RaySearch Laboratories AB (publ)

STO:RAY B

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Eva Nelson]

Hello, and welcome to the presentation of RaySearch Interim Report for the Third Quarter of 2023.

My name is Eva Nelson, and I will be the moderator here today. Joining us in today's call is, as always, Johan Lof, RaySearch Founder and CEO; and also the Interim CFO, Annika Blondeau Henriksson. Johan and Annika will give you a short summary of the quarter, including the financials.

[Operator Instructions] I'd also like to remind you that this session is recorded, and you can find it through the same link as you used for this call and also on RaySearch website.

So with that, I 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. So it's great to see that the positive trend is continuing in 5 consecutive quarters. Our sales have been the highest ever for a corresponding quarter. Sales during the third quarter were SEK 253 million, which is 20% up compared to the year-on-year period. Order intake increased by 10%. We had a cash flow of SEK 64 million, and EBIT was SEK 29 million, resulting in an operating margin of 11.3%, which is also an improvement year-on-year.

The improved margin was driven by the significantly higher sales during the quarter compared to the third quarter of 2022. Overall, we maintain our momentum and see good opportunities for sustained growth, which means that we will continue our active focus on marketing activities.

As in previous quarters of this year, sales for the third quarter were not driven by any extraordinary orders. The largest single revenue item was SEK 20 million, but they were generated by a combination of revenues from small and normal-sized orders and, of course, support revenue. It's worth noting that the support revenue is continuing to grow in a stable and positive direction. This growth is due to increased sales of licenses in combination with the fact that we basically don't lose any customers at all. All in all, we have a strong and stable financial position, with cash and cash equivalents of SEK 307 million, solid cash flow and no loans.

I would like to highlight some important orders and agreements during the quarter. Our long-term partnership with MedAustron in Austria has been further expanded through a new research agreement. MedAustron was the first center in the world to use RayCommand treatment control system to treat patients, and through this milestone, which happened in May 2022, MedAustron also became the first center to use RayStation, RayCare and RayCommand together, a combination that we call RayWorld.

In September, we received a significant order from our partner IBA, which includes implementation of both RayStation and RayCare at the National Cancer Institute in Aviano in Italy. The combination of RayStation and RayCare provides an integrated and unified solution for treating patients at Aviano, especially when combined with a proton therapy machine by IBA. The center expects to start treating patients by the end of 2024.

In September, we also signed 2 important agreements in the U.S. with Baptist Health Lexington in Kentucky and with Oregon Health & Science University, both of which generated revenue in Q3. The agreement with Baptist Health Lexington includes implementation of RayStation at 2 of their large centers, Lexington and Hamburg. The order from Oregon is also for RayStation, which the center will use together with the Radixact system from Accuray.

In October, the Paul Scherrer Institute, PSI, in Switzerland chose RayStation as its new treatment planning system for proton therapy. PSI is renowned worldwide for its expertise in proton therapy. And then from the order of RayStation, we will also start a joint research collaboration, focusing on advanced proton therapy solutions, such as online adaptive.

The Mass General Cancer Center in Massachusetts in the U.S. was one of the first centers in the world to offer proton therapy. And this fall, they decided to replace the current proton treatment planning system with RayStation. This means that our more than 10-year long partnership now enters into a new phase as we expand from -- on collaborating on photon therapy to now also include protons. The center sees this step as an opportunity to streamline the treatment planning as all of their external beam planning will now be done on a single platform.

I'm proud to note that as many as 10 of the 15 top cancer hospitals worldwide are our customers according to ranking by Newsweek. This reflects our strong position in the top segment and confirms that RaySearch is a leading vendor of high quality cancer treatments. When our products are appreciated by the majority of the most advanced cancer hospitals around the world, I think it also indicates that over time, we should be able to continue to increase our overall market share.

Now let's take a look at the financials. Please, Annika, go ahead.

[Annika Henriksson, executive]

Thank you, Johan. On this slide, we present our key metrics for the third quarter. The order intake increased by 10% from SEK 219 million to SEK 241 million. The license order intake amounted to SEK 113 million in the quarter, an increase by 31% compared to the same period of last year. Order intake for support amounted to SEK 102 million, an increase by 4% compared to Q2 -- Q3 2023. Our net sales in the quarter increased by 20% from SEK 211 million to SEK 253 million. Adjusting for exchange rate impact changes in net sales year-over-year is 16%. The increase in sales is driven by sales of licenses, which amounted to SEK 98 million, an increase by 28% compared to Q3 2023 -- 2022, and sales of support amounted SEK 107 million, an increase by 23% compared to the same period of last year.

Operating profit increased from SEK 12 million to SEK 29 million, corresponding to an operating margin improvement from 5.7% to 11.3% in the third quarter. The improvement is driven by higher net sales in the quarter of licenses and support, but is also partially offset by higher operating expenses by SEK 10 million, driven by more normalized activity level post-COVID within our sales department. Administration expenses are still considered to be at the high level within the finance department, while R&D costs were lower in Q3 2023 compared to the same period of last year.

Lastly, cash flow for the period was a positive SEK 65 million, generated from operating profit and changes in working capital, which were favorable. Last year, Q3 cash flow was negative SEK 48 million. So RaySearch cash flow needs to be seen over a longer time horizon, and it can fluctuate over time.

Next page. Looking at the financial numbers for the 9 months period 2023, the order intake decreased slightly by 3% from SEK 704 million to SEK 687 million. The license order intake increased by 6% in the quarter to SEK 302 million, while order intake for support decreased by 14% to SEK [ 280 ] million compared to the same period of last year. In the first 9 months of 2023, net sales increased by 25% from SEK 579 million to SEK 723 million. The net sales of license increased by 18% in the period to SEK 303 million compared to the same period of last year, and net sales of support increased by 25% to SEK 296 million.

Operating profit improved from SEK 22 million to SEK 70 million for the 9-month period, with an operating margin improvement from 3.8% to 9.8%. The improvement is coming from higher net sales of licenses and support, reduced by higher operating expenses coming from the sales and administration departments being high compared to the same period of last year. Lastly, our cash flow for the period of 9 months was a positive SEK 145 million compared to SEK 4 million for the 9 months period of last year, and the improvement comes from our strong operating result and a favorable change in our working capital.

This graph displays order intake and net sales over the past 12 quarters in a rolling 12 months perspective. So at the end of the period, the rolling 12 months order intake amounted to SEK 1.2 billion, and the rolling 12 months net sales amounts to SEK [ 987 ] million, and the trend lines for both order intake and net sales show a steady growth. At the end of the period, the total order backlog amounted to SEK 1.966 billion, of which SEK 526 million is expected to generate revenue over the next 12 months to come. So the remaining amount in our order backlog mainly pertains to support commitments that are primarily expected to generate revenue during the coming 4 years.

On this slide, we present RaySearch quarterly operating results since Q4 2020 to Q3 2023. The operating profit in third quarter of 2023 is, as mentioned by Johan, the fifth consecutive quarter with a positive operating profit. So at the end of the period, a strong financial position, a cash and cash equivalent, SEK 307 million.

Back to you, Johan.

[Johan Löf, executive]

Thank you, Annika. As we look back on the 3 strong quarters in 2023, I have reason to believe that the positive trend will continue for the full year. A strong order backlog of almost SEK 2 billion and the ever growing support revenue also suggest continued growth and thereby, a positive end to the year. As previously communicated, our focus is still on improving the operating margin, with a long-term target of a minimum of 20% within 3 years.

Thank you.

[Eva Nelson]

Thank you, Johan and Annika. We now open up for questions. So operator, over to you.

[Operator]

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

[Kristofer Liljeberg-Svensson, analyst]

It's Kristofer, from Carnegie. Two questions. First, could you -- can you give a little bit more flavor about the lower administrative cost quarter-over-quarter, whether that's a seasonal effect? The reason I'm asking we didn't really see that happening in the third quarter last year. And also on the administrative cost, if you could maybe comment on what potential you see during the time to lower that line in the P&L given the commentary at the conference call that you think they are at elevated level? And then I also wonder about capitalized R&D with amortization here being higher than capitalization in the quarter. Is that also just a seasonal effect or something you expect to continue going forward?

[Johan Löf, executive]

Thank you, Kirstofer. Annika, I think, both of those questions are for you.

[Annika Henriksson, executive]

Yes. So the -- your first question was, why we don't see the seasonal effect on the lower administration costs year-over-year. And the reason is, it depends on how much consultant we have had in at the various time period. In this year, during the summer/fall, we had had a lower person external consultants on board. However, at the end of last year, they were more. So it depends on the mix of number of consultants. The second question was the trend going forward, I believe, on the admin costs and the development. And currently, we are still in the phase of improving our internal processes and routine, and we have not filled all the positions that we currently have vacant. We are looking for to exchange the consultants for permanent staff. So it's still going to take some time to see a clear trend...

[Johan Löf, executive]

I think we could say mid-2024, we will see a strong improvement in admin.

[Annika Henriksson, executive]

You are absolutely right, yes. And then it was the capitalization...

[Kristofer Liljeberg-Svensson, analyst]

So on that topic, given that you have the few consultants [indiscernible] ours in the quarter, we say [indiscernible] good indication of the potential savings, if I compare third quarter versus second quarter, of course, even higher actually more...

[Johan Löf, executive]

Kristofer, it's -- Kristofer, it's very hard to hear you. I don't know. Can we do something here on our end? Please repeat the question.

[Kristofer Liljeberg-Svensson, analyst]

Do you hear me better now?

[Johan Löf, executive]

Much better.

[Kristofer Liljeberg-Svensson, analyst]

Do you hear me better now?

[Johan Löf, executive]

Absolutely.

[Kristofer Liljeberg-Svensson, analyst]

Okay. So yes, so the follow-up question was that the fact that we did not have so much consultants to build ours in the third quarter, does this mean this is a good indication of the potential savings over time? Of course, you will have a few more employees internal, but I guess that's cheaper than having external consultants?

[Johan Löf, executive]

Absolutely. So it's an indication what we can -- we'll be able to see them sometime during at least second half of 2024, we will see a drastic reduction of the admin costs.

[Annika Henriksson, executive]

And the third question was, can you repeat that one...

[Johan Löf, executive]

It was about capitalized R&D and...

[Annika Henriksson, executive]

In the Q3 2023, I believe?

[Johan Löf, executive]

Yes.

[Annika Henriksson, executive]

Yes. And it's...

[Kristofer Liljeberg-Svensson, analyst]

But I think we saw the same -- yes, but I think we saw the same in third quarter last year that the net effect from capitalized R&D, i.e. capitalized R&D minus amortization was also negative, and now it happened again. So maybe that's just a seasonal effect again during the summer. Or is it an indication that capitalized R&D going forward will have less positive impact on earnings than what we've seen previously?

[Johan Löf, executive]

Yes, for sure, less of an effect than we have seen previously because now we are -- maybe we want to see as much as negative SEK 11 million for the quarter, but it will be more balanced going forward. So we'll have a smaller net effect on the EBIT compared to if you go back a couple of years.

[Operator]

Our next question comes from [indiscernible].

[Unknown Analyst]

Yes. I noticed that in your CEO comment, mentioned the long-term target to reach an operating margin of at least 20% within 3 years. Could you take us through this journey, how this will be done? I understand from your previous question about the lowering of administrative costs that this might be a part of the question.

[Johan Löf, executive]

Yes, part of the answer, of course...

[Unknown Analyst]

Yes, part of the answer, sorry.

[Johan Löf, executive]

No, it's about -- it's a combination of increased sales and controlling the costs. So we will make sure that we reach this target by just pretty conservative or stable growth. I mean we only need to assume quite conservative sales growth. And then we will control the cost that we reach the 20% margin.

[Operator]

There are no further questions over the phone.

[Eva Nelson]

And we have no written questions either actually. So by that, I think we can conclude this session. So thank you very much for your participation. And looking forward to talking to you again, if not before, then when we have the year-end report for 2023, and that's presented on the 23rd of February 2024, so next year. So lastly, I'd like to remind you that you can always find this presentation through the same link as you use for this call and also on RaySearch website. Thank you for your participation. Goodbye.

[Johan Löf, executive]

Thank you. Bye-bye.

[Annika Henriksson, executive]

Thank you.