RaySearch Laboratories AB (publ)

STO:RAY B

Earnings Call Analysis

RaySearch Holds Strong Financial Position with Significant Growth

RaySearch reported record sales of SEK 293 million for Q3 2024, marking a 19% increase year-over-year. Operating profit surged to SEK 62 million, resulting in a 21% margin, boosted by a 36% rise in license revenue. For the first nine months, order intake reached SEK 782 million, up 14%, with net sales climbing to SEK 869 million, a 20% increase. The company anticipates revenue growth from RayCare starting in 2025 and has raised its operating margin target from 20% to 25% by 2026. With cash reserves at SEK 425 million and no debt, RaySearch is well-positioned for continued momentum.

Record Sales in Q3 2024

RaySearch reported record sales of SEK 293 million in the third quarter of 2024, marking a 19% increase from the same period last year. This impressive growth showcases the company's strong market position and demand for its products, particularly the RayCare and RayStation software systems. The significant increase in revenue can be primarily attributed to a notable rise in license sales, which amounted to SEK 133 million—up 36% from last year.

Strong Financial Metrics

The operating profit for the quarter was SEK 62 million, translating to an operating margin of 21%, a substantial rise from SEK 29 million and an 11.3% margin in Q3 2023. This marks RaySearch’s ninth consecutive quarter of positive operating profit, reflecting effective cost management and scalability in their business model. Year-to-date, the company has achieved an operating profit of SEK 187 million, with an improved margin of 21.5% compared to 9.8% last year.

Order Intake and Future Prospects

For Q3 2024, order intake rose 5% to SEK 253 million, while for the first nine months of the year, order intake increased 14% to SEK 782 million. License orders saw a 21% increase, further indicating a strong pipeline for future revenue growth. The company maintains a healthy backlog of SEK 1.7 billion, with SEK 471 million expected to convert to sales in the next 12 months, ensuring continued revenue momentum.

New Technologies and Market Expansion

The launch of RayCare and its integration with Varian's TrueBeam linear accelerator marks a significant milestone in expanding market reach. With approximately 4,000 TrueBeam machines already in use worldwide, RaySearch anticipates substantial future revenue from software sales linked to these products. Moreover, the recently signed contract with Connecticut Proton Therapy Center demonstrates further engagement in broader market opportunities, with revenues from this deal expected in 2025.

Guidance and Strategic Goals

RaySearch's board has expressed confidence in achieving its new target operating margin of at least 25% by 2026, up from the previous target of 20%. This adjustment is grounded in stronger than anticipated operational efficiency and a shift in product demand. The company aims to leverage its scalable business model effectively while managing operating costs to meet these ambitious profitability goals.

Investing for the Future

As RaySearch continues to innovate, particularly in automation and AI applications in its software, the potential for future cost savings and operational efficiencies looks promising. Efforts to streamline operations aim to reduce operating costs in tandem with anticipated increases in license sales driven by the RayCare system, setting a positive outlook for profit margins and investor returns.

Earnings Call Transcript 2024-Q3

[Eva Nelson]

Hello, and welcome to the presentation of the RaySearch Interim Report on the Third Quarter of 2024. My name is Eva Gruber Nelson, and I will be the moderator here today. And joining us in today's call is, as always, Johan Lof, RaySearch Founder and CEO; and also Annika Blondeau Henriksson, the interim CFO.

Next slide, please. Johan and Annika will give you a short summary of the quarter first, including the financials. And after that, we open up for questions. And you can ask your question either orally or in writing. And I also want to remind you that this session is recorded, and you can find the same link as it used for this Teams meeting and also 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 all of you to today's webcast. I'm happy to announce that our sales for the third quarter were our highest ever. For the third quarter, SEK 293 million, which is up by 19% compared with the same period in 2023. Operating profit was SEK 62 million, corresponding to an operating margin of 21%. The improved margin was mainly driven by increased license revenue which amounted to SEK 133 million. Order intake for the third quarter was SEK 253 million, and we had cash flow from operations of SEK 61 million.

To summarize, we're keeping up our momentum and the opportunities for continued growth look promising. RaySearch has a strong financial position with cash and cash equivalents of SEK 425 million, stable cash flow and no loans.

In the beginning of September, Iridium Network in Belgium treated their first patient using RayCare, together with a Varian TrueBeam linear accelerator. This marks an important milestone since it greatly increases the market potential for RayCare, which now includes the approximately 4,000 TrueBeam machines in use at therapy centers worldwide.

In August, we announced Connecticut Proton Therapy Center as yet another RayCare customer. The center plans to create specific workflows and taking RayCare in clinical use in 2026 when the center opens. RayCare will be used together with RayStation that we purchased last year.

Revenue from the RayCare order will be recognized in 2025.

Okay. So now let's take a closer look at the financials. Annika, please go ahead.

[Annika Henriksson, executive]

Thank you, Johan. In the third quarter of 2024, our order intake increased by 5% from SEK 241 million to SEK 253 million. The order intake for licenses increased by 5% from SEK 113 million to SEK 118 million. And the order intake for support decreased by 9% from SEK 102 million to SEK 93 million compared to the same period of last year. Our net sales increased by 16%, amounting to SEK 293 million compared to SEK 253 million in Q3 of last year. Adjusted for the exchange impact, the net sales increased by 17%. The sales of licenses amounted to SEK 133 million and increased by 36% from last year's SEK 98 million. The support revenue amounted to SEK 120 million compared to last year's SEK 107 million, corresponding to an increase of 12%.

The operating expenses for the period amounted to SEK 203 million compared to SEK 194 million in the same period of last year, corresponding to an increase of 5%. It should be noted that operating expenses is categorized differently in the consolidated statement, profit and loss in the year 2024 compared to 2023. In RaySearch Interim Report on Page 6, a separate table displays the differences between the 2 years.

The strong sales in the quarter resulted in an operating profit amounted to SEK 62 million and operating margin of 21.1% to be compared to last year's operating profit of SEK 29 million and a margin of 11.3%. This is RaySearch's 9 consecutive quarter with a positive operating profit.

The cash flow from operations amounted to SEK 60 million in the quarter compared to last year's SEK 124 million, a decrease, which is explained by the change in operating liabilities in the working capital. The change in operating liabilities also explains the cash flow for the period amounted to SEK 1.7 million compared to SEK 64 million in the same period of last year.

For the first 9 months of 2024, the order intake amounted to SEK 782 million, an increase by 14% from last year's SEK 686 million. The order intake for licenses increased by 21% to SEK 364 million. And last year, the amount was SEK 302 million and the order intake for support increased by 4% from SEK 291 million in 2023 to SEK 291 million in 2024 from last year's SEK 281 million.

RaySearch net sales amounted to SEK 869 million, an increase by 20% from last year's SEK 723 million. The sales of licenses amounted to SEK 450 million, an increase by 37% and support increased by 16% to SEK 642 million.

The strong sales for the first 9 months of 2024 resulted in an operating profit amounted to SEK 187 million compared to last year's SEK 71 million, and operating margin improved to 21.5% from last year's 9.8%. Cash flow from operations for the period January to September improved to SEK 382 million compared to last year's SEK 340 million. The main driver to the improvement is the improved profit before tax. Cash and bank at the end of the period amounted to SEK 425 million, a significant increase from the cash at the beginning of the year, which amounted to SEK 344 million.

Looking at RaySearch development of the operating result quarter-by-quarter since Q4 2022, it shows a steady growth and improvement in absolute amount as well as in operating margin, with the last quarter amounted to SEK 62 million and a 21% operating margin.

On this slide, we present RaySearch development of net sales and operating results in a 12 months perspective since Q3 of 2022. The development of the rolling 12 months net sales has grown from SEK 768 million to SEK 1.169 billion end of September 2024. The operating result improved from SEK 5 million in Q3 2022 through in a rolling 12 months perspective, and now we are reporting SEK 231 million ending September 2024.

Looking at RaySearch development on net sales in a 12-month perspective, we have close to SEK 1.2 billion at the end of the last 12 months period. The number shows a steady growth as well as increasing support revenue, which amounts to 40% of the last 12 months net sales. So we end the period with a backlog of SEK 1.7 billion, of which SEK 471 million, it's expected to generate in net sales in the following 12 months period to come.

Over to you, Johan.

[Johan Löf, executive]

Thank you, very much, Annika. Okay. So with an operating margin of 21%, I'm pleased to, once again, give a summarized a strong quarter. We see a clear link between increased sales and a positive trend for operating profit. which shows the scalability of our business model.

Our strong performance in recent quarters and the fact that the operating margin has already exceeded the target of at least 20%, which was set for 2026, the Board has decided to increase the target for the operating margin to at least 25% by 2026.

Finally, I would like to thank you, Annika, for your excellent work as an interim CFO for the past 1.5 years. Annika will continue as interim until our new permanent CFO, Nina Grönberg takes her position at the end of January. So best of luck in your future in Davis, Annika. Thank you.

[Eva Nelson]

[Operator Instructions] Okay. Kristofer, please go ahead.

[Kristofer Liljeberg-Svensson, analyst]

Three questions. First, if you could just maybe comment on the much lower increase in operating costs we have seen now lately versus recent year. And if you expect operating costs to continue at this pace when you -- or if that's the assumptions you have made for the EBIT margin target for 2026? And I wonder if you could just also comment on the fact that orders have been tracking slightly below sales here in recent quarters, if we should read anything into that. And maybe related to that, what you could say about the order pipeline and interest among maybe existing and new customers for the RayCare software?

[Johan Löf, executive]

Thank you, Kristofer. Yes. So the we'll start with the lower than perhaps expected increase in operating cost. We -- as you all know, we are paying a lot of attention to that currently. We have a strong focus on the operating margin. And you asked about the target for 2026. What assumption is made for the operating cost. We -- it's mainly driven by an expected historic increase in sales since we believe that RayCare will start to contribute significantly in 2025 and 2026 to our revenue. And also that we'll be able to adjust the operating cost according to how that turns out. Because, of course, it's a forecast, it's an assumption on how sales will evolve. We can always adapt the cost so that we can reach the target.

The second question about the orders tracking slower than sales. That's not a concern at all for us. We see that the orders are very -- quite a lot over time, but they -- we have a very strong pipeline, a strong pipeline for RayCare, and we see a lot of interest, both for RayStation and RayCare in the market. So we are not worried at all about the order situation.

[Eva Nelson]

Any more questions? No written questions.

[Johan Löf, executive]

There is a raised hand.

[Eva Nelson]

So Arne Simensen.

[Arne Simensen, analyst]

Congratulations on a strong quarter. I have a question with regards to the RayStation 2024 launch. You mentioned that it comes with the new automation teachers and sound quite interesting. I was just keen to learn more what will this actually entail will be users? What sort of net benefit will they see in terms of time saving of that? If you were able to expand a little bit.

[Johan Löf, executive]

Okay. It's a multitude of things that -- so we're constantly working on automation, both for -- both in RayCare and RayStation. Two major things are the improvements in deep learning segmentation that really speeds up the segmentation or segmentation of organs at risk as well as deep learning planning that greatly facilitates and speeds up the planning process. But throughout RayStation, we have several -- in addition to machine learning with many other aspects of automation, for instance, scripting and the connection with RayCare via scripts and automation within RayCare. So it's a multitude of approaches and it's a constant focus for us to streamline operations and make things faster for the clinical work.

[Eva Nelson]

Kristofer Liljeberg, did you have another question?

[Kristofer Liljeberg-Svensson, analyst]

Yes. Yes, 1 more, if that's okay. Yes, thought about quite significant lower operating liabilities in cash flow, the reason for that? And if there would be any structural differences for working capital if RayCare sales become a larger part of the total coming years?

[Annika Henriksson, executive]

Yes, the reason for it, it's predominantly that part of what you -- we have as current liabilities is prepayment. And obviously, we have on those been delivering quite a lot. And at the same time, not invoicing so much prepayments in the period.

And with regards to the launch of further launch and the RayCare business increasing, yes, we can anticipate an increase in our current liability in the balance sheet because it's a longer timing to implement RayCare than to...

[Johan Löf, executive]

Yes, basically we get paid earlier and we recognize revenue later for RayCare.

[Kristofer Liljeberg-Svensson, analyst]

And the prepayment for such a deal, how large part of total payments would be before recognizing revenue?

[Johan Löf, executive]

It varies from case to case. Usually, it's only like on the order of 10% for the final milestone, which is acceptance of the implementation.

[Kristofer Liljeberg-Svensson, analyst]

Okay. And could I...

[Johan Löf, executive]

So we it can several milestones, can be, for instance, 20% at -- I think we hear a lot of noise. So different milestones, but it's usually a very small amount remaining for the final acceptance.

[Kristofer Liljeberg-Svensson, analyst]

Okay. And then I noticed that you said that you expect RayCare will start to contribute to sales already in 2025. So that means that some orders you have already taken? Or is it -- do you see order momentum picking up here for RayCare?

[Johan Löf, executive]

Both. Both. But there are several -- for example, we start to deliver to Spain, the Ortega project, RayCare, and that was an order taken maybe that was in 2 years ago, it was a while ago. And then as we start to deliver that, roll that out, those revenues will be recognized plus others.

[Eva Nelson]

Are there any more questions? There are no written questions. [ All ] seem to be happy. So if there are no more questions, I would like to thank you for your participation and we conclude the session, and we look forward to continue talking to you. And if not before, then it's when the year-end report for 2024 will be presented, and that's on the 21st of February next year. So lastly, I'd just like to remind you that you can always find the presentation through the same link as you used for this meeting and also on RaySearch website. Thank you, and goodbye.

[Johan Löf, executive]

Thank you. Goodbye.