Sectra AB (publ)

to SecTrust three-month interim report presentation with CEO Torbjörn Kronander and CFO Jessica Holmqvist. Management will start with their presentations and you can ask questions in the chat function during the presentations and management will address them after at the Q&A session. And with that, I will hand over to you, Torbjörn.

All right. Thank you very much. Welcome to our quarter one presentation for this fiscal year. We'll start with the intro and highlights by myself and then Jessica will take over and present the financial developments and figures. I will have a brief sector way forward and then we'll have a Q&A session at the very end. You can use the chat function or you can send in your questions by email. Our business operations sector, to repeat that, is imaging IT. We manage images. We started with only radiology, which is still dominant, but we manage all images of the hospitals in one single system today. We do pathology, radiology, cardiology, dermatology, ophthalmology, and other ologies as well. And then we have secure communications to the right that we'd handle the top level approved encryption devices, mainly for Europe, almost exclusively for Europe and NATO. We are NATO approved since before. We're also selling mainly into Sweden and Netherlands, but also to other countries. And then we have business innovation where we have a greenhouse of future business or smaller business areas that actually do not easily fit into imaging IT and secure communications. And we have four operations there. Highlights from the quarter. Order booking is doubled compared to the previous or equivalent quarter last year, mainly due to successes in the US and Canada. We have grown very well in the US and in Canada, It's almost exclusively software as a service sales in this region. We sell very few licenses there today. All operating areas grow, which is important. And as I said before, we have a huge progress in transition to as a service model. And know that software service can be a little confusing. One model is selling a license up front, which we did historically, and then getting perhaps an upgrade of service revenue from it going forward. The other one is when you have recurring revenue and you charge per user per month. That's a conventional way of doing it. And many companies have that model today. Most companies today is going to pay for usage, which we went the right way. We went from licensed model to pay for usage. Other companies went to pay per user per month, which we skipped. We think that was good. The whole world is going towards pay for usage, but we went to right away. So we are past a transition that many companies will have to do now. Happy customers drive growth. We have happy customers, which is the main reason we have grew. We are rated as the Happiest customer in the US and Canada in several other areas as well. The contract order bookings grew by 130% compared to Q1 last time. Net sales grew a little less by 6%. Now we also have currency effects in that. But it's still a good growth. And profit picture grew by 26% compared to the previous quarter. The transformation as a service model, as I said, cloud recurring revenue is the recurring revenue we get through cloud sales. This is for usage and what I described before. We also have recurring revenue, which is service contracts for the old systems that was once sold by a licensed model. And therefore, we also inform you of the recurring revenue, including that part. But the cloud recurring revenue is the new business model and that has a very good growth of 46%. And before we had large growth figures of their relative growth figures, but now there is a substantial amount to grow from. So now this is begin to make a real impact on what we do. The all over recurring revenue includes the cloud recurring revenue, but also the old service contracts and they are not growing as much. And the churn, which is very important if charge for use is you don't want to lose customers because you never got that upfront. You want customers to stay. And we have a very low 0.7% churn of our recurring revenue. Financial targets for the groups are from the left stability. Our systems are considered one of the most critical systems on both hospitals and nations. We said the highest level security systems for nations. And we also sell, what some people say is the most critical IT system in the hospital, management of images. It definitely is one of the most critical. And you won't buy that from three guys in the garage. You want stability and long-term on your vendor. And therefore, we also want the financial stable, and we have a equity assets ratio target of about 30%. You shouldn't compromise on that one. But we are well above it at 54%. Profitability, we need to make money, of course, on what we do. The target is 15%. But both of these first, and we are at 19%. Both of these first are hygiene targets, as we see it. If we were asking or really trying to increase margin, we could. but that will compromise our future growth. And you can only increase margin once, but you can continue to grow forever. So whatever we have above 15% should ideally be invested in future growth. And if these two are hygiene goals, we have the third one with the main goal, but it's come third in priority. It's growth of profits per share. And that should be over a five-year period, above 50%. So at 115% is what we have currently. We also had a patent agreement last quarter that drove that up a little bit, but that's a one time thing that we go away after 12 months. So we are showing you two figures based In communications, we were actually chosen to secure communications during the NATO Summit this summer. That is a huge honor. If the top leaders of NATO are using our systems for communicating between themselves, they do trust us. And it was a huge, awesome marketing event for us. It was in charge of that and of course we consider Netherlands as one of our home territories for high-level encryption. And we have NATO-approved encryption solutions since before, but of course it's easier when we're part of NATO ourselves. These phones are the highest possible security levels for mobile devices. We also have an international healthcare provider that went live with 20 sites in the UK. We see increasingly that some of the hospital providers operate in many countries. This is an international one who was our customer before, but they also went live with 20 sites in the UK. It went record fast. All sites went live within two weeks after deployment at the first week. And this shows we are increasing efficiency in deployment in this one. It's interesting that we see increasing and see these very, very large international chains buying from us because of course that's larger volumes and larger contracts if we get international business. It's Radjaldi plus mammography in this case. They do about half a million exams per year. And then I will leave over to Jessica, who will tell you a little about the financial development.

Thank you. Good morning and thank you for joining our first quarter call. We're off to a good start this fiscal year with strong order intake and cash flow and continued growth in our recurring revenues. During my presentation, I will focus on the development in these and our other key financial metrics. We doubled the contracted order intake year on year to 1.3 billion, which is a confirmation of high demand in medical IT and cybersecurity. We were particularly successful with contracting in North America in the first quarter, both in the US and Canada. And our book to bill ratio is currently 2.9, heavily influenced by the large Q2 order from last fiscal year. Net sales increased by 6% to 766 million year on year. Adjusting for currency impact, the sales growth rate equaled 12%. And usage is driving the recurring revenue, which increased by 14%. We had a decline in our non-recurring revenue as our customers are increasingly purchase services instead of the traditional software licenses. The share of recurring revenue out of total revenue is currently at 72%, 65% rolling 12, and we continue to report low recurring revenue churn. Progress in the transition to cloud-based service sales is reflected in the growth in cloud recurrent revenue, which was 46% year on year. All operating areas report sales growth year on year. Imaging IT report overall sales growth of 4%. solid growth in recurring revenue and cloud recurring revenue, as both existing customers and new customers increase usage, but at the same time, less non-recurring revenue. In secure communications, we have delivered year-on-year higher volume of products, services, and development assignments to our customers, resulting in a growth rate of 20% year-on-year. From a geographic perspective, sales are growing in the US and Sweden this quarter. Growth is dampened by the development in exchange rates. We note that in local currencies, all markets showed growth in the quarter. Our operating profit rose by 19% to 119 million. And the margin improved to 15.5%. And we see higher personnel costs, partly due to the increased cost we have for our share-based incentive programs. And at the same time, this particular portal, we had lower costs for consultants and travel. We also highlight that the activation of new large sites is expected to only have minor impact on our profitability in this fiscal year. Operating profit, all our operating areas increase profit year on year as well. Imaging IT is up 20% to 140 million. and shows a margin just above 17%. And this is despite the costs for cloud transition and the ongoing preparations for deployments of large customer sites. Secure communications report operating profit of 11 million at a margin of 11.6. And here profitability is currently pampered by an extension of an ongoing development project. And the increased scope of the project as such is positive, but causes delays in serial deliveries and associated revenues. And we had very strong cash flow from operations in the quarter. And in essence, this is explained by profit growth and less capital tied up in current receivables. We received some large payments, upfront payments in the quarter. We also had quarterly invoicing that was settled within the fiscal year quarter. And we also note that in the comparable period, we had some large cash outflows connected to hardware and other project related items. And they were not repeated this quarter. We close the first quarter with a cash balance of 1.4 billion. And we have a proposed dividend of 405 billion. For the annual general meeting next week. Split in an ordinary and an extraordinary dividend. That was all from me.

All right. Thank you, Jessica. Then we go into our way forward. We have modified this a little bit. I will be a little more brief than normal. We make these presentations little short. In medical IT, what we hear from customers is we lack medical staff and our workload is increasing. Last week I was in a very interesting conference where this was pronounced even more. A lot of medical doctors all over the world, not the least in the US, is just on the brink of burnout. They are working very hard. They make a lot of money, but they work very hard hours. This will not be sustainable. You can make a lot of money, but you need to see your family sometimes. So tools for that is what we are in the business we're in. We are making healthcare professionals more effective. Workflow efficiency is paramount for them. They need to do more in the available hours because the workload is not getting less, it's increasing, and the number of people becoming medical doctors are not increasing at the same speed. Another one is we have too many IT systems. One of our customers explained to me a couple of years back that he had 1,100, not a very large hostel. That is very dangerous, both from cost is high, maintenance to keep knowledge, internal hospital, all these systems and interfacing or everything else and training is very expensive, but it's also huge cyber security risk. Every one of those 1001 systems is a potential attack point for cyber attacks, so they want to get the number systems down. And lately we see integrated diagnostics. People want to use many sources for their diagnostic processes. Dr. Rigoli said something, then the pathologists and so on. Now they want to take joint decisions. And they do that in the form of tumor boards. And we are making tumor boards and clinical conferences more effective. But we also try to get all the data they need into one place. We have connections to the EMR lab, et cetera, and we do all the imaging internally, which speeds things up, which is important. So efficient workflows is becoming paramount in healthcare. I would say almost more important than anything else. We are one of the fastest systems on the planet. You can see they get there very, very fast. It's us and a few others about the same. And today we are the only vendor with all of these what we call ologies in one single system. Radiology is cardiology, pathology, genomics, IT and ophthalmology. And of course, that's very attractive for a hospital who wants to get the number of total number of systems down. They can get all of these in one system. And now we have also added genomics that we still have only one customer there, but we have a large interest when we want to do that. And that's genomic connected to pathology, especially for cancer research or cancer diagnosis. In cybersecurity, We live in a new digital reality. There is increasing attention and cybercrime drives growth. We are very well positioned there and have very strong branding, as we have in medical. We are a strong brand in the areas where we are dealing and people trust us. And that trust is probably one of the most valuable assets we have. We also have a lot of extensive research and patents and last quarter we got a patent settlement that showed that those patents can be very valuable at times. Prioritizing key takeaways. The highest priority for the fiscal year and the next year is to get the new SaaS customers to start usage. You get revenue when they use it. So for us, it's very important they use it and they increase using it and add more modalities to the systems they have bought from us. Note still, even though it's a little less quarterly variations this year, but they are still very large. And if you want to judge sex and look at the rolling 12 average, you will understand very little of what's happening around if you look just at the quarterly. Be aware of the large currency exposure. We are exposed to currency. We have a very large portion of our revenues in foreign currency, and we have a lot of costs in Swedish kronors. And also do not expect significant effect from the large orders. People think that those orders will come materially fast. They will not. It will take time, but it's gradually getting up to usage during this year. And still, I'll say that start with our main philosophy shareholders. I'll repeat it here again. Start with a rational strategy in the growing market. We are in markets that have to grow. If it's a low tide or high tide in the society, people do get older and healthcare usage is increasing all over the world and they will need systems to maintaining that. People do not get less sick in a low tide economy. In cybersecurity, the digitization of society is increasing. People will have or have to spend in cybersecurity. So these markets will grow by their own force. Then if you have happy customers and happy employees, which are needed to have happy customers, it's impossible to have happy customers if you don't have happy employees. They're too expensive when you're worth it. and have some stubbornness and reasonable cost control, then shareholders will be happy. But it comes in that order. We've said that all the time. And we maintain this basic philosophy of how we operate. And then leads us to the upcoming financial events. Next week, we will have our annual general meeting here in Leedshopping, Sweden. It will not be broadcast. It's closed. You have to be here to participate. December 12th, we have a six-month report. March 6th, nine months. And June 5th is a year-end report of this fiscal year. And with that, I also remind you that we modified this presentation based on your feedback. And we got a little feedback. It was a little too much repetitions. We have taken down a little bit of that now. But if you think we should concentrate on something or change the way, the format of this, these presentations are for you, not for us. So send us an email and tell us how you want us to do this to be even better. And that leaves us to this question session. And Helena.

Yes, thank you, Torbjörn and Jessica. And we will start the Q&A session. We have received questions both via email as well as online. And I will start with the questions I got via email already yesterday. And those are from analyzed Nicola Kalanoski at ABG. And the first question is, How should we think about the ramp up and full go live of the following contracts? And then he specifies the US dollar 227 million contract from 2023. Also the NHS Scotland contract and the Quebec contract.

All of this will begin generating revenue this year? this fiscal year but it will not be significant yet there is a ramp up is over several years they typically take a few hospitals into operation but if you have a hundred you will not start all of those hundred at once so but they will begin generating revenue in this fiscal year okay and the next question is regarding digital pathology

Could you please discuss the competitive advantage you have within digital pathology compared to other players in the space?

Well, one is, of course, that we know what we're doing there. There are now vendors who will say competition in gradually who say they will have a following within a year. But pathology is not gradually. It's images, yes. But the images are different and they're managed differently. You need completely different functions. So we are in a good position. We know what we're doing. Second, of course, you get all of these type of images in one single system. And we do have one single system that operates very well for all of these systems. We win when there's pathology-only RFP, and we win when there's radiology-only system. But it also works for the other side. So we are competitive both in pathology and in radiology because we win these individual deals. That is not being able to show a report or occasional images. Actually, we are there. And this combination, and also that you can get images from all these sources when you take the final decision diagnosis without having multiple systems and user interfaces, that is a strong advantage.

And a follow-up. A question, how long have you been offering the digital pathology and how does it differ compared to radiology when it comes to installation, implementation, et cetera?

We've been offering it for about almost 10 years now. We started, we know this. We have special people working only with this. It is different and similar to radiology. The workflow is very similar. So the workflow components and how you operate. how you list things, how interface to eMARS, for instance, are similar. The viewing is quite different. Pathology images are very, very large. The most important thing in the pathology image is color. And the regulatory requirements are a little bit different also. So the viewer component, it's quite different, but in the same system. But the radiology part is what we know from the beginning. And pathology, we have learned over the last 10 years. But they are not the same thing. Pathology is very, very large images. You can't handle them in the same way.

And then I have a fourth question from Nicola Kalinowski, and it regards certification, especially in the US. Have you ever received an authority to operate with any part of the US government?

No, not yet. We could achieve that when we need it. But so far, we have not done business with the U.S. government.

And a follow-up question is, do you have a FedRAMP certification in the U.S.?

FedRAMP is a cybersecurity certification, and there are many of those. We normally, we are a cybersecurity company. These are things we can do. As we have not sold to the federal government in the U.S., we don't have a FedRAMP, but we have TexRAMP. Texas rampage was required in the state of Texas. We got that because we need a customer there who required it. That we published last quarter that we have. If we want to do FedRAMP, it's similar but a little different. But it's not an impossible task to get FedRAMP A for when we need it.

Okay, then I will move on to questions from the online audience. And the first one is from analysed Jakob Lemke at SEB. I will start with the first one. Could you explain what causes the volatility in imaging IT recurring revenue? Why they increased significantly significantly quarter on quarter in K4 and now decrease in K1.

There are two things to that. Currency, of course, impacts the reported number. The other is retroactive revenues in the fourth quarter.

The next question from Jakob Lembke is on imaging IT non-recurring revenues. Is it possible to say if you view the quarter as weak for being a K1 or more normal?

That's a level of quantitative analysis. We can't do that publicly.

And another question from Jakob Lemke, is it now It's now three years since you won the large contract in the US. How much of that have you implemented now? And I think maybe this is the contract you refer to, Jacob. You may write another question. Could be the 227 million that we received two years ago in 2023. How much of that have you implemented now? Has the process to implement this contract gone according to your expectations?

Nothing goes to expectations. That doesn't mean you can't have success. But yes, it's going on very well. And as I said before, we will begin invoicing now. We have invoice services and we have done a lot of migrations. So, I mean, if you get the contract that you need to move the old archive to the new and that takes time. And before you have it on the new archive, you can begin invoicing for exams. But during this fiscal year, we will begin taking that into operation in the first part of that system. And over the next one to two years, that will go fully into operation.

And then yet another question from Jakob Blenke. Secure communication. Previously, you have talked about delayed deliveries. When do you expect them to come through?

Currently, we expect to have some impact towards the end of this fiscal year. But we'll also continue into next fiscal year. As of right now. That's our expectations.

And then I will move on to questions. from Kristoffer Liljeberg at DNB Carnegie. And I think the first questions may be similar to one we already have answered, but can you please explain why recurring revenues did not increase versus K4, also when adjusting for negative currency effects?

All right, so I repeat, retroactive recurring revenue in the fourth quarter. is the main explanation.

And the next question from Kristoffer Liljeberg is, in the report you write that financial impact from new customers will be small this fiscal year. Does this mean that the sequential growth for recurring revenue will remain rather slow coming quarters?

We will not go into that projection forward, but the important thing is to realize that these very large customers, they have hundreds of hospitals equivalent to a country. They will not go live in all 100 hospitals at once. They will gradually take it on. When they see it works, they will take the next one. So it's not like a binary thing that you put on a switch. You take them gradually on live when you see the previous one works.

And the next question I think you have touched upon, but you could repeat the answers maybe. How many years do you think it will take for orders signed last two years to be fully up and running?

Another two to three years.

And a final question from Christopher Lilleberg here. Can you explain what are the larger cost items in external costs and why it has stopped growing after the large increase in recent years? Will it pick up again, or is this trend an indication EBIT margin has bottomed out?

Well, as I mentioned during the presentation, in this quarter, we had lower consultant and travel costs to mention two categories of costs. We see this as it fluctuates from quarter to quarter. There's less activity in the first quarter than we have in the other quarters.

Okay, then I will move on to questions from the online audience again. The first one is from Jakob Lemke at SCB. Can you further explain the share-based incentive programs mentioned in the report? Is it possible to share how much these burden the result in each quarter last year? Are these something you have always had for a long time? And which segments is share-based compensation mainly burdening? Oh, there were quite a few questions in there. Should we take... Maybe you can talk about what those are.

Right now we have three programs running. We started one after the comparable quarter. So that is explaining the increased cost year on year, partly. Then we also have the share price development. which is impacting the cost that we have to recognise for these programmes. It is particularly impacting the social security contribution that needs to be cost accounted for. What were the other questions?

One was if it was possible to share how much this burdened the results in each quarter last year.

That is not something we have disclosed previously.

I can give a comment that we have begun recognizing or showing it now. Because we have a large variation in cost due to the stock price. And we are not controlling the stock price. So when the stock price goes up, we get a cost associated with that. And we need to explain that because the effect has been material over the last years.

And the last part of the question was, which segment is share-based compensation mainly burdening?

The cost is carried by all operating areas.

About proportion to the number of people of revenue we have, but a little more than imaging IT because these programs are larger in the US and Canada than it is on the European side.

Thank you. And then we have a question from a user about Visage. They claim they have the only cloud native solution and all other vendors need some on-premise components. Is this true or are you also 100% cloud native?

No one is 100% cloud native. You need clients locally. Everyone has that. And you need some form of gateway to send images from a Delta Zen. And so in saying everyone is completely cloud is not true. There is a component. And we are about the same as they are and many others.

Okay, and just for information for you online, if you have any further questions, please write them, and I will move on to another question from Kristoffer Liljeberg at DNB Carnegie. How large was the retroactive revenues in K4, and why did you not mention before that explained part of the big increase in K4?

It was not... It was not deemed significant to report in Q4. Again, I repeat, it's both currency and retroactive revenues that is impacting the Q1 numbers.

Thank you, Jessica and Torbjörn. I think that was all of us.

questions for today and we thank you very much for attending and those of you who come to the agm next week much welcome otherwise we'll see you in september thank you very much