are related to expected revenues for this year. And as you can see, the majority of those are related to VIST. And we have the majority of the order book related to 2025 and going forward. And in the order book, we have orders as far away as 2029, which is related to software and the subscription over 5 years' time.

And just a short notice on the annual recurring revenues, it's more or less on a stable level compared to last year, with a switch where we have the software licenses increasing versus the decrease in system rentals.

So to summarize this, order intake, SEK 61 million compared to SEK 65 million with a total of, for the full year so far year-to-date, SEK 170 million. The order book, a decrease of 9% to SEK 117 million, gives net sales in the quarter at SEK 58 million and for the full year, SEK 205 million -- sorry, SEK 204 million, which, as Göran pointed out, is in line with year-to-date last year. And since we have made investments for the future this year and we are growing our strategic initiatives, this leads to an EBITDA for the quarter which is negative with minus SEK 6.2 million and more or less a breakeven for the full year compared with an EBITDA of 21%, almost 22% last year, year-to-date.

And a comment on the cost base. While we are cautiously managing our cost base, we, at the same time, continue to invest in our future in areas related to global sales, to strategic initiatives, especially the ones that we talked about at the Capital Markets Day in March, and also actions to improve our efficiency going forward and preparing us for scaling.

And last but not least, a comment on the operational cash flow, which is positive year-to-date, while negative for the quarter. And this is obviously tied to the result and also an increase of accounts receivables. And this leaves us with a cash at the end of the period of SEK 46 million.

[Göran Malmberg, executive]

Thank you. So some concluding remarks from me then.

First, I mean, I want to just reconfirm that we have financial targets. We are driving for 20% to 30% annual growth in net sales. And we have an ambition to reach 20% EBITDA within the next 3 years, but the longer-term target is 30%. So again, going back to the discussion on variability, nothing in what we see right now in the third quarter changes this. We are very comfortable in our ability to continue our growth journey really and to continue to develop our business.

So as a summary from the market side, I mean I think the recent release of the consolidation of our NV neurovascular products has been received in a very positive way as well the first real integration of Ankyras and VIST is also super, super positive and got a lot of positive reaction. The ability to really rehearse a full procedure based on the result of Ankyras is exactly what we wanted.

I also think that the recent congresses that I mentioned in my slides also just note the very strong dominance we have in this market and how our customers really appreciate what we provide. I mean we got a comment from some clients last week about the fact that we are at their congresses. We are present in most parts of the world where they are present. We can support them. We can work with them locally in congresses, and there's really no one else that can do that.

So I think that's really, really important for me. I mean, obviously, the basis is the technology we have and how people perceive our technology, but the fact that we have an organization around that, that is solely focused on this is very, very important. So that brings us to a very, very clear market leadership in this space.

So from a business side, I mean, obviously, not exactly what we wanted in Q3, but still solid last 6 months, I would say, with 50% (sic) [ 15% ] increase. And we are running on in a good way, very good development on our opportunities and the business development in both hospital industry and across our regions.

We can see that APAC is really doing well from a net sales point of view this year, which is obviously very important. So I think that also highlights the importance of being balanced between the regions because we know that in a growth journey, we will have ups and downs across industry, areas or regions. It's important for us to be as we are spreading the risk between regions and different business areas.

So as a last remark, I mean the quarter and as well the year as a whole really highlights the importance of a long-term perspective of what we do. And we really remain very confident in the market opportunity we have and our ability to sustain this growth.

So with that, I'm done. Thank you.

[Rikard Engberg, analyst]

Thank you a lot, Göran.

[Rikard Engberg, analyst]

And my first question is, can you please describe the 2 major orders that you achieved after the end of the quarter, when we have planned it delivered and in what areas they are?

[Göran Malmberg, executive]

Sure. Unfortunately, we can't talk about the names of the companies, but the first one is in the electrophysiology area. And it's a follow-on order for one of the leading companies in that field. And it's an order really to -- as a result of a global contract we have with that company, and we expect that to continue to be -- will be followed by more orders from the rest of the world, but also from their headquarters.

The second order that was a larger one is in the CRM space. And we have had quite some success in the CRM space over the last couple of years. As you will notice probably, several of the larger orders we presented both this year and last year has been in that space. This is a different client in the same space, and that highlights our -- the importance of our solution in that space.

And this is really very nice. This is a client that's been with us for quite some years. And they now really consolidate around us and really expand their simulation footprint with a significant amount of simulators and really based on their understanding for the benefit that our technology provide for their market presence. So 2 really, really important clients that is a start of something more.

[Rikard Engberg, analyst]

And just a follow-up question on this. Are these orders related to the new software suite that you have launched? Or are they...

[Göran Malmberg, executive]

No, no. These are -- the first one is EP, which is also in the heart. And the second one is cardiac rhythm, so it's the pacemakers which is also in the heart, while the new software in the brain.

[Rikard Engberg, analyst]

Okay. Great. And this new software suite that you have launched, will you sell it to both existing clients and new clients?

[Göran Malmberg, executive]

Yes, we will convert our -- in the industry side, we will convert our perpetual license structures and the structure we have there, where we have typically project or customer-specific solutions of software for each client. That will be consolidated around a platform, and we really will have these clients jump on that train and follow the development of that product. And we will also then obviously upgrade our hospital installations in the neuro space to move on to this new product. But I think most importantly, this would find new clients and new use cases in the hospital market, which I think is the largest growth possibility here.

[Rikard Engberg, analyst]

And I guess also since it's sold as a Software-as-a-Service solution, I guess it will be a way to reduce the volatility between the quarters in sales?

[Göran Malmberg, executive]

Hopefully. That's the idea. That's the idea that eventually would have -- we can come into the year and have a substantial part of the year done coming into the year. That would be a dream. So exactly, yes.

[Rikard Engberg, analyst]

Great. And can you please talk about the development for Ankyras during the quarter? We saw that it had a clearance early this year. And how has it been developed? And how has it been received by the market?

[Göran Malmberg, executive]

We are pounding on, pushing on. We got one new significant device client for Ankyras during the quarter. I think the existing clients we have is really seeing a lot of value from the market using it. And the number of cases, as you know, the business around it is based on the customer paying per case. So we are monitoring the case that are used for each month or each quarter, and that's continuously going up. So we're moving in a good direction.

We are working with an updated FDA regulation in the U.S. to get the online solution approved. We also have new functionality we want to add in to the product. And we are present in, as I said, in all major neuro congresses in the world presenting this, which is really, really important. So I think we're getting traction, but it's obviously taking time. Yes.

[Rikard Engberg, analyst]

Okay. Great. And can you just elaborate a bit about the order intake in the quarter and what has been driving this in the 3 different segments?

[Göran Malmberg, executive]

Absolutely. I mean, as Ulrika said, I think I said as well, but we had a strong third quarter from a hospital point of view. But obviously, we are dominantly dependent on the device industry. So we can see a bit softer order intake in the U.S. region. And we can also see there is no real major businesses in the third quarter. I mean you can probably see that some of the orders we announced in Q2 could have come in Q3, and maybe 1 or 2 of the orders we announced in the beginning of Q4 could have come in Q3.

So I would say it's no major orders. We can also see that the gross -- sorry, that's related to net sales, but it's not really any major events in the third quarter. And I think that's a result also of the third quarter, obviously, is a summer quarter. I mean, in Europe, you have July and half of August off and, to some extent, U.S. also taking more and more vacation. So it's a bit softer quarter generally.

[Rikard Engberg, analyst]

Okay. Great. And one last question for me is just can you elaborate a bit on the duration of the current order book presented? How much is this year and the coming years?

[Göran Malmberg, executive]

I will leave that to Ulrika.

[Ulrika Voksepp, executive]

Yes. So the order book of total SEK 117 million that we have SEK 37 million that we expected to deliver and get revenues on this year. And the remaining SEK 76 million, they are '25 or going forward with the main part, obviously, for '25. But as I said, we also have software recurring licenses. This goes hand-in-hand with what Göran talked about, these new products as well. So they are revenue taken over a 5 years' time. So there is orders even up to 2029, but the majority of the order book right now is for '25.

[Göran Malmberg, executive]

But you can also -- if I have to add, I mean you can also see that the decline in the order book is obviously related to one thing, it's that the order intake is lower than the net sales. So it's no really other reason for that. But I think it's nice to see the structure of order book that we have a lot of that into the future. Exactly what you said, Rikard, I mean we want to make sure that we even out the seasonal variations, and that's what we are doing. We're building the order book for a longer perspective rather than just the next couple of weeks or months. Absolutely.

[Rikard Engberg, analyst]

Okay. Great. Göran and Ulrika, thank you for coming to us here at Carnegie. And thank you, everyone, for watching and listening.

[Göran Malmberg, executive]

Thank you.