Sectra AB

STO:SECT B

Earnings Call Analysis

Strong Revenue Growth and Cloud Transition

Sectra had a solid first quarter with revenues up 24% and operating profit increasing by 44%. The company is advancing its cloud-based service sales, with cloud recurring revenue growing 42%. Major growth areas include Imaging IT and Secure Communications, reporting sales growth of 23% and 38% respectively. Despite large quarterly fluctuations in order intake, recurring revenue stayed strong at 67% of total revenue. The transition to a service model is expected to reduce profit variation over time. Sectra's operating profit margin increased to 13.8% and cash flow improved year-on-year.

Strong Revenue Growth and Increased Recurring Revenue

Sectra has reported a robust first quarter with a 24% increase in revenues, amounting to SEK 724 million. Particularly notable is the significant shift towards recurring revenue, which now makes up 67% of the total revenue for the quarter. This strategic move towards a cloud-based service model has seen cloud recurring revenue grow by 42%.

Performance Across Business Areas and Markets

All of Sectra's business areas demonstrated year-on-year growth. Imaging IT, the largest segment, saw a 23% increase in sales, with recurring revenue at 70%. Secure Communications grew by 38%, driven by higher business volumes. Business Innovation, although experiencing slower growth at 5%, continues to contribute positively. Geographically, the highest growth was observed in the U.K., the U.S., and Sweden, with Denmark and Canada leading the growth in other regions.

Operating Profit and Margins

Operating profit rose by a substantial 44% to SEK 100 million, improving the operating profit margin to 13.8%. This growth is attributed to strong performances across all operating areas, with Imaging IT and Secure Communications reporting impressive margins of 14.8% and 13%, respectively. However, the transition to a cloud-based model is expected to bring quarterly variations in profit due to the upfront investments required.

Cash Flow and Financial Stability

Despite a negative cash flow from operations at SEK 57 million, Sectra's cash balance stands strong at SEK 699 million. The company emphasizes that the negative cash flow is part of the traditional pattern and has improved year-on-year due to decreased tied-up capital in current receivables.

Strategic Shifts and Customer Satisfaction

Sectra is undergoing a significant transformation towards offering services as a product, particularly in cloud-based solutions. This shift aims to establish long-term benefits and reduce seasonal fluctuations in profit. Notably, the company has focused heavily on customer satisfaction, with high praise from customers in regions like Denmark and the U.S. Such efforts are expected to sustain growth despite the initial investment burdens.

Focus on Cybersecurity and Future Prospects

The increasing demand for cybersecurity solutions, partially driven by geopolitical tensions like the situation in Ukraine, has benefited Sectra. The company is well-positioned in this market, providing advanced encryption systems to NATO and other European nations. In addition, Sectra is exploring new growth areas, including genomics IT, orthopedics IT, and AI applications, which, although new, show high potential for future expansion.

Financial Targets and Investor Outlook

Sectra's long-term financial targets include maintaining an equity-to-assets ratio above 30% (currently at 52%) and achieving profitability above 15% (currently at an annualized growth rate of around 138%). The company aims to continually grow profit per share and maintain high customer satisfaction. Sectra's management owns shares and emphasizes long-term incentive programs to align employee and shareholder interests.

Conclusion and Future Investments

The ongoing transition to a service-based model and substantial investments in cloud technology and customer satisfaction indicate Sectra's commitment to long-term growth. While short-term fluctuations and investment costs are expected, the company's strategy is aimed at substantial future benefits. Sectra remains a compelling prospect for investors due to its strong market position, customer satisfaction, and innovative growth areas.

Earnings Call Transcript 2025-Q1

[Helena Pettersson, executive]

Welcome to Sectra's 3-month interim report presentation with CEO, Torbjörn Kronander; and CFO, Jessica Holmquist. My name is Helena Pettersson, Investor Relations Officer, and I will be the moderator of the Q&A session held after management presentation. And with that, I hand over to you, Torbjörn.

[Torbjorn Kronander, executive]

All right. So welcome here for our first quarter of the year. I will start with the interim highlights, and then Jessica will come in with the financial development. I will talk a little about the Sectra way forward and then we will have a Q&A session, and you can ask questions over chat or e-mail and then Helena will read those, so we can hear them. Sectra's business operation again is Imaging IT, where we manage images in health care. We have secured communications, that's actually the foundation of Sectra, Sectra stands for secure transmission. We do encryption and very high-end approved encryption systems. We don't do VPN for people at home, et cetera, we do what the nations and the military and the security forces and governments ask for. And then we have business innovation, which is our greenhouse for new operations.

We haven't changed. This is about the half year back, and I will go a little deeper into that and that is Genomics IT that we added to this. We have been developing that for about 1.5 year. And we had strong performance in all operating areas this quarter. Our first quarter normally is weak. There's not a lot of activity in our customer market or in our markets in the first quarter, but we had an unusually strong first quarter. We are rapidly changing to as a service model. We don't sell products much as a product. We sell them as a service. Which, of course, limits our growth and also profits when you do the transition, but long term would be beneficial. We are growing a lot in that area and also in other areas. We have large investments. Going over to as a service model in the cloud, requires us to change how we develop and deploy products, and that is large investments. That is both prevalent over the last 1 or 2 years, but it will continue with heavy investments also this year.

So we will be effected of the burden of doing this transition for the whole year, but the years after, we will hope to see a little improvement. And we're also working -- we have the high effort in high customer satisfaction. For instance, our incentive -- so long-term incentive program that is now proposed to the shareholder or shareholders in the general assembly next week is based on not financial performance only, but also that our customers are happy with us. And that's a very important long-term success factor. The transformation to as a service model cloud recurring revenue, which is our recurring revenue of our operations in the cloud. It's grown to 42% to SEK 123 million. And now that is now -- we're now reaching a level where the relative growth makes an impact on the overall figures, recurring revenue as a whole grew 21%.

And the difference between this is that recurring revenue as a whole is also service contracts and maintenance of -- and rentals of old systems that we've had for many years. While the cloud recurring revenue is the new business, what we sell as a service deliver from the cloud. We also -- if you are based on a service model, it's very important that they keep your customers. You have these kind of people paying every month, but if you leave -- if they leave you instead of staying, of course, it's not a good thing. You never got paid upfront, so your people pay when they use it, they need to like it and then churn becomes very important. How large portion of that recurring revenue do you lose? And we are very low, continues very low at 0.4%.

Happy customers, that's the best way to grow in our opinion, the contracted order bookings were down this quarter to SEK 615 million. Now that is still more than our revenue, but the comparison quarter 1 year ago had a very, very large order. And comparing to that, it was down but we have huge quarterly fluctuations in our order intake because of the size of the contract and the length of the contracts. So we hope to see that averaging out of the year. You have to look at the rolling 12 at Sectra to really understand us. Net sales grew 24% and the profit per share grew as well to 42 -- or SEK 0.42 per share. Financial targets, our 3 main financial targets is equity/assets that is stability. We sell to customers who are extremely dependent on what we do.

They will not buy that from 3 guys in a garage because the entire hospital or the entire country might be depending on that we succeed and we stay as a trustworthy provider. And then you don't want to buy that from untrusted or unstable companies. So equity/assets solidates it, the financial trust is very important. We have as a target to be over 30% and we're at 52%. Profitability, that is another -- so the 2 first goals here is a hygiene factors. Profitability should be above 15%. We have a very good pipeline of good ideas and things we want to do and develop. We will keep it above 15%. If we get ways about that, we will use that for investment to grow the main goal, which is growth of profit per share. That growth target is set to 50% which is an annual growth of profit of around 8% or something like that. We are ways above that, we're at 138% now.

Secure communications' highlights, we see partly based on a new product mix, partly based on that there is a tension in society as you know, with Ukraine and everything like that, which has increased the awareness and the need of secure communication products all over the world, but Europe is our home market, Europe and NATO and we see considerable growth, and we are now okay in communications after being struggling a couple of years before that. We also see a -- we have a little developing arm where we develop security for energy companies so-called SOC, which we survey or we kind of look on the networks of energy companies, so they don't get inclusions. We see this is changing to the better.

There is an increasing awareness that a country's energy provision needs to be secured against cyber crime. We're also adding new products for both old and new customers we are coming out with new products, and we have a nice healthy product development coming in with new products over the next years over for that. In business innovation in Orthopaedics IT, medical education, genomics IT and research. In Orthopaedics IT, we got our first ever time that Sectra has been able to get a reimbursement code in the United States, really without reimbursement for a procedure in the United States, it's extremely difficult to sell. And that is what the cost was to get paid for. And when you go into reimbursement, this for implant motion analysis, where we see postoperative if a prothesis is properly stuck to the skeleton or if it moves.

If it moves, you have to revision. You have to redo the operation. And we have a very interesting technology there. We've got a temporary CPT III code for it. That means we have a couple of years, about 5 I think, where actually customers will get reimbursement. And if it shows they are actually asking for it and using it, then they can get a real CPT code, which is permanent reimbursement for that product. Medical education, the most interesting thing there right now so we're adding radiographer that is the people who run the x-ray machines. And there is a huge need in those universities all over the world to -- for educational tools for the radiographers. And we have just implemented all of Denmark and we have some very interesting customers in the U.S. also starting to use our education tools for radiographer education. And then, of course, we also have the medical doctors' educations that we've been working with for a long time.

And genomics IT, I will come back to that in the next slide. And then we have research where we do a lot of research in AI and applications of AI. In genomics IT, it's a new service to handle high production levels of genomic data, mainly right now for oncology, long term, we might extend it to other diseases as well. So this is initially a product doing solid tumors together with University of Pennsylvania Health in the U.S. It has gone live in May in University Health Systems in Philadelphia. And they're using it as a main production line. The interesting thing about this area is that it's a thing you have done increasingly and then you use Excel or homegrown IT systems for it. But when production gets -- or when the usage gets big enough, you need to industrialize it and that is exactly what we have done.

We have large initial interest from other institutions, but growth will not be like a rocket of this product. It's a new product. The world has to understand that it works, begin to trust it and begin to budget for it. So don't expect this to take off. But long term, this is a very interesting area, complementing our other products in medical diagnostics, especially in cancer diagnosis. Imaging IT, our largest area. We have the ongoing transformation to Software as a Service, which is clearly highly pronounced there, especially in the U.S. or North America, I would say. Cloud recurring revenue in that area grew at 42%. And we have also several -- even though the order intake now was a little slower compared to the last quarter, we have an interesting pipeline to discuss further.

One example, as we began doing this over the last presentations here, we got an order for all of Region Hovedstaden in Denmark, which is Copenhagen and the hospitals surrounding Copenhagen, they have been trying -- they had tried with several vendors. It's a very complex, very large hospital environment. They have tried several other vendors before. We finally got the order, and it's now fully rolled out all over. And very interesting is that a politician or a hospital manager in the region said publicly, it was the best public health IT product they've run in Denmark, which, of course, is a big praise for us. This shows that they -- it is used. It's not stopping every day. As the previous systems were, actually it's not stopping at all, and it provides this value for a very large portion of the capital of Denmark. Financial development, I will leave the word to Jessica.

[Jessica Holmquist, executive]

Thank you. Good morning, and welcome again to our Q1 presentation. We are pleased to report a solid first quarter with strong growth in both revenues and operating profit. And volumes are increasing and recurring revenue is growing. And this first quarter has been characterized by deliveries and preparations for the deliveries of previously ordered customer projects. During the first quarter, we received orders for Sectra One and Sectra One Cloud in North America, Europe and rest of world. And we also received orders in secure communications, various orders in secure communications, such as one for development and serial deliveries of Tiger/S.

Contracted order intake amounted to SEK 615 million a significant decrease versus last year, 79% down. And as Torbjörn pointed out, in the comparable quarter we recorded an individual order of SEK 2.4 billion and the orders of that size are not repeated quarterly and hence, cause large fluctuation in our reported order numbers. We continue to grow with satisfied customers. In the first quarter, revenues are up with 24% to SEK 724 million, and the recurring revenue churn remained low at 0.4% rolling 12. We have growing volumes. And consequently, we see increased recurring revenue. The share of recurring revenue out of total revenue in first quarter equaled 67%, 58% rolling 12. And there is clear progress in our transition to cloud-based service sales. Cloud recurring revenue increased by 42% in the first quarter.

Currency impact on sales was limited in this first quarter. We see sales growth in all operating areas year-on-year. Imaging IT report sales growth of 23%. And customers have increased their use of installed solutions and more hospitals have gone live. And the share of recurring revenue in Imaging IT was at 70% in the quarter. Secure Communications has delivered products and services during the quarter to authorities and defense providers and resulting in a sales growth of 38% year-on-year. Business Innovation has had a slower start to the fiscal year than the other operating areas and report sales growth of 5%. Sales increased in all geographic markets, all of Sectra's geographic markets.

There is -- the trend from previous reporting periods is unchanged. We see the highest growth in absolute numbers in the U.K., in the U.S. and Sweden. And Denmark and Canada, show the highest growth in Rest of Europe and Rest of World. Operating profit rose by 44% to SEK 100 million in the quarter, and the operating profit margin was strengthened year-on-year. Profit development is a result of growth and strong performance in all operating areas and the operating profit margin equaled 13.8% in Q1. The transition or the shift in business model to service -- to cloud-based service sales will reduce the level of variation and typical seasonal effects will fade out over time, but we are still in this transition and can expect to see quarterly variations in our profit generation.

All operating areas increased profit year-on-year. Imaging IT which is up 28%, reported a margin of 14.8% for the quarter. And here, we have profitability being impacted by both the ongoing preparations for deliveries of large customer orders where we will see revenues grow over time as the systems become fully operational. We also have an impact from ongoing initiatives to become a service provider. Secure Communications increased operating profit by almost 300% and the main driver here is a higher business volume. They report an operating margin -- operating profit margin of 13% in the first quarter. Cash flow from operations was negative to minus SEK 57 million in the first quarter in line with our traditional pattern for cash generation and an improvement year-on-year due to decreased tied-up capital in current receivables. The -- we closed the reporting period with a cash balance of SEK 699 million. And with that, over to you again, Torbjörn.

[Torbjorn Kronander, executive]

Great. Thank you. I'll speak a little about the way forward. Our general philosophy is those who have heard us before recognize this one, we've kept this for many years. If you have a rational strategy in a growth market, you begin there. You begin by identifying that the market you're operating in will grow. Ideally, it's a market that has to grow by external forces kind of neutralizing a little bit of the effect of the economic tides around you. And then if you have happy customers, which is required for growth and in order to have happy customers you have to have happy employees. It will not work otherwise, you cannot have happy customers without happy employees. Dare to be expensive when you're worth it and little stubbornness and a thick forehead and careful with cost, shareholders will be happy, but it comes in that order. And the Russian strategies in the growth markets are high, I think we have.

Coming in on this customer satisfaction. We -- again, we have said this since we were awarded this. This is normally awarded in January-February each year and '24, we were the happiest customer in the main segments, which is U.S. PACS Large 11th year in a row and U.S PACS Small Canada, very high rankings in Canada. Northern Europe and Southern Europe. And Europe has been divided into 5 regions that we have best-in-class in 2 of them, and we are second into 2 more. We also say that as for the happy employees, employees have to be motivated and culture is a very important thing. And we use, in general, one single rule for that. And if we can give everyone -- make everyone adhere to and live, the oldest rule in all humanity, the golden rule, do unto others, what you want them to do to you, we will be fine. Customers will be fine, and then we will be fine and you shareholders will be fine as well. So this is a thing we preach very much kind of unusual for an IT company, perhaps, but still very valid.

One thing that was mentioned last report was that KLAS, which are doing these evaluations of customer satisfaction, they also do other evaluations and reports. And this is from the U.S. market, it was in January 2024. And it's a 500-page report that you can acquire from KLAS if you're interested and it goes through everything. Training quality, deployment quality, stability of the product, everything, about 10 vendors in PACS. The most important one that I think and we think is most important is would you buy again. And that's a real verdict if we did a good job. And we -- 98% of our customers in large health care institutions in the U.S. would say they would buy from us again. There is no of our competitors that is even close, we're actually so high that we average -- the average, we are the only one above the average. Everyone else is below the average.

And I will not go through their names here, and that's not appropriate, but we have very happy customers, which is crucially important. This Charles Darwin, what he really said -- we like quotes or I like quotes, I use them. I do change them now and then, so you don't get bored with them. It is not the strongest of the species that thrives and proliferates is the most adaptable. Things change. We are living in a world of increasing and very rapid change. We have AI coming in, we have new technologies. We have a very tense international situation between countries and there's wars going on in Europe again. And then a company who want to operate in such a world has to be adaptable. You have to be able to change, you have to be able to change fast. And that is -- I think we are. I think it's a very good thing with us that we actually are able to adapt.

We are considered to be the thought leaders in our industries, which is a good thing and we hear that from customers. One of the things we're doing now is transforming into as a service company. As I said before, we're increasing the recurring revenue. We have a large interest, so this is kind of the areas where it's good for both vendor and customer. Customer will get a feeling that they don't have to use a lot of cash to pay something upfront, that they think will work but might not. So they pay per usage instead. For the vendor long-term, if you don't lose customers and you provide a good job is more income than getting an initial license upfront. It requires low churn. As I said, we are at 0.4%. And revenue and profit growth will temporarily be smaller. And in that we are not through this yet.

So I mean, just before -- because we had a very good quarter 1 that will not proportionally go up for the rest of the year. We will see it leveling out, and we are still in a hefty investment phase, especially in North America on very large contracts that have not really begun to pay back yet. So we will see still large variations through quarters and don't expect the first quarter to be kind of extrapolated all of the year. Investments of future revenues are taken upfront, where payment comes later, and that is a situation we have here. Long term, the financial effects of this would be strongly positive. And we are the only vendor now that not only do this for radiology imaging, we do it for all imaging in our health care system.

We do for ophthalmology, orthopedic imaging, cardiology, we just had a cardial advisory Board of physicians here where we discuss what we do in that area and improving rapidly. Digital pathology is growing very well, especially in some countries, notably France, where we do very, very well in digital pathology. And Amplifier Services, which is our AI app store, and other areas as well. So all of this, you can get in 1 single contract, in 1 single system, which, of course, is very important for the customer. Enterprise diagnostic imaging, and we are now adding genomics to it, which means we are not only doing images, we do diagnostics for the areas where it's most important, the old people's diseases. In medical IT, the demographics of the western world is alarming. I think some countries are now even below 1 child per woman averaging, that means those countries will disappear.

And some of the main GDP growth countries from 20 years back or 10 years back are now having a big problem. People live longer and longer and get sicker and sicker, the workforce, working health care get fewer and fewer. And everyone cannot work in health care. We need to make health care more efficient or this will not work. And in order to make it more efficient society has to concentrate on the diseases of the aging person, neurodegenerative disease, cardiovascular disease, oncology cancer disease, Musculoskeletal disease, which is one of the most expensive diseases we have, but not much is discussed and vision. These are what drives cost in health care and those resource use. If we can make these 5 more efficient, we have done a huge service to society, and the results will be margin in that for us.

And as you see, we have medical imaging there, but we are transitioning into medical diagnostics with -- sorry, with that the Genomics IT do it as well. So vision for medical imaging area or medical area is collecting all imaging-related diagnostic data, one system to support better care for patients and lower cost and reduce complexity for the providers in the health care. We have had radiology, cardiology. So this is the asset, sorry for that. We have now radiology, pathology and genomics, which is cancer. We have cardiology, a very large area of disease and ophthalmology, 1 single system, which, of course, we are the only vendor on the planet to have this in 1 single system and customers are asking for it.

They don't want 2,000 IT systems. They want a few. We have the highest customer satisfaction. It increases customer efficiency. They don't have to have 5 staff in IT working with each 1 of the 2,000 systems they have. They can have 5 staff working with the 1 system they have. I'm not saying we can replace 2,000 systems. We can at least replace 5 with 1. So it decreases customers' cost and it decreases cybersecurity risks because every IT system you have in a health care environment is a cybersecurity attack risk. And if you can reduce them, you reduce the risk. Now no IT system is 100% secure. I'm not saying we are either, but we are better than most already from the beginning and we have fewer systems, which is also good for cybersecurity.

And then in the cybersecurity area, we live in a new digital reality. There are increasing international tensions and cybercrime as well. Both of these drives growth. We are very well positioned, have a very, very strong branding in this area. We are providing NATO, European Union and more than half of the countries in Europe with the most advanced encryption they have, especially in mobile environments. Threats are expanding, attackers are getting smarter. And also the attackers now have AI. A couple of years back, if we got a known vulnerability in, for instance, Microsoft Windows or some other IT environment, it took a couple of weeks before the crooks had made an attack software for it and a virus.

Today, they also can use AI that can write that attack records in hours. So it's now very strong reasons to be very good at cybersecurity. Also, the impacts are larger and larger, you saw CrowdStrike in last quarter, which actually shut down a very substantial part of industries on the planet with 1 attack and that was not even a criminal. That was a bug that was introduced by a provider. Demands more and more countermeasures that society and companies must invest in. As I said before, the ideal to be in a market where society and companies must invest come high water or low water, we have to do things in cybersecurity, and we are there, and that drives that market for us. So why should you be a shareholder of Sectra.

We are positioned in markets that are by external factors forced to grow and growing is easier in a growing market than in a declining market. We have high customer satisfaction and a very strong brand in areas where brand trust and trust is super important. Rapidly increasing recurring revenue and very low churn. Yet, we have very exciting self-finance prospects for future growth areas. Several of our business innovation would have been if they had been listed as a start-up being valued quite a lot. A majority of these areas are already cash flow positive and profit positive as well, except for genomics, but that's very new. Management at Sectra own shares and incentive programs are long term. We don't pay people by shares and that they can sell within a week, our incentive programs is stock-based, but they are over long term.

Then we come to the upcoming financial events and Annual General Meeting and the Annual General Meeting will be next week, September 10 here in Linköping, it will not be broadcast. You have to be here physically to attend to it. December 12, 6-month report, March 14, 9-month and finally, year-end report on June 5. We also urge you, these presentations are made for you, we try to listen what you do and what you say, and we need to make them efficiently. So you think they're valuable. If you have any feedback on these meetings, send an e-mail to [e-mail]. For example, the idea is to have some examples of business is coming out of that channel. We got that suggestion. And now we add some examples of products to the presentations. Then we come to the questions section.

[Helena Pettersson, executive]

Thank you, Torbjörn and Jessica. I will do opposite from previous meetings. I will start with a question from the chat function this time, and it's about secure communications. What are you going to do with the communication business?

[Torbjorn Kronander, executive]

Grow it, as with everything else at Sectra, have happy customers and that's about what we can discuss.

[Helena Pettersson, executive]

And then I will move over to questions from analysts following Sectra. And if you have any further questions online, please write them in the Q&A chat. And I start with Nikola Kalanoski from ABG. One of the operational bottlenecks is cloud implementations. Would you say that you are able to ramp up the tempo to onboard a greater number of hospitals? Or should we expect the rate of at least 2 hospitals per month to continue going forward?

[Torbjorn Kronander, executive]

We will -- we're working hard to improve that. We have already come a very, very long way. We have some huge cloud orders that would not be possible in that pace, we would have worked for 20 years, and we will still not be through. So yes, we are improving rapidly and cloud it also lends itself very much in that direction. But we need electronic training material. We want support going automatic. So a huge progress in that area. We're not there yet, but we are working on it, and we have come quite a long way.

[Helena Pettersson, executive]

And I continue with questions from ABG. Follow up on the previous question, does the rate of cloud implementations in terms of number of hospitals per month differ among geographies. I.e. is it faster in the U.S. than in Europe?

[Torbjorn Kronander, executive]

Cloud is still hampering Europe by the EU regulations GDPR, which had different interpretations in different countries. There was a judge decision called Schrems II, that said that an American own operator couldn't provide a health care sensitive information or host that even if the sites were in Europe. It's very unclear but we see increasingly hospitals in Europe who say it's okay to use a Google or a Microsoft or an AWS, Amazon cloud if the service are in Europe, so we have such customers. But it's still disputed and it's very different interpretations in different countries. In the U.S. and the U.K. everyone's okay with using the Microsofts and the Googles and Amazons and we see a much more rapid progress there. In Europe, we still have private cloud that we host ourselves which is not our specialty, we shouldn't do it, but we are forced by regulations to do it.

[Helena Pettersson, executive]

And then a third question from ABG. Is there a difference in the exam volume growth among clients in Europe versus the U.S.? If that is the case, could you please help us understand why there may be a difference?

[Torbjorn Kronander, executive]

So we don't see a clear trend different. I mean, it's mainly is that more and more people get old and old people have much more exams and that varies a little by market. We don't see any clear trend that there would be a difference in the different markets.

[Helena Pettersson, executive]

Thank you. Then I will move on to questions from Jakob Lembke at SEB. What is driving the growth in nonrecurring revenues? Is this something we should expect to continue?

[Jessica Holmquist, executive]

Well, not all revenue from our SaaS contracts is recurring. For example, revenues generated during implementation and for migration of data that's nonrecurring revenue. And those revenues, we will have those revenues going forward as well. And then we also have the communications side of the business, where we have a much lower share of recurring revenue.

[Helena Pettersson, executive]

And next question from SEB. Based on your work with customer, size of your implementation team, et cetera, when do you foresee we could see acceleration in go-live in cloud sales?

[Torbjorn Kronander, executive]

It's already happening, as I said before.

[Helena Pettersson, executive]

Could you talk about the pipeline for new larger cloud contracts, anything that could materialize in this fiscal year?

[Torbjorn Kronander, executive]

Well, we can't disclose things that are in discussion, but there is a solid pipeline, as I said, in the introduction of customers, both large and small, that are interested and we hope to get a substantial part of them.

[Helena Pettersson, executive]

And then another question from SEB. Regarding digital pathology. Could you talk a bit about how important a step the FDA clearance supporting DICOM is? Has there been any noticeable acceleration for digital pathology following this?

[Torbjorn Kronander, executive]

It's a general trend that people want to use standards. We saw that in Radiology in the '90s, the big modality vendors tried to create a close department. So they had an x-ray machine and they wanted to do the PACS. Then, of course, when you want to buy the next x-ray machine, there's a huge advantage or even impossible to buy a competitive -- competing device. Now customers only take that for a while. And then they say, no, we want to have freedom of choice in every single component in the hospital. And in order to do that, then standardization is crucially important. Now pathology is a more unmature area. So standardization has been slower but customers really want to have the freedom of choice of the next device. We have as an independent vendor who also come from radiology, where DICOM is a standard for image transfer is very well, so why no one does anything else today. We have introduced that and we have driven that trend in pathology. I don't think there would be a major change, but it's good for us sales that we show that we are a true open systems vendor.

[Helena Pettersson, executive]

Thank you. Then I will move over to questions from Kristofer Liljeberg at Carnegie. Increase in the number of employees has slowed somewhat last few quarters. Is this temporary or a first sign that the massive ramp-up needed to handle new contracts is coming to an end?

[Torbjorn Kronander, executive]

I don't think we will grow as fast as we did before, but we will still grow, especially in some markets where we have a lot of big orders. If we have huge orders like the one we got 1 year ago, that needs to be implemented. And that takes payment.

[Helena Pettersson, executive]

And the next question from Carnegie is, could you comment on timing for larger new contracts that will go live coming quarters?

[Torbjorn Kronander, executive]

We are gradually -- when we get very large orders like billions, there is normally a bunch of hospitals or there is a bunch of hospitals below that, might be hundreds of hospitals. And that is not something you take live over 1 day. You start with their -- they say there's only 1 way to eat an elephant, right, 1 piece at a time. So your 100 hospitals, you gradually take them into use, and that process has begun for that large order, but we are not -- nowhere even close to half ways yet.

[Helena Pettersson, executive]

And then we move on to questions from David Vignon at Stifel. Could you share some insights into the progress you've made in cardiology both in terms of offering and in terms of commercial momentum, particularly interested to hear your thoughts on the partnership with General Electric?

[Torbjorn Kronander, executive]

Cardiology is an interesting field. There is a very large market in cardiology. We -- it has had its own systems, but we now have several customers, not the least in U.S., use our products for cardiology. But then they have other products as well doing some parts of cardiology offering. As I said, we last week had an advisory board, mainly by Americans here in Linköping, and we discussed we're adding functionality all the time. There is no hesitance for us going into aiming to be a very good provider in cardiology. We are not all the way yet, but we're getting there.

[Helena Pettersson, executive]

And next question from Stifel, are there any triggers that could help the U.S. adopt digital pathology tools faster? CPT codes have been available for more than a year. So is growth limited by resources to roll out the solution on the hospitals' side or limited by Sectra's sales force?

[Torbjorn Kronander, executive]

I think it's a conservativeness in the business. Radiology is very often technology savvy, and they use the new technologies. Pathology is a little more conservative. And it's also a new area. You can't expect a complete new area to grow very fast, at least not in the beginning. But we see a kind of an increasing deployment rate in the U.S. after a while, very important hospitals like University of Pennsylvania is showing that it actually works.

[Helena Pettersson, executive]

Thank you. And we actually have a follow-up question on that at the chat function as well. How many existing customers did adopt the digital pathology solution already?

[Torbjorn Kronander, executive]

I don't really understand the question, so I will interpret it in my way. Of our current customers, I would say then less than 10% have gone out to digital pathology, but not all have digital pathology or pathology at all. Pathology is not like radiology, available in all hospitals, it is available in some hospitals.

[Helena Pettersson, executive]

Yes, if you -- someone online have a final question, please write it, and I will take another question that we have received on mail. And this is -- I think you have touched upon this earlier. How should we think about seasonal patterns. Could you please give some more flavor on how recurring revenue will impact rest of the year?

[Torbjorn Kronander, executive]

Well, it will gradually decrease, the fluctuations. So I mean we have had a typical kind of a quarter 1 is bad and very high numbers later on. That will be decreased but we will have a lot of investments this year as well. So we are far from through that time where we actually have to invest a lot for cloud. So there will be substantial costs and less variations in income over the rest of the year than we used to.

[Helena Pettersson, executive]

And with that, I think we can close the Q&A session.

[Torbjorn Kronander, executive]

All right. Thank you very much for listening.