Sectra AB (publ)

So our nine-month presentation this fiscal year. The agenda, I will do the intro and highlights as usual, and then Jessica will go into the natural development. I will talk a little bit about the way forward, and then we have the question Q&A session via chat function and email. You can also email and chat during the presentation, as I said. So our first a little about our different business operations. We have imaging IT, by far largest operation handling images. Initially that was radiology. Increasingly we do all images in the hostels and we are still unique in that we in one single system can handle all the different image types of a hostel from radiology, pathology, ophthalmology, cardiology, dermatology, etc. Images is a very important part of the diagnostic process. And it's growing a lot by itself. Then we have secure communications on the right, where we separate comes from, from the beginning, secure transmission, where we do mainly encryption solutions for communications, both as mobile handsets, but increasingly also in fast highly secure network operations and we have business innovation with our greenhouse for new uh interesting ideas where products can be for a while before they have to develop and since one year back about we have genomics it as well which is an increasingly part of the agnostic process especially for oncology cancer We have had one possible live at the University of Pennsylvania in the US for almost a year by now, and we are in the process of, we have quite a large interest in that area going forward. So that's where we deviate a little bit from images, we also handle other data. But it's unstructured data, it's not something you put in a database easily. A little about the highlight of the quarter. We were voted number one in customer satisfaction. This year we got a record number of awards. We got eight, and the most important is large hostels in the US, but we also won small hostels in the US, Canada, Northern Europe, Southern Europe, DACH, which is Germany, Austria, Switzerland, and Middle East this year. And digital pathology, which is only one award still because it's too few customers in the U.S. still to have a separate report from digital pathology in the U.S. So digital pathology is global. The picture is from the award ceremony in Las Vegas only two weeks ago. We are building a strong and future-proof business. We do have high customer satisfaction. We think that is super important for long-term success. We are also in a rapid progression as a service model. We're selling software as a service and not as a licensee. That has a quite strong impact on the revenue and profits during the transition, but after the transition, it will be good for both customers and us as a vendor. And we think this drives significant growth and major investments to increase the growth going forward. Extensive patent portfolio, which we saw at the fruition of this quarter, where we actually had a settlement in the US, agreement in the US, that resulted in a net increase in profitability of more than 100 million Swedish kronor. unusual this first time we've got such a big payback from patents, but it shows clearly that a strong IP portfolio is very important. With transformations as a service model, the cloud recurring revenue, which is a very important indicator for this transition where we this is the increase in the recurring revenue based on cloud sales we are moving we're through transitions both payment transition to pay as a service but also that we're moving the products up into the cloud instead of have a lot of hardware on-prem these are not the same thing people very often confuse them and but we do both at the same time we do have customers who have on-prem hardware who still pay as a service model, but we have no customers who buy a license in the cloud. The cloud recurring revenue is the recurring revenue we get from these cloud transitions, and as you've seen, we've been in the transition for quite a while, but now significant numbers and very high growth, and it is a very important indicator for us. Recurring revenue as a whole includes also service revenues from the old installations, That also increased by 18%. And then we have churn. If you want to keep building business in the cloud and software as a service, you don't want to lose customers. And we have 0.6%, which is a very low churn. And that means that the incoming customers very often stay or almost always stay. After customers, best way to grow. Contract order bookings was up 9%. It's very important to realize that last year and this period, we have a very strong order intake. So it's a little unfair comparison, but it was still good. Net sales was up 13%. Now note that when you lose those initial licensees and get over to software as a service revenue, If we had still been on the old model, it would have been bigger. And profit per share increased by 60%. However, that was including the one-time patent settlement. Positive non-recurring effect from patent settlement, as I said before, we have an extensive patent portfolio. One is a US patent within mobile VPN solutions, so it's in secure communications. During Q3, we have licensed the US corporation as part of a set that resulted in a profit increase of more than 100 million Swedish kronor. The national targets for the group are our stability, the equity to assets ratio that should be above 30%. It's currently 47%, so well above our threshold. Profitability margin should be about 15%. We are well above that at 19% despite the transition. We have now introduced a little extra curve that you said, the dotted curve, that's including the patent settlement. That's not part of normal operations. We will have split curves for a while to show that difference in the curves here. And then our main target, when the first hygiene measures are fulfilled, is growth of profits per share. And that should increase by more than 50% over five years. We are currently at 121%. And of course, including the patent, as you see, there is ways about that as well. In secure communications, we have, it is today our fastest growing operating area. We have high demand for our secure communication products. It's an increasing tension in the world, as you know, and especially Europe have woken up that Europe has to handle their own defense in the future. And that has driven demand for our products. We have positive earnings boost from the patent settlement as well. So communication is at an all-time high this last quarter. One interesting area outside of the pure defense is an order we have gotten from the Swedish Prison Probation Service, where the inmates will need to have a discussion with their lawyers, some external information, but it needs to be done in a very secure way. They are not allowed to talk to anyone, and it's got to be encrypted between the lawyer and the inmate. And we have received an order for secure communications for ads that we do on Samsung ads that are used by the clients or the inmates for communication with legal entities and getting whatever they are allowed to get from the outside without risking that they can communicate to the outside world. In business innovation, orthopaedics is good progress. We have received preoperative planning increases and we also do postoperative follow-up operations, which is actually a very interesting area. Revisions of prosthesis is very expensive and also highly risky for patients. Medical education, we have had a tougher time, and that's mainly because we before sold large terminals, hardware, and those have more or less gone away for us, but the recurring revenue is strong. So the growth in recurring revenue for education is very strong, but the loss of the hardware business, which was predictable, has happened this quarter. and impacts both profits and revenue. Genomics IT, we have a large interest, but this is in the customer phase. We have our first customer. People want to see how that works out before buying more. But we have a large interest, and we were last week in a large international conference in Las Vegas called HIMSS, Healthy Chematics in Medicine. And it was clear that our oncology story about what we do in pathology, genomics, and radiology combined for oncology diagnosis was very well received. And the research will focus on various aspects of the AI clinical decision making. In imaging IT, we have ongoing transformation to SAAS, as I said before. Cloud recurring revenue was up 45% there, and we have some very large orders coming in, and we have high interest on the market. Not only in the US, all over where we are present. We are not present in all countries in the world. We have selected to be multinational and not global. It's better to have good market share in the markets we're in than to have small market share in many markets. Then I'll leave the word to Jessica Holmqvist-Ausif.

Thank you. Welcome. Good morning and welcome to this part of the presentation where I will walk you through the financial development in the nine month period. Demand for our products and services remain high with the contracted order bookings surpassing 5.8 billion in the nine month period. of which roughly 5.3 was guaranteed order intake. And the largest order secured year to date remains the Sector 1 cloud from Quebec, received earlier this year of 3.1 billion. During the third quarter, we received orders for digital pathology from customers in Norway, Sweden, and the US. And we also saw the University of Hartford place an order for our services for medical education. And in secure communication, we also received various orders. A European defence customer signed a contract for Tiger S system, including service and support. Excuse me. And we also received an order for further development of existing systems by the Swedish authorities. And as always, we point out that the size of individual orders causes large quarterly fluctuations in order bookings. Sales are steadily increasing, up 13% to 2,326,000,000 in the period with only minor impact from currency. It's high customer satisfaction, underlying growth and also the strong development in secure communication that jointly drive the overall sales growth. And then this fast transition drives recurring revenue and As you also heard Torbjörn saying, the cloud recurring revenue increased by 44% year on year. And we are pleased to report low recurring revenue churn of 0.6%, rolling 12. The third quarter as such had an increase in sales of 22%. And in addition to the growth drivers mentioned before, we recognized licensed revenue in the quarter, driving the sales development in the third quarter. Our main business areas increased sales year on year. Imaging IT grows with new customers and hospitals continuously being deployed and also existing ones ramping up the usage. And in secure communication, we saw the fastest growth in the period, up 41% year on year, and now close to 460 million rolling 12, a result of increases both in product deliveries and development projects. And business innovation, We see rapid growth in recurring revenue, but that could not fully compensate for lower non-recurring revenue in the period. Looking at sales by geography, we conclude growth in all markets with strong development in Sweden and the Netherlands. driven by the trend in secure communication and we observe the highest growth in absolute term outside Sweden in what we call rest of Europe spread across several markets and we also note stable growth in our main markets Our operating profit increased by 29% to 414 million, excluding the non-recurring patent settlement. And the growth in recurring revenue combined with the higher non-recurring revenue from licenses in the third quarter, and again, the strong performance in secure communication contributed to the operating profit growth and the strengthened margin The third quarter in isolation with an operating profit of 205 million, excluding the patent, stands out as an exceptionally strong third quarter. And given quarterly fluctuations, it is important to focus on long-term trends when assessing sectors financial performance. Our main business areas also increased profit year on year. Imaging IT, which is up 20% year on year, is positively impacted by the strengthened quarter. However, non-recurring revenue is lower than in the comparable nine-month period, as we see customers purchase services rather than traditional software licenses. And in imaging IT, we still carry implementation costs for the major customer contracts received in recent years, where none of them is yet in full production. In secure communication, we see strong performance year on year. The operating profit is at 60 million, excluding the equal to a margin of 19%. And again, this is driven by higher volume in general. Our cash flow from operations amount to 700 million in the period. And we had strong cash flow generation, both in the second and especially in the third quarter. And the main drivers behind the strong cash flow are increases in advances from customers, also the patent settlement, and as well as the underlying profits. Over to you, Tobi.

All right. Thank you, Jessica. A little about the way forward. We have a saying that success in business and most things is very easy. Just live and act the oldest rule of human history, the golden rule. We try to tell our people and remember ourselves that if we treat customers the way we want to be treated ourselves, we'll be okay. Very often businesses forget that. This is an unusual IT company. I think the oldest rule in the world. And that resulted in good rankings in Claas, which Claas is a company in Salt Lake City, in Lutla, who evaluates medical IT, not only the things we do, but all medical IT. And they do reports about this, and they rank vendors in different categories in IT within the medical field. And we have come out top again for the 11th year in a row in North America, large hospitals, which is what we started with, but now they have been doing evaluations in other areas as well. We came out on top in eight areas, as I said before, of digital pathology is a new area besides radiology. One thing they ask about, and I've shown this picture again, I will show it again. They ask, one thing they ask customers is, would you buy again for large vendors? Now, this is previous years, previous year, this was 2024, and 98% of our customers would buy from us again. We are so high above all competitors, and I didn't want to bash people, so I blanked out the names of those vendors, but we're the only one above the mean, the market average at 81%. This has been published this year again, but we are not allowed to share it with you yet. But I can say our rank has not decreased, which is a thing I can say. We actually increased it from 98%. And this is an old quote that we used internally as well. Profit and business come mainly from repeat customers, customers that boast about your product or service, that bring friends with them. And our main reason we have grown so well in the markets we're in is that we have happy customers who tell other customers that we are an okay company to work with. And that drives our growth. In medical IT, we see that the demographics of the Western world is alarming. Not only the Western, Japan and Korea is as bad or worse. And China is getting there. People live longer and longer and get sicker and sicker. The workforce working in medical is fewer and fewer. Everyone cannot work in healthcare. That means the healthcare operators in the world must become way more efficient in order to cope with this situation and our job is to help them with tools for doing that. And the medical main growth areas again will be neurodegenerative disease, the diseases of the elderly, cardiovascular disease, cancer, skeletal, and vision and hearing. And the green areas is where we do ourselves. In neurodegenerative disease, we have partners that measure MS, plaque, etc. But we do the main imaging ourselves. Cardiovascular, we do increasingly products in cardiology. In cancer, we do both pathology and omics, and radiology, musculoskeletal, we have our orthopedics business, and then vision and hearing, we have ophthalmology, image handling, which is increasingly complex. These areas will grow in the future, despite if it's a good time or a recession even, because people will not get less sick in a recession. Efficient workforce is then becoming paramount, important. We hear it more and more and more that how efficient is it? Doctors cannot move around. Doctors has to do the work and they cannot fill in with IT too much either. They need to be able to treat patients and diagnose patients. And we are the only vendor with all of these image specialties in one single system. And that's another reason why it's good to have this is that the Hospitals today have too many IT systems. I know at least one hospital that have more than a thousand in a not super large hospital. Thousand IT systems is huge cybersecurity risk. It's also very expensive to maintain and run because they need people who know all of these thousand. So consolidation of IT in hospitals is very important. We are the only vendor with all imaging in one single system. Other vendors can offer pathology and radiology, but they have it in different systems. We have it in one. And in the sector one offer that we now have as a SaaS model, we offer all of these. You can get one contract and then you just add on the other ones when you need. That enables better care for patients because you can do things faster. Efficient workflows. lower cost reduce complexity increase cyber security and we have the same we have minted the tagline brilliant workflows made for you that we use for clinical exhibitions and we have that as a tagline our clinical exhibitions but at the it exhibitions we've modified and call it brilliant consolidation made for you. And that we use that for HIMSS now. And that's a very important thing to CIOs of hospitals all around the world. They need to get the number of IT systems down. In cybersecurity, We have a new digital reality. There is increasing international tension and cyber crime drives strong growth. We know that nations attack each other's infrastructure, both for IT, but also in reality. But especially the IT parts, we can prevent to a large extent, not to 100%, but we can help preventing that with our products. We are very well positioned. We have a very strong brand name in Europe in cybersecurity. We also have extensive research and patents, as you saw from the patent settlement. Again, our philosophy with shareholders, it starts with the rational strategy in the growing market. Both cybersecurity and medical IT need to grow, despite high tide or low tide in the society at large. We have more and more IT needs to be protected and threats are increasing. And we have the aging populations that need care, despite there not more people working in healthcare. And both of these are good markets to be in, and they have to grow because of the underlying forces. Then if you have happy customers, then in order to have happy customers, you need happy employees. You cannot have happy customers without happy employees. We work a lot with that as well. And then we need to be expensive when you're worth it. We should not give things for free. We are good and we are worthy of having a reasonable pay for it. And then you're a little stubborn and reasonable cost control. Then shareholders will be happy. And I think we have proven that over the last 15 years or so. But it comes in that order. And that is how we build a strategy. That's why having happy customers is so important. Long term, I would like to take a note that the quarterly variations in sector are very large. Last quarter, we had a little dip compared to the previous year Q2. This year it was up, but don't evaluate sector on quarterly variations. It's up some quarters and down others. Look at 12 months rolling when you evaluate sector, and then you see a nice slope upwards over the years. But I just want to remind you of not extrapolating everything. It goes good in one quarter, bad in one quarter. That does not mean that you can take that little curve between quarters upwards or downwards. So why should we shareholder, etc.? We opposition the markets that are, as I said before, by external factors, forced to grow. We have a high customer satisfaction and a strong brand. rapidly increasing recurring revenue and very low churn. Yet we have very exciting self-financed projects that could be a startup by itself, but we run them internally in our business innovation, but also within the different business areas. And management-owned shares, which we think is a good thing. Not only options, but they also own shares. And with that, we conclude and we'll set the upcoming 2025 financial events and annual general meeting. First, we have a capital market date for medical, not for communications this time. It's only for medical. It will be in Stockholm, March 27th. And June 12th, we have end-of-year report. And September 9th, we have our annual general meeting. That will be in Linköping, Sweden, and in real life. Your feedback is important for these meetings. Please let us know what you think. Send an email to info.investor.center.com. We are very open to changing the format of these meetings and listen to you because we do this for you, not for us. And then we'll go to the questions, please.

Yes, thank you, Torbjörn and Jessica, for your presentations. We have a number of questions that we have received both through email and online in the chat function. And I would like to encourage all of you online that if you have any other questions, please write them. And I will start with a few questions from Nicola Kalanowski at ABG. And the first question is, could you please provide us with a status update on your customer's appetite for additional module purchases in both North America and Europe?

It's quite large. possible clusters, for instance, in regiology or in pathology, when they want to extend that to another ology, they very often come to us. Not all the time, but very often.

And the next question is regarding UK.

How would you say that the investment needs for cloud packs and additional modules looks like in the UK where you already have a leading position?

It's good. We are one of the trusted vendors for NHS. And we see that we have sold quite a lot of pathology, for instance, into our installed base already. But it's a good position to be in UK. And we are very happy working with the UK. NHS is a good customer.

I hope it's a good vendor for them.

And then we have a question about US and staff sharing. Is it possible to use staff from the US to aid with implementations in Canada, for example, or does the staff need to be local when it regards implementations?

We cannot use cross-country staff. normally they need a work permit to in the state where they are but very often our canadian staff are american citizens or the way or the other way around and then we can use them in the other country and a fourth question here would you say that

A long cloud implementation process could make some prospective clients not choosing Sectra, or are there other factors that are typically more important when selecting a Cloud Pax vendor?

It varies a little bit. I don't think it's the most important factor. The most important factor is the quality and that they get good service. Now, the long implementation time is very often not due to us. It is normally due to that they need to get networks in place, especially in cloud. They need fast networks into the cloud provider, and that is not depending on us. It's also internal operations in the host that change a lot of things, and that takes time.

And then I'll move over to questions in the chat function, and the first question comes from Jakob Lemke. And what drove the strong quarter on quarter increase in cloud recurring revenue in K3? And should we expect this to continue in coming quarters?

We made a retroactive reclassification from non-recurring revenue to cloud recurring revenue of 10 million, impacting the quarter on quarter.

And further questions from Jacob, trying to understand the strong margin development in imaging IT. It seems like cost did not increase year over year despite sales increase and group employees increasing 9%.

Well, so yeah, in the third quarter, we recognized license revenue And that impacts both the sales, of course, and then the operating profit and strengthens the margin.

And so that's what happened in the third quarter.

And the next question is, are there any effects, revaluation or other positive one-offs impacting K3 EBIT in imaging IT?

Yeah, there is some currency impact in the third quarter. But again, I would say it's the license revenue that we were able to recognize in the third quarter that caused a large impact. And then it's also, of course, timing of when it comes to cost, it can be timing of larger customer events, driving, sales and travel expenses, for example, that could happen one year and not take place the next year.

And for the moment, the final question from Jakob Lembke on secure communications. Do you expect to benefit from Europe's ambitions to significantly increase defense spending possible to say when you start to see increased orders?

I think we are. I think we are doing that already as Sweden has extended its budgets for defense and so has other countries in Europe.

So, yes, I think we will be positively impacted by that.

OK, thank you, and then I'll move on to questions from Christopher Liljeberg at Carnegie. And the first question is regarding operating costs. Adjusting for legal advisory cost, it seems OPEX only increased 6% year on year in K3 and has now been virtually flat sequentially over the last four quarters. Is this just a temporary slowdown considering the comment that deployments will continue to impact margins negatively next fiscal year?

I would say we have

Well, again, it's a lot of timing that impacts quarter on quarter when it comes to operating expenses. But of course, we try to be careful. We manage costs. We have good cost control. But with the large deployments ahead of us, that takes some resources. I don't know if you would like to add something there, Torbjörn.

We are, of course, we should increase revenue more than cost, otherwise it would be very bad. But it's variation between quarters as well.

Next quarter from Kristoffer is on the same topic. What explains that external costs adjusted for legal costs in K3 are down versus second half last year? Less external consultancies or something else?

We're rather down on travel and sales expenses. And when it comes to external consultants, we're more or less flat. some increase, but more or less flat.

It's a mix of different operating expenses.

And the third question from Kristoffer, how large was the licensing order recognized in K3 that you said explained strong earnings in imaging IT?

That we do not disclose. OK, then I'll move on to a private investor, I suppose. Who has a question regarding the patent settlement? In the. The patent settlement is in.

Other revenue with 195 million sick.

I know what the question is. Where in the income statement is the cost recognized for the patent settlement?

That's in other operating expenses. The line is external expenses, I think, in the income statement, it's named. Thank you.

And we have one further question from Jakob Lemke. Can you give a status update on the implementation with the large US Health Network and Quebec?

It's progressing. It takes time to start up the server side. So I know the networks, as I said before. It also takes reorganization of the customer side. They have to be trained. In Quebec, for instance, we have about 125,000 employees need to be trained on our products. That is a large effort that we do not do ourselves, but we train the trainers and that takes time.

OK, and then I will switch to email again with a few questions from private investor. And he is wondering what's included in recurring revenue versus cloud recurring revenue.

And cloud recurring revenue is when when the services that we deliver are cloud based. That's the difference between recurring and cloud recurring.

And recurring also includes service contracts, all the old installations that were done forever. Our first installation is still on-premise, but they need service, and those service contracts are not included in the cloud recurring.

Okay, and the next question there is why not all competitors are included in the class ratings?

It depends on how many installations they have in a certain region because of statistical significance. Claes says that it should be about 15 installations for instance in the US and I think five in Europe to be included.

They don't want to include one or two customers that would be not statistically significant.

Thank you. Then I think we have addressed all the questions for today.

Right.

Then we thank you for your attendance and looking forward to seeing you soon again. Thank you.