All right, welcome to Optomed Q1 Investor Call. My name is Sakari Knuutti, and I'm the CFO of Optomed. We have also Juho Himberg, our CEO, on the line. Our Q1 results came out this morning, and more importantly, previously we announced that we have now obtained the FDA clearance. The presentation that we go through is available on our IR site. Please note that you can unmute yourself in case you have questions by pressing star six. All right, Juho, the stage is yours.
Thank you, Sakari. Good morning, everybody. Let's run through our Q1 results. The main thing during this spring, although it happened after the closing of the Q1, is that we finally received the FDA clearance for our Optomed Aurora AEYE- DS camera, and it's been something we've been waiting for a long time, and now finally we received it. It's a first handheld camera powered by AI, and we are really delighted to be now available to sell it. Q1 results, all in all, were satisfactory. Especially software segment was lagging a little bit behind, although devices segment was flat comparing to last year. Then we announced that we are really working with quite interesting new developments in China.
For those ones who've been following Optomed a longer period of time, China used to be our main market, but since a couple of years it's been declining, and now we are reinventing ourselves in China. Let's move to the next slide. FDA clearance, we finally got it, and the results were really, really good, and this raises the bar for other handhelds entering into the market if they want to compete with us. So sensitivity was 92%-93%, specificity 89%-94%, and imageability 99%+, which are really amazing results. And bear in mind that with our AI health solution, it's only a single image per eye. So there are in the market currently a combination, AI camera combinations, which requires two images per eye. And with AI health algorithm, it's possible to just run results with one image per eye.
This is much, much smoother comparing to many other competitors currently. It makes results and the process is much faster. So these were carried out 2 large prospective phase 3 studies, and really it demonstrated the best-in-class efficacy and imageability. Then move to the next slide, our business model. So this is how the business will be conducted now onwards. So it will go into the recurring revenue model where we are having our camera AI health algorithm and then our portal. And it's a recurring revenue model, so there will be fixed annual or monthly subscription fees, and we are moving away from the capital sales model. So this is really nice having a recurring revenue model for this business. Customer benefits, it's a really low barrier to subscribe, so there are no initial investments, only monthly rental fee with excellent clinical results.
Currently, the reimbursement rate is really high, $55 per diabetic patient. Also, this is pushed by the insurance companies, and it improves the HEDIS score. This is the Medicare star rating. So we are targeting roughly 300 customers and the clinics. And next year's 5-10 years, there will be at least 50-100,000 AI connected fundus cameras in the US market. It's starting to move really fast. Then let's go to the next slide, key figures. Revenue declined 4.4%. This is mainly due to the software segment, or it is due to the software segment. Net loss was slightly better than last year, and also the earnings per share -0.06 EUR was slightly better than last year. Cash flow from operating activities was EUR -515 compared to EUR 440 last year.
The percentage changes are looking quite big, but still we are talking about relatively small variations. Then let's move to the segment highlights. Devices segment, it was flat comparing to the previous year. Gross profit slightly below previous year, and also the gross margin. Here, the reason for this one is that we sold some Smartscopes out of the stocks, which reduced the margins. And the other thing is that we were not that much focusing on the capital sales in the U.S. market as our sales organization was preparing for the launch of Optomed AI Health solution. Currently, we are in discussions with a prominent eye hospital in China. It is the number one hospital considered in the top tier hospitals in China, and a private equity fund to establish a joint venture for the screening services.
It will be the first of this kind of service in China, and we are expected to sign the agreement during this quarter. Gross margins a little bit below previous year. As I mentioned before, in the USA, the sales force was really preparing for Aurora AI launch and basically was not focusing that much on the capital sales as they didn't have time. Software segment revenue and EBITDA declined versus last year. We had very strong comparables. This is due to the fact that last year in the Q1, we had in Finland this change. There were new hospital districts created, and there was a lot of billing done due to that restructuring work. The good news is that we have a decisive victory on this Optomed non-healthcare development services in Finland. It's a governmental agency, which is not related to the healthcare.
We flagged last year that if we would have lost this deal, we would have lost EUR 1 million sales during this year. Now the contract will last for eight years. This risk has vanished now from our books.
Moving on to the cash flow for Q1. The cash flow was stable. The net cash from operating activity was approximately -EUR 500,000, which was roughly on the same level as last year. Then the cash position, you have to take into account that we actually paid back a term loan of EUR 1 million in Q4. So if you look at today's cash position as compared to the comparison period, you have to take into account that EUR 1 million loan has been paid back, but nevertheless, the cash position was now EUR 5.7 million against the EUR 7.2 million of last year.
Summary, FDA clearance obtained. It's been the major development, which we've been waiting for years already. We finally got it. It also cleared some disbelief in the market that handheld cameras cannot have it. We really proved that handheld cameras are on par with the tabletop cameras with what comes into the results. We are well positioned for the next phase growth.
All right, we're happy to take questions now, and you can unmute yourself by pressing star six.
Hi. This is Gustaf from Redeye. So first, I know that you mentioned it in the presentation, but what was the reason for the decreased gross margin in the software segment during the quarter, if you could repeat that?
Well, as it comes to this, it's kind of a seasonality thing. Last year, there were a couple of license deals that had a positive effect on last year's number, and this year we didn't have those. So it's a seasonality item.
It will be flattened out during the course of the year.
Yes.
Okay. And also about the plans in China, I wonder if you could elaborate a bit more about these joint venture plans and also if you could talk more about the revenue model.
Okay. So we are currently in the negotiations to forming a joint venture with a large Chinese private equity fund. And we have also engaged number one Chinese tier one eye hospital. And this will be recurring revenue model where we will be suppliers of technology. And on our business plan, we will start with phase one with a relatively small number of the patient and the screenings, but it will increase during the course of the year. And why this is different now comparing to many other previous attempts is that we are working very closely with healthcare institutions where we are going to get the patients for the screenings. And it will be a recurring revenue model.
Okay. Thank you. Also if we look at the US market, when do you expect you to have the first subscribers in the new model?
We will have very soon. Very soon.
Very soon. Okay.
Yes. We will tell you more about during the in August when we will have a Q2 result sharing.
Okay. But can you say anything about how many U.S. players that you currently have in discussions regarding these subscriptions deals?
Many. A lot.
Many. Okay.
Yeah.
Also if we talk about staff in the U.S., do you think that you will need more staff now that you have received the clearance, let's say, for yeah, during this year, for example?
Okay. So this is a new business model, and it's a blue ocean market. So our plan is run between 60-90 days like a proof of concept. And then during that period of time, we will fix all the possible shortcomings, and we might need to redefine the processes. And we are really making this process to work effectively. And we will spend roughly 2-3 months on that one. So it's a completely new business. There are a lot of things to be done. And then depending on the first subscribers and the volumes, most likely we will require to hire more people in the U.S.
Okay. Thank you very much. Also just the last question, I was wondering about the employee benefit expenses during this quarter compared to last quarter in Q4. What was the reason for the change? It decreased a bit during this quarter.
Just a second.
I think it decreased from EUR 2.4 million to EUR 2.1 million. But what I could see was also that the same number of.
Yeah. If you look at the employee benefits expenses, that was in last year, that was EUR 2.2, and now it's EUR 2.1.
Oh, okay. Okay.
So yeah, the difference is it is not that big.
Okay. Yeah. Yeah. That was my last question. Thank you very much.
Thank you, Gustaf.
Thanks.
Hello. It's Pia Rosqvist calling from Carnegie. I hope you can hear me.
Yes, we can. Hello, Pia.
Great. Great. Hi. Congratulations still on finally receiving the FDA approval. I got a few questions regarding that. So in the U.S., if I understand you now correctly, you plan to run during the second quarter now proof of concept with some of your clients. Does that mean that you actually can start recording revenues then from the third quarter onwards?
It depends how fast we will, of course. We will have a recording of revenue on the second quarter as well. But the third quarter will be the full quarter when we will have the service available.
Okay. Now what kind of scale-up plans do you have for the U.S.? What kind of sales levels are you targeting? What kind of contribution should we expect from the U.S. this year given that you stick to your sales guidance of growth in 2024?
Right. So like you stated, we actually stick with our sales guidance at the moment. This is kind of the reason for that, is that we, like Juho mentioned, that we are facing a blue ocean market. We don't really know at this stage what the demand and what is the pace of the implementation are going to be like. So at this stage, I have to say that we are not sure how fast or slow the implementation will take place.
Okay. But thank you. But can you give some kind of indication on, I mean, what kind of uptake? I mean, are you disappointed with or what would you be satisfied with if we talk about this year?
As it comes to kind of at the moment, we think that we should be able to definitely reach the guidance. Then it kind of depends on, as you know, we are moving to a recurring revenue model. So the invoicing, the revenue recognition will be done monthly. So it very much depends on when the first we complete the pilots and kind of the pivot period and when the actual more large-scale revenue recognition of the big deals that happens monthly instead of in our CapEx model when it actually takes place when you do the sales or execute the sales, when that takes place. But like Juho said, is that we are now kind of in a situation that we are in an executing and seeing mode instead of latency mode.
And then we are going to learn a lot more about the market and then update the capital markets accordingly when we know a bit more about the pace of implementation.
You need to bear in mind that even we have done a lot of internal work. We have done a lot of preparation for the launch. All our staff has been trained, and there are very good plans for that. Due to the lack of the clearance, we couldn't talk to the clients. We couldn't show the prices. We couldn't show the products. We couldn't really do the promotional things. Now it starts. We know that there is a demand, but this we need to bear in mind.
All right. Thank you. Then let's wait and see. But another question with regards to the pricing. Can you share anything now about the pricing model which you start to use?
The pricing model will be like as we have stated before, it will be like a revenue-sharing model.
Yeah. Sorry for being unclear. I meant the price level of this service. Can you give some kind of indication of the revenue share model then with your partner AI?
That's a little bit. It's quite a delicate situation since revenue share, we need to have a permission because it's an agreement between us and AI Health. And there is a strong NDA disclosing anything because we would disclose our share. Then at the same time, we would disclose also AI Health's share. And this is something we need to share together how we are reporting that.
Okay. But with regards to the price of this subscription-based model, do we talk about EUR 10,000 or what kind of price level are we talking about?
Yeah. So we're talking about, first of all, yeah, it's a blue ocean market. We are obviously waiting for the customer and market feedback to get actually what is going to be the street price for this product. We mentioned before it was mentioned before that we talked about the $10K. And let's see if it's going to be that or not. But I suppose that if you think about it, if it's $100 or $10K, you're definitely more right with the $10K.
Okay. All right. Thank you. Then I have a few questions still if I can continue on China. So can you in any way quantify now the business potential in China? And what kind of investments would be required from you in this joint venture? And what cameras are you selling? Are we talking about Smartscopes, or are we talking about newer cameras? And is AI involved in any way in this joint venture screening service?
Okay. I can open that watch that we are talking about the newer cameras than Smartscope. Also is that there might be AI involved, but it's something we will not take part at this stage. And we will be the technology partner for this one. This healthcare institution we work or we are working currently, they tested multiple cameras. And they found our cameras the best suited for their purpose. And they want to have us as a technology partner. So it will be our investment will be technology, software, and hardware.
Okay. I hope you can share something about the business potential then later on if and when this joint venture accelerates.
Yeah. We will open more once we come more detailed press release out together with our partners.
Yeah. All right. Great. And then maybe coming back still to the U.S. model. And then you said your organization is ready to roll out the product. But in terms of your plans to accelerate sales, so should we expect you to need further financing to accelerate sales in the U.S.?
How this works is that we are going to sell different ways. We will have our direct sales. We are working together with the distributors. Then you need to bear in mind is that AI Health, our partner, is also sharing. We are doing a joint effort with AI Health, with Optomed, and our distributor partners. Depending on this one, how fast it goes, if there is something we can get more business investing more into our sales force, it can be that there might be further investments to be done.
All right. All right. Thank you. My final question, are there any specific risks you would like to highlight now with the change in your recurring revenue model? Moving from capital sales to a recurring revenue model, are there any specific risks that you would like to highlight?
Not in terms of the model. Obviously, as you well understand, the revenue as it now records monthly as opposed to kind of having the full revenue coming in the month of the sale, that will affect kind of the pacing of our revenue recognition. That way, our revenue, for example, this year. But not specific risks in terms of the model.
All right. That's all for me for now. Thank you so much.
Thank you, Pia.
Thanks, Pia.
We are happy to take more questions. Star six for unmuting yourself.
Hello, gentlemen. This is Juho from Inderes. A couple of questions. I will just start with the very easy one. Maybe you can comment something. How many active devices are you expecting at the end of the year? And of course, I'm talking about Aurora AI in the United States.
By end of year, I can give you a number. It will be three- or four-digit number.
Three or four digits. All right. That's better than I expected, I mean, in terms of accuracy. Another question about the United States and perhaps also the OEM channel. Do you see that this is going to be cannibalizing your other equipment sales? That the sales are going towards the Aurora AI and other cameras are not so popular or are not so much in demand after this?
It's a different business because our OEM channel, they are buying cameras without AI. Then they are using those cameras for all possible eye diseases and mitigations. Aurora AI, its main purpose for that one is for screening of diabetic retinopathy.
Yeah. And apart from that, it's kind of the target market for Aurora AI that's going to be in the primary care where. And then again, if you think about our CapEx sales, the majority doesn't go to the primary care at the moment.
Yeah. That's right. So it's a different business, different applications, different customer groups.
Basically, you don't see significant change in other equipment sales?
At the moment, no. Yeah. Yeah. We don't see that.
Excellent. I guess I will just start thinking about the commercial state now. You have sold, I suppose, something like 1,000 cameras, perhaps to the US. And I suppose that these have potential to activate AI. Or you can just say that, "Please take this camera instead and compensate the client." Is there any possibility that you could accelerate using your own client base like this?
Of course, it is possible, but that is not our intention to do because those clients are different.
Yeah. Exactly like stated, that's actually a different market. So that doesn't accelerate in our thinking too much what we are doing here at the moment.
Understood. And finally, and this will, I guess, Pia already asked about this basically, but the cash flow, could you comment on how much working capital is this going to tie up and whether you are going to be needing additional financing? Because at least I understand that you need to make those devices, and then you have to do the revenue share. So eventually, it will be very profitable. But in the beginning, I suppose that the cash flow profile is somewhat lagging.
Yeah. It is somewhat lagging as compared to the CapEx model. Yes. But at the moment, we don't expect the working capital to be an issue with regards to the model as we have taken precautions regarding that one. And obviously, it kind of depends on the pace of the implementation as well. If we are getting, let's say that we got a very big deal, that obviously has a one-time effect on our cash profile and the working capital. But we are expecting to kind of get on a cash-positive level rather quickly on those deals as well.
All right. Thank you very much. That's all from me for now.
Thank you.
Thank you,
Happy to take more questions. Star six for unmuting.
Hi. It's Pia here again. I have another follow-up question regarding this public tender process, which you earlier flagged for. It could have, yeah, bear a EUR 1 million risk on your revenues for this year. So we are well into 2024 now. So have you delivered services to them during the first quarter of this year? I'm just trying to understand the remaining revenues you are expected to now gain for this year. So do we lack one quarter of revenues, or will you be up to speed as this deal is signed?
No, we don't. It was due to end the previous contract in the middle of the year. We have been in the first quarter delivering this service, as asked before.
All right. Okay. Good. Thank you.
Thanks.
We've got some.
Yeah. Sorry if I can. It's Pia here. Another question popped into my mind with regards to China. I'm now contemplating, of course, the challenges you have had in China before of really lumpy capital sales. Now you talk about the new business potential in the joint venture of being a recurring revenue model. But do you see any, or how do you assess the counterparty risk in this new deal given that you still have payments that are lagging behind from another Chinese partner?
Yeah. We will be a lot more careful than we were last time in terms of the counterparty risk. It will help that actually if you think about our receivables, they will be most likely from the joint venture company where we are actually a shareholder. So we are going to be fully aware of the situation all the time. So that will help there. So we are not expecting the same kind of difficulties as we had before.
Okay. Sorry, just to make it clear, regarding this joint venture, you said you will be the technology partner. But will you do a cash injection in this joint venture as well?
Yes, most likely. But it's going to be very limited. So I'm talking about in the range of the likely number is in the range of, let's say, tens of thousands. So it's going to be very limited for us.
Okay. All right. Thank you.
We still have time for more questions? Star six, if you want to unmute yourself.
Yeah. Hi. It's Pia here again. So regarding the future outlook now and given that you have been able to secure the FDA approval, so what are your plans with regards to, I mean, an update? Do we need an update to your strategy? And how about your long, medium, and long-term financial targets which were presented in conjunction with the IPO? When will you plan, or when do you plan to update those?
Yeah. Once we have a lot of going on, it's kind of the same situation as it was before. Before, we used to have the technical risk in terms of the FDA clearance. That's now gone. We got it as we expected to get it. But at the same time, we are still yet to see how the business really starts to run. So once we have a bit more visibility on that one and also the Chinese one, we will most likely host a capital markets day and elaborate a bit more our strategy, our targets there.
Yeah. And here, I would like to also underscore is that this is not some FDA clearance. It's not a normal FDA clearance because there is already reimbursement. Quite often, when companies are talking about FDA clearance, then when they get clearance, then they start to go and look for the reimbursement. There is already reimbursement code for that one. And also, there is this HEDIS incentive for the healthcare institutions to starting to use this service. So that is something which puts the stars into the right position for us. Then when you talk about short, medium-term, our plans, I believe that this is just the start, this diabetic retinopathy to be screened. And when you are looking at what's happening in the market, what kind of algorithms there are coming, it will be quite fast expanded into the other pathologies and other screening programs.
And that is something we need to bear in mind that this is not the end point for us. This is just a starting point for us. We need to go first capitalize this investment, get the money in, and starting to look also at the other things. Technology companies, they need to all the time invest money back to the R&D, invest money back to the development and the visioning, and be on the top of this whole business.
Yeah. And at the same time, it's kind of a we believe that this clearance, it also kind of improves our position in terms of there has been some kind of let's say that there has been question marks with regards to the handheld quality versus the desktop device quality. And now we have FDA clearance. We have clinical results that speak for themselves. So that will definitely improve our position in terms of, first of all, with other conditions perhaps in the future and also with regards to the client base as well. And the FDA clearance, it's also a huge merit for us. It can be used in the other markets as well. It's something we can differentiate from the other handhelds is that we are the one with the FDA clearance, the only one.
Good. Thank you for the additional color. I'm still coming back to your long-term or your medium-term targets, but those which were published in 2019. For example, in the medium term, you have said that you prioritize investments in the organization to support growth and then to achieve an adjusted EBITDA margin of more than 30% in the long term. Is there anything which has changed, or are these valid in your current thinking?
Well, we are in a pivotal moment at the moment of how this is a new bit. When we created the first target in connection with the IPO, we didn't have the AI model or the recurring revenue model which we do at the moment. So they might be subject to change. But as mentioned in this call a couple of times, it's kind of a we are in the same situation as many of you are that we do not have kind of too much information about this blue ocean market, how it will actually go with regards to our product. But those will be definitely investigated at that when we have more information about the market and then also how we when we have the capital markets day once we have a bit more understanding of how our new business works.
Great. Thank you so much.
Thank you, Pia.
Hi. This is Juho from Inderes again. One last quick question, if I may. Like you said, there's reimbursement, there's HEDIS scores, and basically, all the clients should be inclined to take part in this revolution. But desktop cameras and AI have been around for quite a long time. And I guess the reimbursement and HEDIS scores have been around for years. So how is the market right now, and has it developed as you have expected?
The one thing is that, to comment on that, one is that the ones having the clearance with the benchtop, they have not really been pushing this one. And if you look at their workflow, how it goes, it's not client-friendly. And also, two images per eye, it makes it also very slow. It's something they have not been really pushing. So they'd be more interested in human read or something like this. This is the first time when the company is really coming and pushing this one. And we believe that those previous things are not good indications on this one at all. And also, handheld, those cameras have not been pushed or tabletops have not been pushed into the primary healthcare because those have not been sellable for there. So now, this is something completely new and completely different.
All right. Very interesting. Let's see. Thank you.
Thank you.
We still have a couple of minutes left if you have further questions. All right. I suppose that's it for today. Thank you very much for participating. We hope to see you again in our Q2 call when we also hope to have a bit more light on how the business in the U.S. has started to run. Thank you very much all.
Thank you very much.