RaySearch Laboratories AB (publ)

STO:RAY B

Earnings Call Transcript 2023-Q1

[Eva Nelson]

Hello, and welcome to the presentation of RaySearch report for the first quarter of 2023. My name is Eva Nelson, and I will be the moderator here today. Joining us in the call is, as always, Johan Lof, RaySearch Founder and CEO; and also the CFO, Henrik Bergentoft. Johan and Henrik will give you a short summary of the quarter, we will look into the financials and then there will be some final remarks.

After that, we open up for questions. And you can ask them either orally in the call or submit them in the text field under the presentation. So remember, if you want to ask a question orally, you need to be in the call. This session is recorded, and you can find it through the same link as you used for the call and soon also on RaySearch's website.

And with that, I now hand over to you, Johan. Please, go ahead.

[Johan Löf, executive]

Thank you, Eva. I would also like to welcome everyone to today's webcast.

We're happy to note that our net sales for the first quarter were the highest ever for the first quarter, SEK 230 million, which is an 11% increase compared to the previous record net sales for the corresponding period last year. At unchanged exchange rates, the increase would have been 4%. This is also the second highest net sales for a quarter ever and Q4 last year is still the highest.

In the quarter, we had a cash flow of SEK 85 million and an EBIT of SEK 24 million, resulting in an operating margin of 10%. While operating margin is higher than that of the full year 2022, it was negatively affected by currency and translation effects, increased rental costs from inflation and higher expenses in our finance function.

The second half of 2022 and the beginning of this year have clearly demonstrated a reopening of the market, and this has had a positive effect on our sales. To leverage this potential and momentum, we have intensified our marketing activities, which has led to higher costs but also presents significant opportunities for continued growth. We usually point out that RaySearch order intake can vary significantly between quarters depending on the timing of single larger orders. And in this quarter, order intake decreased by 24%, although the comparison was quite tough since orders in Q1 2022 grew by 88%.

It's worth mentioning that net sales for this quarter is not based on any major orders at all. The largest single revenue was actually SEK 11 million. Instead, it mainly consists of a combination of revenue from many small and normal-sized orders as well as support revenues. The support revenues continued to grow steadily with our growing installed base, and they were 38% of the total revenues this quarter.

So last Sunday during the trade show, ESTRO, we signed a renewed agreement with BEBIG Medical that expands and deepens our collaboration within brachytherapy and also extends it to other areas in radiotherapy. Within the new agreement RaySearch's software, RayStation and RayCare, will be more integrated in -- with the Shinvas linacs, the Chinese Shinvas. And BEBIG distribute these linacs globally outside of China. Our initial partnership started in 2018, and the purpose then was to integrate RayStation and RayCare with BEBIG's brachytherapy system. Since then, we've taken significant steps together. And with the new agreement, we look forward to an even closer connectivity between our products, something that will enhance both quality and availability of cancer treatments.

UniteRT is a new and exciting collaboration between leading vendors within radiotherapy, and this was launched at ESTRO this last weekend exactly. The main objective with UniteRT is to ensure that patients get the best possible care throughout the treatment regardless of provider as the initiative gives health care professionals the freedom and flexibility to choose the best equipment from different suppliers without compromising on quality, patient safety or efficiency. This also promotes innovation within the industry as UniteRT encourages and facilitates for new players to enter the market. We really look forward to participating in this important initiative and to continue to improve cancer care together with our industry colleagues. The reception at ESTRO was very positive and many more companies joined the collaboration within short.

Our base of loyal customers keeps growing. This quarter, we reached another important milestone, namely that RayStation has now been adopted by more than 100 clinics for ion radiotherapy, most of them are proton centers. And this means that we have more than 80% of the market. RaySearch has, by far, the most advanced treatment planning system for ion therapy planning. And thanks to our commitment and continuous delivery of cutting-edge solutions, we have managed to remain at the forefront.

Now let's take a closer look at the financials. So please, Henrik, go ahead.

[Henrik Bergentoft, executive]

Thank you, Johan. So this slide displays our main financial metrics, with a couple of comments to be made starting off with order intake. And as Johan pointed out, we traditionally see a quite heavily fluctuations between quarters when it comes to order intake. So the decrease in order intake of 24% is to be seen in that context, meaning that we live in an environment where volatility is certainly part of our business and also compared to a very strong order intake last year.

Net sales in the quarter rose with close to 11% to SEK 230 million. The change was attributable mainly to higher sales of support and hardware revenue, and again highlighting what also Johan said, that the very important recurring support revenue rose at 13% to SEK 87 million and now constitutes 38% of the total sales during the first quarter.

Operating profit in the first quarter amounted to SEK 24 million as compared to close to SEK 30 million last year, representing a margin of 10.3%. Now the decreased profit compared to last year is mainly explained by increased selling and administrative costs as a result of a more normalized level of activity this year as compared to previous years, which was still affected by the pandemic. And on top of that, we do have a higher cost for rent as a pure consequence of the current inflation rates, the finance functions still have a large degree of financial resources. And on top of that, we have a negative effect of currency effect as compared to last year where it was positive.

Cash flow in the first quarter from operating activities was SEK 151 million as compared to SEK 125 million last year. That change was largely attributable to a decrease in working capital and our ability to collect outstanding receivables from a very strong fourth quarter, meaning that total cash flow for the quarter amounted to SEK 85 million as compared to SEK 35 million last year. And at the end of the period, total cash and cash equivalents amounted to SEK 244 million as compared to SEK 140 million.

In this context, I also want to mention that the results in the first quarter of 2023 as previously announced meant that RaySearch reached a solvency ratio and an EBITDA-based covenant in the company's credit facility with SEB, meaning our bank. Now the total credit facility available is SEK 200 million, where SEK 0 million has been utilized, which is an important point to made. And another equal important point to be made is that RaySearch has now received a so-called waiver for these covenants breaches, meaning that the credit facility now is entirely available to us.

This graph displays order intake and revenue over the last 10 quarters in a rolling 12 months perspective. And the pandemic really started to impact the company towards the midyear of 2020 and started to pick up again at the end of 2021. And as displayed on these graphs, both trend lines for order intake and revenue has evolved very positively since then. In the context, I also want to mention that the total order backlog at the end of the first quarter amounts to SEK 1.9 billion as compared to almost SEK 1.5 billion last year. So a very strong number. And out of that, about SEK 520 million is expected to convert into revenue in the coming 12 months.

Another slide to put things in context. This one displays our operating profit for the last quarters, where we can see -- where the pandemic certainly generated several loss-making quarters with a volatility to follow. But as we can see here that the last 3 quarters, we have seen a constant improvement in the operating profit. So a positive trend line here as well.

So now over to you again, Johan.

[Johan Löf, executive]

Thank you, Henrik. Yes. So to summarize, the effects of the pandemic have finally subsided in most markets. And with all the positive signals we're seeing around the world, I feel quite optimistic about the future. Moving forward, our focus will remain on sales, product development and cost control. To take advantage of the opportunities presented by the improved market conditions, we have ramped up our sales activities and also lifted the hiring freeze. With this strategy, combined with a strong quarter and a robust order backlog of SEK 1.9 billion, we have a good foundation for continued growth and an increased operating margin.

So with that, I thank you for listening.

[Eva Nelson]

Thank you, Johan and Henrik. And we'll now open up for the questions. Operator, over to you.

[Operator]

[Operator Instructions] The first question comes from Kristofer Liljeberg from Carnegie.

[Kristofer Liljeberg-Svensson, analyst]

Four questions. First, if you could explain this sharp drop for the level of amortization in the quarter and whether they will remain at this level for the remainder of the year, or is there any large new R&D projects that will start to be amortized. Then I was wondering how we should think here about marketing and R&D cost for the remainder of the year given that you want to start to recruit again?

My third question relates to administrative costs, now almost -- not 100% but almost twice as high as 2 years ago. So what potential do you see to lower that line in the P&L and the timing of that? For example, what's the status when it comes to sublease of some office space? And finally, working capital, good release here in the quarter. What should we expect for the full year when it comes to working capital?

[Henrik Bergentoft, executive]

Yes. Thank you, Kristofer. So I'll start off and pick a couple of questions. The first one, the sharp drop in amortization cost is simply based on the fact that several -- just putting that into context, those are R&D projects that are activated as immaterial assets in the balance sheet, and those are depreciated over a 5-year period of time. And at the end of 2022, several of those activated projects had been fully amortized, creating this drop in amortizations. Those will pick up slightly now again from the midyear while we have new releases that are completed and that will be started to be amortized.

[Kristofer Liljeberg-Svensson, analyst]

So just as a -- should we expect them to be back around SEK 50 million per quarter towards the end of this year or somewhere in between?

[Henrik Bergentoft, executive]

Yes, I would say somewhere in between. I mean, it will be trending back to that level, yes.

[Johan Löf, executive]

And regarding the second question, so we are -- as I said, we are recruiting again for -- we quit the hiring freeze. To get a feel for what sort of volume we're talking about, something around -- I think we'll go back to around 400, maximum 400 employees towards the end of the year. I think we topped out before pandemic at 430-plus, and we've been down to 370 employees. So that's the order of magnitude. We need to strengthen our marketing organization -- or our market or service organization in APAC, in some areas, in some regions. And we also need to fill in some holes in the development organization, people that we -- important key positions that we lost during the hiring freeze.

[Henrik Bergentoft, executive]

Yes. And with regards to admin costs and savings potential, as you pointed out that the office facilities here at the headquarters, we do have a potential to sublease some of that. And that is ongoing, and that would roughly mean SEK 15 million annual saving potential. Activity is ongoing but we have not yet concluded on anything there, but definitely a saving potential. So that's the main driver really behind us lowering that cost line.

And when it comes to working capital, I mean, that is certainly the intention, to work as good as we can with that. But that also has a lot to do with how deals with customers are arranged, really. Certainly, we try to push for some upfront payments and then payment upon delivery, but that will certainly sort of depend from case by case. But I mean, we believe, I mean, over time that operating profit and cash flow will be fairly closely linked together over time. But as with order intake, we will definitely see volatility in this line as well onwards.

[Kristofer Liljeberg-Svensson, analyst]

Makes sense. Could I just follow up on cost and on margins? So I think you said that the ambition is to improve margin. At the same time, you want to expand the organization. But would you expect margin this year to improve if we strip out the positive effect from lower amortization? I guess, amortization must be like, I don't know, SEK 20 million lower this year than last year.

[Johan Löf, executive]

Yes. We will focus on the margin for this year, meaning that we -- the recruitment is also -- will be adapted to that. I mean, that's a -- it's a good control knob that we have. We can accelerate or slow down recruitment linked to how the sales are evolving, simply put.

[Eva Nelson]

[ Matthias Johansson ] has a couple of questions again. I think you've answered some of them, but I'll repeat anyway. You showed an EBIT margin over 30% back in 2016 to 2017 on much lower sales volumes than today. When will you exceed these levels again?

[Johan Löf, executive]

Okay. I shall answer that one first. I mean, that will happen. It's -- yes, it's not that many years into the future as well. One has to keep in mind that RaySearch is a completely different company now compared to when we had those 30% margins, and we have an extremely strong product portfolio and we have the 900-plus customer base that is growing steadily. So it's a very good position to be in. And I think we would probably be at a healthy margin now had it not been to the pandemic. That really set us back for some time. And I think this and the previous couple of quarters has shown a turning point when things are moving in the direction of margins of -- that are representative of a growing software company.

[Eva Nelson]

Okay. Thank you. And then you already talked about the increased rental costs, but [ Matthias ] has another question on this. How large a percent of your headquarters are you currently using possible to sublease? You want to add something, Henrik, maybe?

[Henrik Bergentoft, executive]

I don't think we're going to express a percentage on that one. Rather, I'll say that there's a SEK 50 million saving potential on the rental.

[Eva Nelson]

Yes, thank you. Yes, you already mentioned that. Last question from [ Matthias ] then. Great cash flow for the quarter, extrapolate-able for the future.

[Johan Löf, executive]

Extrapolate for the future, okay.

[Eva Nelson]

Yes.

[Henrik Bergentoft, executive]

Yes. And I think Kristofer asked that question. I mean, that is certainly our intention, to be as effective as we can with working capital. But it comes down a little bit how deals are structured, really. But we certainly see a close link between our operating profit and our cash flow over time.

[Eva Nelson]

Good. Thank you. And then there is one question from [ Matthias Tolgen ]. It's in Swedish but I'll translate now. Congratulations to a good report. One question. Q1 2022, you write in the report, "At last, we expect a growing interest for RayCare later during the year where RayCare will be able to be connected to Varian's TrueBeam." How are we doing with this? Is it ready already? Or are we -- when can we expect something?

[Johan Löf, executive]

Thank you for that question. It's a very good question. The -- there has been delays, obviously. The testing has been done earlier this year. The -- all the testing has been successfully completed, and we are now waiting for administrative -- some administrative processes within Varian. So we are in a waiting mode now, and as soon as we receive the certificate of interoperability between RayCare and TrueBeam, we can start to promote that to customers.

[Eva Nelson]

Thank you, Johan. Are there any more questions?

[Operator]

On the phone, no.

[Eva Nelson]

No. And no written questions either. So by that, I say thank you, and we can conclude this session. And we look forward to continue talking to you, if not before, then when RaySearch presents the second quarter report, and that's on the 25th of August. And you can always find the presentation through the same link as you used for this call and soon also on RaySearch's website. Thank you very much for your participation today. Goodbye.

[Johan Löf, executive]

Thank you, and goodbye.

[Eva Nelson]

Thank you.