Sectra AB (publ)

Welcome to Sectra's three month report presentation with CEO Torbjörn Cronander and CFO Jessica Holmqvist. My name is Helena Pettersson, investor relations officer, and I will be the moderator of the Q&A session later. The chat function is open from start and you are most welcome to start writing questions during management presentation. And with that, I hand over to you Torbjörn.

All right. So welcome here to our three-month report, our first quarter for this fiscal year. We will start with the interim highlights from the quarter by May, and then Jessica will come in and speak about financial developments. I'll speak a little about our way forward, and then we'll end up with a Q&A session. We both call in and we have the chat functions, or you can write the emails in. So our main business lines sort of petition is imaging IT solutions where we started up doing mainly radiology image handling for hospitals. Today, we increasingly do all image handling from hospitals. As hospitals want to consolidate their IT system, they want to theorize these systems. And we are a vendor who can do all their images in one single solution, which has resulted in some substantial orders over the last quarter. And then we have IT security, where we mainly do encryption systems and secure communication solutions. And then we have growth opportunities outside of the main business lines, which is our little greenhouse. These are small, but they are supposed to grow rapidly. Medical education IT, where students, medical students are nowadays trained in a very different way from historically. We have a special business unit for that, and that is more or less only doing recurrent revenue today. We have orthopedics IT where we do some special image management for orthopedists. And they use images very differently from radiologists and the diagnostic side of hospitals. They use it for therapeutic preparations. We have research division, mainly doing research within AI and genomics now. And we have inside the main business lines, we have critical infrastructure in secure communications and increasing digital pathology in imaging IT. which is then part of that overall image management of hospitals I spoke about. That area is growing rapidly right now. And we added 2022 genomics IT, which is not images, but very much related to pathology images and increasingly used in diagnosis of cancer. And also treatment of cancer, I would say. Highlights from the quarter. We had an all-time high contracted order booking of up to 33% from a very strong quarter last year as well. This result is sort of for the order of these images. We have high demand within all business areas. Signed the largest order to date for Sectra. US Sectra won cloud contract. That means we do not get paid up front. We get paid after the customer uses it. It's one of the larger hospital chains of all of the US healthcare systems. And we are, initially we got an order for radiology, but there is also a umbrella contract that can be extended with other images. And they had the vision of having only one vendor for all images in the entire system to save costs and increase efficiencies on their side, also increasing patient quality. Our orders now are very large systems and they're over many years, which means the contracted order values become very large. And we have significant quarterly variations due to large individual orders. Of course, we got orders in this size and the order intake goes up and down between quarters. We have positive trend in all business areas. We have rapid progress in the transition to services and cloud deliveries, also for hardware not the only software in medical but also in hardware we're moving into recurring revenue that is increasing faster than the revenue long term we have a currency tailwind that will not be forever but right now it helps to cushion the effects of the change to a service providing business model uh we have definitely seen a very strong turnaround for secure communications that i will come back to later We are transforming the entire company to deliver as a service. Also, our security business, very often we, instead of selling our high quality systems, we rent them to the customer. We let them use it for usage. Our net sales for the quarter was up 21%. Profit per share was up 14%. Our recurring revenue, which is a very increasingly important measure now, is up 28%. And the churn, that is how large proportion of the recurring revenue we lose. Of course, if you get a lot and lose a lot, you don't gain anything. But we have a very low churn, 0.9% of our return, which means that the income becomes an integrator, which is good for long-term business. The financial targets for the groups are all fulfilled. We have the equity ratio first, which is a measure of stability that should be well above 30%. It's currently at 51%. The second one is profitability, operating margin. We do not want that to be too high. We have too much to invest in for future growth, but it should be at least healthy above 15%. It's currently at 19%. And then the last and most important is growth per profit per share over a five-year period. That is the target to be above 50%. We're currently at 113%. And that's our main target. The first two can be seen as hygiene factors. The third one is the main target of our financial targets. In sector secure communications, we have considerably improved earnings, which is a very good thing. and that depends on two things i would say both the world around us with the kind of 10 situation european security right now with christ demand but also a new management for this business area which has proven very good uh strong order intake and as well we don't know what the application to nature from sweden will mean we do are not members of nato yet But so that is a little unsecure, unknown right now. But we do sell into NATO because we have NATO approved products already now that we sell from our Dutch operation. Image and IT solution, our largest business area by far. We got three significant Sector 1 cloud go-lives during the quarter, that means uh we are selling and getting paid for per uh usage instead of upfront which of course affects the growth rate uh we will during this transition have much lower growth than we would have had both in profit and growth uh than we would have had with the old business model but long term this is better uh we have low turn on recurring revenue as i said before um and we have a cloud recovery which is a portion of or the increase of the return revenue we sell for cloud applications. That is the main growth area that's up 76%. Then I will leave over to Jessica, who will tell you a little about the financial development.

Thank you. Good morning, everyone on the call. And I will jump right into our Q1 financials, starting off with the order intake. Contracted order bookings was close to 3 billion in the quarter, up 33%, with high demand for our offerings, both in medical IT and secure communications. And the single largest contributor to the record high order intake is the already mentioned 10-year Sector 1 cloud contract in the US, which amounted to approximately 2.4 billion. Sorry. And in this context, again, we point out that orders of this size do not come every quarter. We see stable top line development with growth in net sales of 21%, a reflection of our long-term commitment to customer satisfaction. And the SaaS transition is driving recurring revenue growth up 28% in the quarter. And the recurring revenue from our cloud contracts was up 73% for the group to 86 million, equaling or coming close to 15% of total sales, which is a sign of progress in this area. And as Torbjörn also mentioned, our recurring revenue churn is limited and the recurring revenue development is supported by that. And it remains just below 1% on a 12 month rolling basis. And also looking at the non-recurring revenues, growth in those in Q1 came mainly from secure communications. All business segments increased sales in Q1. Imaging IT was up 19%. And as customers expand their use of our solution and also due to a growing customer base. And we also note that the currency tailwind contributed to growth in this segment. Secure communications increased top line by 35%. And the positive trend that we've seen over the past quarters remained in Q1 and the demand was also confirmed by additional order intake secured during the quarter. We also have growth in business innovation, although this segment still represents a smaller share of our total revenues. All geographic markets increased sales, except in the US, where we now see an impact of the change in business models. In the comparable quarter, we had more upfront or more deployment revenue from license sales, whereas this quarter's deployments were SaaS contracts to a larger extent. and the highest growth in absolute terms we had in the UK, largely driven by recurring revenue growth. Our operating profit rose by 8% to 69 million in the quarter, whereas the operating profit margin was slightly reduced. The operating profit is affected by the shift to service sales and cloud deliveries and this in combination with our continued investments in in the organization preparing for large deliveries cost the lower margin in the quarter we also had increased cost for marketing activities in q q1 versus last year The weak Swedish crown give a favorable currency effect that is partly offsetting the transition to service sales. And on a rolling 12 month basis, the margin was at 19% at the end of Q1. Imaging IT delivered less operating profit than in Q1 last year. During the quarter, one customer in the UK, two customers in the US went live in sector one cloud. And as these cloud installations ramp up in production volume, they will contribute nicely to revenues and profit over time. At short term, it means less revenue than a traditional license sale. And secure communications delivered a strong performance in Q1 versus last year. Demand for encryption products and cyber security is high and we have seen that the market situation has normalized. We still note that quarterly Variations are expected in this segment due to the nature of the business. Cash flow from operations was negative at 98 million in Q1 due to negative changes in working capital. Q1 is normally weak and timing effects in customer projects caused tied up capital in projects and accounts receivable to increase. The overall cash position is strong with 808 million, including the 120 that we have in a short-term bank deposit. During Q1, we signed an agreement to acquire two properties, the headquarters in Linköping, plus an additional property nearby. We paid a deposit during the quarter and the rest was transferred on the closing date, September 1st. We do not expect these acquisitions to have a material impact on financial results. With that, I am ending my part of the presentation.

Thank you, Jessica. I can comment on the acquisition properties that it is not our intention to be a real estate company, but this was an opportunity to reduce operational costs a little bit. We signed up instead of renting the entire property. So our way forward. Where others see a problem, we have a demographic challenge all over the world. We have cybersecurity threats all over the world. We see opportunity. We have our special niches in when healthcare must scale up and become industrial production. And industrial in a positive sense. Some say that healthcare shouldn't be in industry because we're treating humans, but industrialization means repeatable quality at the lowest possible price. That is exactly what healthcare is all about now in order to survive the demographics explosion. And you can do that in a very humane way if you're careful about it. And then when mobility, when top level security needs to go mobile, we see that very much at the COVID, people dealing with very sensitive material, they also need to be online when they are traveling or working from home, and that's a very special niche for Secco. Focus Forward is high customer satisfaction. As before, the only way to have long-term success in a company, and we are long-term, is to have high customer satisfaction, which we have proven over and over. We measure this by net promoter scores. and we are externally measured, especially in medicine and medical, by the CLAS Institute in Utah, who measure customer satisfaction in the US and other countries, and we have had the highest customer satisfaction for many years in a row. But you cannot have high customer satisfaction if you have unhappy employees and a poor culture. We work a lot with recruiting the right people and having the right culture because then customers will be happy. It won't work otherwise. Then, of course, profitable growth. That is what business is all about. Also, we've been good at seeing where things are going to end up and skate where the puck is going to be. We started in digital pathology eight years ago, and now other companies are seeing this was the correct move, but we are now very well positioned in that. Now, sometimes we have to take a few bets and we have to shut it down, but we are willing to take risks for these opportunities that might become very big for the future. And we say the main cultural thing we use in our discussions internally and externally is the oldest rule of humanity. People forget it. It's the one thing you've seen in all religions we found around the world, and that is the golden rule. And it might be strange that an ITCO, which isn't the oldest rule of religion in the world, but it's a good rule. Behave unto others as you want them to behave to you and we'll be fine. And that is what we try to teach and infuse in our employees. In medical, we have the growth areas that are a consequence of the demographic situation all over the world. And that is the old people diseases. We have more or higher and higher shares of old people and retired people all over the world, a little different timescale in different countries, but this is coming in the entire developing world. And we have no way of doing this. I have a friend who said that if we are going to keep the relationship between staff in healthcare, in hospitals, and patients in 20 years or 15 years from now we need to choose every single student who are examined or graduated high school and put them in healthcare that won't happen so we need that's why industrialization is so crucial and the things that are most important are the diseases of the elderly and that's neurodegenerative disease cardiovascular disease cancer disease musculoskeletal disease and vision If you cannot see, you become very expensive and dependent. And all of this is medical imaging. But we try to be very good in these five areas because that is where the money is going to be and the needs and thus the money, which we can get a share of our customers' profits. And we added genomics, which fits perfectly into cancer. We don't do everything in genetics and genomics. We do solid tumor diagnosis, which is very closely related to pathology. It's even called molecular pathology. And it's a very high growth area of medicine that has not been industrialized yet, but needs to become so. Our vision for the medical imaging area is collecting all imaging-related diagnostic data in one system to support better care from patients at lower cost and reduce complexity. And the large order we got from the US was exactly about this. This customer wants one single system for all image-related data they have in the entire operation. That saves costs for them. They don't have so much staff trained in different systems. And they can also do what we call integrated diagnostics, where they can use multiple input for the same diagnosis, which is very important for the correct diagnosis and follow up during cancer treatment. And we are currently the only company who have radiology and pathology in one single system because we started so early. Now we're adding genomics IT. That means complete cancer diagnostics in one single system. And it's built for production. This is not research equipment. It can be used for research as well. We're good at that. But it's mainly built for production. So doctors actually can come home at a reasonable time instead of burning out, which is a big risk today. Medical doctors all over the world are working so hard that the risk of burnout is increasing. in an unacceptable way. And our job is to help them out so they do not burn out. Going from research IT tools to production in genomics and just genomics alone, we see an estimated market growth in 90 percent per year for the foreseeable future. Now, this is very small. We have no revenue there yet. We have a collaboration project with the University of Pennsylvania in the US. who wants to take this into production during 2024. And we're developing together with them right now to build this. But it is a large interest all over the world for this integrated with pathology and radiology. And this is, as we see, the spot on for skating to where the pack is going to be. Data needs to be integrated. Decisions for diagnosis must be based on all available data in one single system. And we have a huge growth in genomics as the number of DNA sequencing for cancers is going up all the time. In cybersecurity, we have a new digital reality. Cyber security market will grow. It has to grow because cyber theft, cyber fraud and cyber espionage are growing. We see it every day in the papers, not the least in healthcare, but also in other areas. We are very, very well positioned. We have a super strong brand known as the only vendor with top or secret approved mobile phone in Europe, for instance, which we can use to sell all the other equipment. And the current crisis in Europe will boost demand even further, as we'll see. REST are expanding. Attackers are getting smarter. They utilize advanced psychology and behavioral science to find vulnerability. I think you all have been exposed to phishing attempts. A few of you might have even bit that hook. um about the impact are larger and larger and that means that cyber security will continue to grow um demands more and more counter measures does investment society in companies like us uh we are transforming it as a service company and not only software we also do hardware as a service to some extent in in communications And that has quite large implications for growth. We would have grown much faster than we do right now if we had everything up front. But long term, this will be good when this integrating system begins to work. We have increased our recurring revenue to 59% now, and we had 58% for the full year last year. We have a large interest in this, and we see more or less all these we're discussing, especially in the US right now, is this model. But in order to be successful, you require low churn. As we said before, we have a very low churn. We are below 1%, which means we add on. Everything we add on will be long-term income. During the transition, revenue and profit growth will temporarily be smaller. This we have spoken about for several years. We also had a capital market day in this year, said that we'd be stronger this fiscal year, that we're in now, 2023-2024, and we see the effect that we predicted happening. Long-term, the financial effects would be strongly positive, however. This would be better than the old model, but it will take a few years to get there. Why should you invest in sector? We are positioned in market that are by external factors forced to grow. No one can do anything about the demographic situation. We want to keep healthcare and we are very well positioned in that area. And in cybersecurity, likewise, it has to, the market has to grow. We will position that. We have a very high customer satisfaction. And in order to have that, we need to have high employee satisfaction with a strong corporate culture. I think we're ranked very high in Glassdoor, for instance, in the US, which is a site where prospects and employees can evaluate the employers. A strong brand in markets with trust is critical. If our system fails, people will die in the hostels, and that's when brand is very important. Likewise, cybersecurity, if we fade their secrets that should not be public, will become public or known to the enemy. And that's a brand market. Both are brand markets, and we have strong brands in both markets where trust is critical. We have rapid growth in the largest medical market in the world, which is the United States. We have profitable, very strong cash flow, normally not this quarter, but over the years we have that. And we have a solid balance sheet, which is trust for our customers. We have rapidly increasing revenue, recurring revenue, especially the cloud-based revenues, which is important. We have a good collaboration with public cloud vendors, especially Microsoft. And we have very low churn. Sustainable investments in R&D with exciting future opportunities. One of these small greenhouse projects we're doing, if they grow, we will have very strong business in that. We do not invest in these unless they have good potential for the future. Now, some of them will not succeed and might have to be closed down, but that is okay. They are all profitable, which is the important thing, except for genomics, yes. And our management owns shares, which we think is important, not only options and stuff, but they actually own shares. The upcoming financial events after this is September 7th, which is now, three days from now, two days from now. Our annual General Assembly here in Linköping in Sweden, and then December 14 with our Q2 report. Please remember, your feedback is important. We try to modify these meetings and presentations based on what you think. So if you have any suggestions to improve it, please send an email to info.investor.sector.com and we will review it and modify presentations so they become effective for you. And then we open up for the question section.

Thank you Torbjörn and Jessica. I will start with a few questions from Kristoffer Liljeberg at Carnegie, who has sent a mail. And the first one is, could you please explain when you expect revenue to start for the recent large US order? According to the press release, the deal was supposed to generate about 2.5 billion over 10 years. Is it back and loaded?

It's back and loaded that we do not get paid. It's a lot of hospitals. Some of them will go live quite soon. They will begin to get, but taking, you know, so many hours of life will take time. So it's definitely gradually build up over one, two years.

And the next question from Christopher is, Historically, external costs tend to be lower in K1 than in K4, but not this time. What is the reason for that?

It has been some hardware that we shifted and some peculiarities. Sorry about that. Jessica, do you have any more?

Well, and also the ramp up of the organization that we're hiring, like I mentioned before, preparing for the

large deliveries ahead of us and the third question is looking at order to be delivered in the next 12 months it was at half the level seen in the past four quarters does this reflect natural variations or should we expect that to be lower in the past because of the change in revenue model to more subscription?

We ask more and more customers. They cannot sign up for a contract with us. In some cases, it's a framework contract. Sometimes it's a definite single provider contract, as we have with a big deal right now. But they won't promise what they are going to buy for every quarter, which means we cannot you know report it in that way it will be money anyways but we cannot guarantee it because they only pay when they use the system but they also commit that they will not use any other system so unless they stop doing medicine they will pay and then we have a question from david mignon at stifle

You shared in the report that you were hiring in North America to be able to deliver on major contracts. Can you share your plans in terms of hiring for the coming quarters? How many hires should we expect? And should we expect personal expenses to grow faster than sales in the short term?

In the short term, personal expenses will grow faster than sales because we have to deliver these large products before we get income.

uh we do not reveal uh how many people we employ and then we have an additional question from christopher lily can i give what is the total investment for the properties how large will the positive impact be on a bit from owning instead of renting yeah

Uh, 150 million, uh, is the preliminary purchase price for the, uh, properties. Uh, we, um, count on a smaller EBIT impact that we did not quantify, but it's, it's immaterial.

Um, but it's, it's positive.

It's positive. Yes, for sure. It's positive. Uh, but it's, uh, it doesn't have a material impact on our P and L.

And what I can see, we have no further questions on the chat function and I will check the email again. And we have no further questions on email, so we end.

And we thank you for your attention. We look forward to see some of you on Thursday if you come down to the General Assembly and the rest of you in December for our Q2 report. Thank you for listening and goodbye.