RaySearch Laboratories AB (publ)

STO:RAY B

Earnings Call Transcript 2022-Q3

[Eva Nelson, executive]

Hello, and welcome to the presentation of RaySearch Interim Report for the Third Quarter of 2022. My name is Eva Nelson, and I will be the moderator here today. Joining us in today's call is Johan Löf, RaySearch Founder and CEO; and also Henrik Bergentoft, the new CFO, who took up his position only a couple of weeks ago, and he will now present his first quarterly report for RaySearch.

Johan and Henrik will give you a short summary of the quarter, will also look into the financials, and then there will be some final remarks. And after that, we open up for your questions, which you can either ask orally in the call or submit in the text field here under the presentation. [Operator Instructions] Let me also remind you that this session is recorded, and you can find it through the same link as you used for this call.

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

[Johan Löf, executive]

Thank you, Eva, and good morning, everyone. First of all, I would like to make an extra warm welcome to Henrik Bergentoft. As Eva said, he has only been here for 2 weeks. And we are very happy to have you here, Henrik. Can you just introduce yourself, please?

[Henrik Bergentoft, executive]

Absolutely. Thank you, Johan. So I am thrilled to be part of RaySearch. I think it's a fantastic company in what the company does being a major player in the fight against cancer and, on top of that, having great growth potential. I have almost 20 years of experience from stock market listed companies that I hope to be main contribution to the company. So very happy to be on board.

[Johan Löf, executive]

Thank you, Henrik. We are very happy to have you here. So now let's move over to the presentation of our Q3 report.

So we're happy to note that our order intake in the third quarter increased by 71% to SEK 219 million. And our net sales rose 55% to SEK 211 million. These numbers are the highest ever for the third quarter and the third highest for all quarters. There were 2 fourth quarters before with high numbers. Usually, Q4 is the strongest quarter for RaySearch.

If we look at the development during the first 9 months, we noted an increase in order intake by 52% and an increase in net sales by 28% year-on-year. Finally, our operating profit for the quarter was SEK 12 million.

In September, the renowned center Instituto Europeo di Oncologia placed an order for both RayStation and RayCare for its proton clinic in Milan, Italy. IEO has been our customer since 2017, and they use RayStation for their photon treatments. Next fall, the center plans to take an IBA proton machine in clinical use. And that's the reason to why they have now chosen to expand the use of RayStation and, in connection with that, also add RayCare.

Another center that has also decided to combine RayStation and RayCare lately is Seoul National University Hospital in South Korea. They ordered RayStation in April this year. And in July, they decided to add RayCare. So these 2 orders as well as our positive experiences at the trade show ASTRO last month confirmed growing interest we see in RayCare.

In September, Sunnybrook Health Sciences Centre placed an order for RayStation. Sunnybrook is one of Canada's largest and most well-known hospitals, and we are proud to have them as our customers and look forward to cooperating with them. The agreement includes a complete configuration of RayStation, where RayStation will replace the Pinnacle treatment planning system that Sunnybrook use today. The total value of the order is about CAD 6.2 million, approximately SEK 53 million. And of this, SEK 30 million was booked as revenue for Q3.

In October, McLaren Proton Therapy Center at Karmanos Cancer Institute in Michigan in the U.S. placed an order for RayStation, and this is very exciting as the center plans to become the first in the world to deliver proton therapy with a new partner, Leo Cancer Care's upright treatment technology.

As I just mentioned, we signed a collaboration agreement with Leo Cancer Care in Great Britain. So Leo Cancer Care are expert in so-called upright radiotherapy, a very exciting new technology that we believe has a great potential. For example, when using carbon ions, you need to have a huge gantry that weighs 600 tonnes or so in order to direct the beam. With this new technology, you can have a fixed beam and rotate the patient instead. The combination of RayStation, RayCare and Leo Cancer Care solutions will provide a fully integrated solution for upright radiation treatments.

In September, RaySearch Board Chairman, Lars Wollung, and another Board member, Johanna Öberg, decided to leave their positions. I would like to take the opportunity to thank Lars and Johanna for their dedicated work and valuable contributions to RaySearch Board.

At an Extraordinary General Meeting a couple of weeks ago, 9th of November, Günther Mårder was selected as a new Border member. Günther is CEO of the organization Företagarna, and he has a broad experience in both entrepreneurship and the financial market. Together with his commitment to RaySearch and the fight against cancer, I'm convinced that he will become an excellent addition to our Board.

So now let's take a closer look at the financials, so please, Henrik.

[Henrik Bergentoft, executive]

Thank you, Johan. So please allow me to make a couple of comments on the key financial metrics for RaySearch and for the third quarter. So order intake increased by 71%, ending up with a total of SEK 219 million in the quarter as compared to SEK 128 million last year. Net sales grew with 55%. In constant currencies, the growth was 33%, totaling SEK 211 million in the quarter compared to SEK 136 million last year. The very strong net sales increase produced a significant improvement of operating profit that ended up at SEK 12 million in the third quarter as compared to a negative operating profit of SEK 27 million last year, producing an operating profit margin of almost 6% in the third quarter as compared to a negative profit margin of almost 20% last year.

Total cash flow for the quarter was negative with SEK 48 million. A comment to be made on that, the main reason for that is mainly deviations within the working capital, which are purely timing effects. We could see an opposite effect in the second quarter this year where the cash flow was very positive or very strong. Over time, we see that profits and cash flow are fairly correlating. So over time, that's the pattern we'll see. So this is more timing effect in this quarter.

So this slide displays order intake and net sales over a longer period of time in the 12-months perspective just to show you a trend line and how this is evolving and also putting the pandemic consequences into a larger context. So as you can see that the pandemic started to impact the order intake in the second quarter of 2020, which then translated into the corresponding negative trend in net sales, which continued for a number of quarters. And at the end of 2021, we could see a positive shift in the trend, and that has continued since that. And as you can see where we are now both with order intake and net sales, those are very strong and positive numbers in a longer period of time context.

We are also ending the quarter with an order backlog of SEK 1.7 billion, which is by far the highest order backlog the company has ever had, which, of course, is a great promise for future positive development of net sales.

So I believe I hand back to you, Johan.

[Johan Löf, executive]

Thank you, Henrik. Okay. So the cost-reduction program that we introduced in the fall of 2021 continues. The number of employees has increased by 13% year-on-year, and costs for travel and market events are halved compared to the pre-pandemic level. On the other hand, we have had increased costs as we initiated projects in the financial department to strengthen our financial reporting. Also, lower capitalization and higher amortization contributed to the fact that the effects of the program haven't been fully reflected in our operating profit yet.

But overall, I'm glad to see that despite a mixed start to the year, the first 3 quarters indicate quite positive trend. We will continue our chosen path and keep our focus on sales, product development and cost control.

As our order intake, rolling 12 months is now greater than SEK 1 billion, and the order backlog is at a record SEK 1.7 billion. We have a solid foundation to generate continuous growth onwards.

Thank you.

[Eva Nelson, executive]

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

[Operator]

[Operator Instructions] The first question comes from the line of Robin Hepworth from EdenTree.

[Robin Hepworth, analyst]

Just at the end there, you gave a figure, I think, at SEK 1.7 billion as your total outstanding orders. Are you able to give a little bit of a breakdown of that number and perhaps your sort of best estimate of how -- what proportion of that will actually turn into sales? What's your experience of that?

[Johan Löf, executive]

So yes, to start with, the conversion is 100%. We -- I don't think we have ever seen an order being, I would say, canceled. So -- and Henrik, you can -- so this is a combination of licenses and service revenues mainly. And Henrik, you can maybe give the details.

[Henrik Bergentoft, executive]

Yes, absolutely. And it's a very good question. It's exactly -- and it's actually also spelled out in the quarterly report on Page #4. But the SEK 1.7 billion order backlog consists of SEK 1.3 billion being support agreements, mean that those will be recognized over the contract period of those support agreements. Then we have licenses, the hardware and training that is the remaining plus SEK 400 million. And we also expressed a number that SEK 608 million of this order backlog is already now programmed to be released to our income statement in terms of revenue during the coming 12-month period.

[Robin Hepworth, analyst]

Okay. Are you able to perhaps also just to give a brief description of how you see sort of the order outlook or perhaps we can sort of go back a stage and look at how many orders were canceled or how many orders you were perhaps expecting at the start of the COVID pandemic to give us some indication as to how much outstanding orders there might be out there? Is there anything you can say about that?

[Johan Löf, executive]

I think that's what you said about order cancellation. I missed that part because, as I said before, we don't see any orders being canceled. In our experience, we haven't had any orders canceled.

[Robin Hepworth, analyst]

No. Okay. I can see that there weren't any orders canceled. But nevertheless, during the onset of COVID, the number of orders coming through were significantly down. And how much of that decrease in orders during the COVID period have been recouped in the period since then, so in the last 9 months or so? Just is there sort of an outstanding -- any idea how much of an outstanding order intake there might be as a result of COVID, I suppose, is what I'm asking.

[Johan Löf, executive]

Yes. So I guess what you're after, there was like a backlog, so people didn't order as much during the pandemic. And then -- so there is sort of a pent-up demand from that period. But I don't think that's what we see. There is such an effect, of course. But I think the main driver here or the main sort of factor is that we are now in a more -- we're back to normal, not completely normal but almost a normal market situation. There are still some markets where we see some issues still in China. We see issues in India. But to a large extent, Europe, Japan, North America are pretty much back to normal.

And the increase that we see in growth, I think, is mainly due to the fact that we are, as a company, in a much stronger position now. We have had 2 years of furthering develop all our products. And we have released 2 new products during this period, so the development has been going on quite unaffected by the pandemic so that over, let's say, a 2-year time, that's 4 releases of all our products. So they are in a much more -- much more competitive, to put it like that.

And so I think it's that we see. We have a normal market situation where we can go to trade shows. We can go and visit our customers. That was not allowed during the pandemic. There are no like frozen budgets that we saw a lot of in. When there was like a turmoil in the hospitals, they were completely absorbed by the treatment of COVID patients, and they couldn't think about investment -- investing in new planning system. So I think that's what we see, the normalized market situation. And we are ready to take on that -- those opportunities.

[Robin Hepworth, analyst]

Okay. Perhaps just a final question before I leave it. China, of course, it hasn't yet normalized probably for you. Can you say how big a market China has been, how big a market it could become?

[Johan Löf, executive]

Yes, the potential is huge in China because they are completely under dimension when it comes to radiotherapy facilities. We have a pretty good installed base there, 50-plus centers that have already purchased RayStation. But there are 1,000 radiotherapy clinics in China that will need better technology going forward. So that's an important market for us.

For the future, it doesn't contribute much currently to our revenue. But we have -- I think we have our own -- we go direct to China. We have RaySearch China present in -- based in Shanghai. And we are ready for that market when it comes back to normal.

[Operator]

[Operator Instructions] There are no questions at this time. I would now like to hand over back to Eva.

[Eva Nelson, executive]

Okay. Thank you. There are a couple of written questions here. One -- 2 from Rain Leesi. First one goes RaySearch has had steady growth in support revenues over the past years. And also, support revenues are increasingly significant part of the order backlog. Is it mostly driven by growing installed base, which increases the support revenues? Or have you also tweaked your pricing model more towards support revenues, which are more reoccurring in nature and effectively more towards subscription revenue model?

[Johan Löf, executive]

Okay. Yes. So, so far, the -- you're completely correct that the support revenues have grown steadily year-by-year, and that will continue. But it's so far only due to the increased installed base. And it's not only installed base, it's also that every customer or a large percentage of the customers invest in more licenses. So they buy more RayStations, and they add more functions or modules to their existing RayStations. So when that happened for a given customer who pays 12% of the license investment every year, of course, when they add technology or buy more licenses, that very customer will generate more support revenues.

So, so far, it's just thanks to the growing installed base that the support revenues grow. And these are long-term relationships. Our first customer for RayStation that we got in 2009, I mean they still generate support revenues. So they -- every customer -- there are some exceptions, but in general, if you run these systems clinically, you need to have a support contract.

But going forward, we will now index our maintenance contracts so that we can bill for -- so that we can take into account inflation. So that is happening. It's going to be built into all future support contracts. We have also divided -- or created a portfolio of professional services so that we now define quite well what is covered by the support contract so that there is a certain number of things that are covered there. It's new versions of the software every 6 months. It's phone support, Level 1, 2, 3, but that's it.

And then professional service, all the other things are being -- can be offered then separately. So professional services in terms of beam commissioning for RayStation. It can be workflow configuration for RayCare. So we have maybe around 10 items that we can offer as professional services. And given our installed base now at 870 clinics around the world, 42 countries, all of them are potential customers for professional services. So I think that can be -- that's going to be an important source of revenue for RaySearch in the future.

[Eva Nelson, executive]

Thank you, Johan. We have a couple of questions about the Varian TrueBeam interoperability from Rain Leesi. And there was someone else asking that question. And please provide a comment on that, please.

[Johan Löf, executive]

I can comment actually. So we have an interoperability agreement with Varian regarding the connection between RayCare and the TrueBeam accelerator. It's a very important thing for RayCare since TrueBeam, it's Varian's most common machine and since Varian is also the leader in the LINAC field. I think that is going to be extremely important for RayCare to be connected to the TrueBeam machine.

So there has been delays. As you can see, we estimated our first target release was summer last year, and it's still not out. It's been -- it's actually ready. The connection is ready. We have done several tests at Varian bunkers in the U.S. So with the big project teams from Varian working together with our project teams, we have done all the validation tests in bunkers, a few rounds of those. But there's one round remaining, and there were some administrative issues that has delayed that. So -- but after this last round of testing, we can release.

We want to get the certificate from Varian that we have interoperability with the TrueBeam, and we can start to sell RayCare to TrueBeam customers. So it's unfortunate delays, but it is coming. And we are pushing very hard to make it come sooner than later because it's extremely important for us.

[Eva Nelson, executive]

Thank you. [ Fredrik von Bassewitz ], he asks, this quarter, the hardware grow a lot. Can we expect that to continue?

[Johan Löf, executive]

No, I think that's not a trend, really. It happens. We love -- or we offer our customers to choose themselves whether we should provide them with hardware, and we have, yes, a decent margin on the hardware. We're not a hardware company, so we focus on the software, of course. So these are -- this is circumstantial. It's -- I don't think we can just happen that some big customers wanted to buy the hardware from RaySearch. So it's -- yes, I think that's the answer to that.

[Eva Nelson, executive]

Okay. [ Silver Schmeimann ], he asked, could you please elaborate a bit more on the drivers of support and hardware revenue during Q3? What are the components of the SEK 17.1 million other operating income in Q3 and the proportions? Did you get that?

[Johan Löf, executive]

It was many questions.

[Eva Nelson, executive]

Yes. I'll take the first one again. The drivers of support and hardware revenue during Q3, that was the first one.

[Johan Löf, executive]

Yes, the support that's just -- we discussed that already.

[Eva Nelson, executive]

Yes, yes.

[Johan Löf, executive]

So that happens by design. Hardware, I also think I answered that, saying that's -- yes.

[Eva Nelson, executive]

Yes, I think you answered that. Yes, I agree. What are then the components of the SEK 17.1 million other operating income in Q3 and the proportions?

[Johan Löf, executive]

I'll hand that over to Henrik.

[Henrik Bergentoft, executive]

Yes, I can answer that. And the main component in that profit and loss item are currency adjustments or balance sheet items. So a consequence of the stronger dollars and the euro compared to the SEK revalues a lot of our balance sheet items since those are denominated in that currency.

[Eva Nelson, executive]

Okay. Thank you. Last written question from [ Tamer Ezzat ]. Could you please give a little bit more detail on RayCare's commercial progress? How many clients completing installations, reference systems, order backlog, interoperability with key tools?

[Johan Löf, executive]

Yes. So we have -- we see a growing interest in RayCare. We have an installed base of over a dozen clinics that have purchased RayCare, and they -- I would say, about half of them are clinical. And the rest are about to go clinical with RayCare. But there is a growing pipeline. We actually see a similar pattern to what we had for RayStation when we launched RayStation.

So in 2009, we had one customer for RayStation. In 2010, we had 2 RayStation customers. And then the year after that, it was 8, and then it was 30. And then it was, I don't know, 85 or something like that. I don't remember exactly. So it was like a quite slow uptake. And we see a similar pattern here with RayCare with a deviation that during the pandemic, I think, in total, we had only 4 orders for RayCare for obvious reasons. But the interest is really on a completely different level now. And we have a lot of quotations out. And I cannot comment on the size of the pipeline in monetary terms, but it's a very good pipeline.

So I expect that we see over the coming years is going to be hopefully a similar pattern as we have seen for RayStation in the RayStation's beginnings. And it's important to keep in mind that these 870 clinics that grow at about a rate of 100 per year now, a little bit less but around that order of magnitude, they are all potential takers of RayCare. So in these situations, we have customer relationships ready. There are a huge, say, benefit for these clinics to combine RayStation and RayCare. It will improve not only that they have RayCare, but it's also going to improve their experience with RayStation because RayStation becomes a much better treatment planning system in conjunction with RayCare.

Can you remind me if I -- there was something I didn't answer?

[Eva Nelson, executive]

I think that was it. Order backlog, yes, you mentioned that. Interoperability, yes, you mentioned.

[Johan Löf, executive]

Yes, interoperability. So we spoke about Varian's TrueBeam already. RayCare is working together with the IBA machine. So we have several customers -- several of our paying customers are IBA proton customers, and they -- so they have RayCare. We have interoperability with Mevion, another proton vendor. We have interoperability in place with Accuray for their -- they have 2 machines, CyberKnife and Radixact. So we are connected to both of them.

And basically, all the other proton vendors are connected, MedAustron, a carbon ion vendor, AVO for RayCare, Sumitomo Heavy Industries, Hitachi, Toshiba. Toshiba, for instance, this sold the carbon ion facility in Seoul. They have the Toshiba machine, and they will have RayCare.

So on the particle side, we are connected to almost all the machines. And on the proton side, TrueBeam is going to be a big step, and then we continue to add on more Varian machines. And then we also have to -- we don't have any interoperability with the Elekta linacs. So that is going to be -- we want that to happen as well.

[Eva Nelson, executive]

Thank you, Johan. Last question from [ Tamer ] then. What is the progress of the subletting of the new office?

[Johan Löf, executive]

Okay. That's a good question. We are working on that very hard. We have 2 floors here that we're going to sublease. We have some interested parties and candidates for these premises. So we are continuing to work on that. And that's our -- our commitment is to sublease those 2 floors. Okay?

[Eva Nelson, executive]

Okay.

[Johan Löf, executive]

Then there were a couple of other written questions as well. There is one question regarding the fact that Varian is leaving proton therapy, so Varian was -- IBA is the leading proton vendor, I would say, is the Belgian company IBA. And Varian, I think, should be considered their strongest competitor. So from IBA's perspective, it's very beneficial that Varian leaves the proton therapy field. And they see we have a very close relationship with IBA, so I hear what they say. And they see there are a lot of orders -- canceled Varian orders that are coming IBA's way.

From RaySearch side, of course, that's good in the first step since we have a very close relationship with IBA, and we sell -- almost 100% of their installations are with RayStation and with RayCare. But before Varian was leaving, we won -- we have a very strong position in the particle field. And for new business, I would say we won 80% of the deals anyway.

But since -- we're not sure what Varian will do with Eclipse, which is then the treatment planning system competing with RayStation. But it's fair to assume that customers -- it doesn't make the Eclipse option stronger, I would say, because if the intention of Varian is to leave protons, how much would they invest in Eclipse as a treatment planning system for protons. So yes, essentially, this is very good news for RaySearch in summary.

Let's see. There's more question here. There's a question about a state like this, when can we expect that increased cost due to initiated improvement projects in the finance department flatten out? And I would say, during next year already we will see this flattening out.

And I think that's -- I think we covered all these questions -- the written questions now?

[Eva Nelson, executive]

Yes. And then I have no more written questions here. So...

[Johan Löf, executive]

If there are more questions in the...

[Eva Nelson, executive]

Exactly. Are there any more questions? No? Okay. Many thanks then. And with that, we conclude this session. And we look forward to continue talking to you, if not before, then when RaySearch present report for the fourth quarter, year-end in '22, and that's on the 28th of February in 2023.

So lastly, I'd like to remind you that you can always find this presentation through the same link as you used for the call. Thank you very much for your participation today, and goodbye.

[Johan Löf, executive]

Thank you. Goodbye.

[Henrik Bergentoft, executive]

Thank you.