To Optomed Q2 investor call. My name is Sakari Knuutti, and we also have our CEO, Seppo Kopsala, and Lars Lindqvist with on the line. Our Q2 release came out this morning. The presentation, our presentation is available on our IR site. It's www.optomed.com/investors. Note to everybody that everybody is muted for now, but in case you have questions, you can unmute yourself by pressing star six. Okay, Seppo. The stage is yours.
All right. Nice to have all of you here. I am Seppo Kopsala, CEO of Optomed, and I will walk you through our Q2 results. In the presentation, let's go straight to the slide number 3, looking at the highlights of the second quarter. Revenue decreased 7% to EUR 3.7 million. The reason for declining revenue was significantly reduced sales in China. Our camera sales reduced by over 90% in China. That was partly compensated by a strong growth in rest of the businesses. All our other business areas, including software, OEMs and rest of the world camera sales continued strong growth.
We completed a directed share issue, and the company raised EUR 4.8 million in equity. These funds are to secure the successful launch of our AEYE camera in the United States after we get the FDA approval. Going to slide number 4. U.S.A is the number one focus market for Optomed. After completing the clinical trial, we have been proceeding in FDA clearance process for our product. We cannot provide the estimates, but when the possible clearance is coming, but everything so far has been proceeding as planned. Anticipating the upcoming launch, we have now started hiring a lot of sales and marketing personnel.
They were main amount of those people were hired during the second quarter of the year. Now the internal trainings and preparations have started for the upcoming launch activity. In China remains a challenging market to forecast. Lockdowns still affected significantly on our second quarter business in China. We couldn't do much sales activity still. All the major cities, they're still under lockdowns. Now the lockdowns have finished, and people can gradually get back to business. We do believe, and we do expect that during the second half of the year now China market starts recovering as well. That is how it at the moment seems.
For sure, it's an early stage, and we need to start rebuilding our China channels, almost from scratch. Going to slide number 5. This is the main prospect what we are working on Optomed. Bringing this Aurora AEYE camera to the U.S. market, and we bring it to primary care locations after receiving FDA approval. Altogether, depending on different estimates, there is about between 200,000 to 500,000 potential point of care locations in the United States who can potentially and who are looking to or considering start doing screenings for diabetic retinopathy. We are aiming to those locations.
Depending on the different estimates, we believe that within five to 10 years, there will be at least 50,000-100,000 AEYE-connected cameras in the U.S. in primary care locations. We want to be one of those main providers of these systems. This will enable us to make a tremendously big recurring revenue in the U.S. if we succeed in this plan. This is where we focus now all our sales and marketing and business development efforts in the near future and coming years. The solution is very unique. It's the first and only handheld camera that will be FDA approved with this AI solution.
It's also the clinical performance is excellent. We have one of the best-in-class numbers in terms of sensitivity, specificity, and imageability. All these critical numbers are very top quality in our system. The solution is also very low cost compared to anything in the market. We have a reason to believe that we can take a significant market share from this market. Reimbursements are now existing in the U.S. for these examinations and for these clinics.
It increased these Medicare Star Rating numbers and HEDIS scores, which are important for these clinics to have higher reimbursements for their examinations and bigger patient flows. This is a true revenue-making product into those primary care clinics. Going to slide number six. Q1 2022 financial highlights. As mentioned, revenue decreased 7% to EUR 3.7 million. Gross margins decreased slightly. That was mainly because we had a bigger amount of OEM deliveries during this quarter. The other sales mix was not so favorable in this quarter. This is not a trend. It's more like a variance quarter-over-quarter, random variance.
Also, in a reference quarter, there was a half a million one-time item. That was visible in the reference quarter numbers. Adjusted EBITDA was minus EUR 800 ,000 which was quite much in line with our own planning. Cash flow from operating activities was minus EUR 1 million. That was mainly due to the increased sales and marketing and business development expenses, exactly, especially in the United States. However, it was still better than one year ago. Going to slide number 7. First half of the year, it was EUR 6.95 million, minus 12.7%, compared to the reference year.
Second quarter showed a little bit improvement compared to the first quarter of the year. Still not back to growth yet on the second quarter. Gross margin 62%. Again, the reference period was affected by this EUR 0.5 million One-time item. Cash flow was in the same level like in a reference year. Going to the Devices segment highlights, slide number 9. Revenue in China decreased over 90%. We had a very big Q1 and Q2 last year in China, and now we didn't have, we had only very little revenue in China during those quarters. So that affected in Q1 and Q2 now.
The revenue decreased by 28% because of that. Our other channels, OEM and distributor sales, they grew over 40% this quarter compared to a year ago. Western markets, the demand is good and the markets have recovered from the COVID. EBITDA was - EUR 460,000. That was mainly affected by this reduced China revenue and increased expenses in the United States. Software segment highlights, going to slide number 11. There was one larger solution delivery made in Q2, affecting positively in revenue.
That was mainly other businesses and the recurring revenue continued stable growth on top of that. Gross margin was a little bit lower. Again, this was more like a random variance. It was just in this case the sales mix. EBITDA was significant improvement. However, almost half a million EUR positive EBITDA. Software segment is doing good, continuing good stable growth. Our outlook 2022, slide number 12. We keep our full year 2022 revenue forecast. At the moment, it seems that the second half is coming up strong.
All the Western markets are expecting very strong growth in camera sales. Software is expected to continue growing, and also now that China is expected to recover. However, the biggest uncertainties are related to recovery of China. At the moment, it seems that we have been able to resume our sales and marketing activities, and there is a demand on the market. It's early stage, we will only see after a few months how the China recovery will continue. That's the uncertainty related to this forecast. Balance sheet, I will give floor to Lars to walk through the balance sheet and cash flow.
Thank you, Seppo. That slide number 13, balance sheet. Equity ratio about 60%, almost 64%, and a good level naturally boosted up a little bit by the new financing in Q2. The borrowings of EUR 6.3 versus EUR 5.8 the year before, we think still then we have a good balance between equity and borrowings. Net working capital of EUR 4.2, going down from EUR 4.8 last year, mainly driven by increased inventory due to the ramp-up of new products. Lower accounts receivable, better cash in, and higher payables due to the ramp-up of the production, so to say. Interest-bearing net debt of -EUR 0.8 versus -EUR 2 last year, and minus means plus cash, so to say.
The cash is higher than the debt. Going to 14 cash flow. Cash flow from operating activities - EUR 1 million versus - EUR 1.4 million last year. The increase in investing activities is due to the capitalization of product development, which is in the peak during the first half of the year, going down in the second due to the new product being ready. The increase in finance activities is naturally due to the directed share program concluded during the quarter. By that, I hand the floor over to Seppo.
All right. Thanks. Slide number 15. We continue our core strategy through expanding the business through these three directions. To really squeeze it in a brief, it means that we are strongly pushing towards the U.S. primary care market and the key product will be Aurora AEYE camera. Expecting to receive and pushing towards FDA approval and then commercializing this product. Compared to couple of years ago, the focus is now very tight. We have tightened that in the United States. The key thing that has changed during last two years is that now there is a reimbursement for this AI-based examination in the U.S.
It is a tremendously big market and market opportunity. There is direct financial incentive for these clinics to start now doing these examinations in a primary care level. We do believe that we will have a winning product once we get that to the market. This is where we are now focusing all our efforts. We do believe that after few years we will be a significant player in that market. That was the Q2 presentation. I will be happy to receive questions now.
Please remember, you can unmute yourself by pressing star six.
Hi, this is Pia Rosqvist from Carnegie. Can you hear me?
Yes. Hi, Pia.
Hi. Hey, thanks. I've a couple of questions or actually more than a couple. If I can start with the sales of devices. You refer to a very strong sales outside China, and OEM sales seem to be returning. Can you describe, you know, the visibility into the OEM channel? Will the recovery be a lumpy one, so large orders in one quarter and then again a couple of more quiet quarters while the OEM channel digests these orders? Also, have you any visibility into the distribution channel? I mean, who
Yes.
Who is buying, who's the end customer?
First part of the question regarding the OEM channels is that we do foresee that at least some quarters forward, the OEM sales should continue more or less in a level what we have now achieved. Then, we don't see the reason why it would start going down again. It seems that gradually OEM sales is recovering and the trend is positive until foreseeable future. Second question for distribution channels. They are those same distributors who we have been serving several years and who went quiet during the COVID, but now the end user demand has been recovering now last one year. That is a stable growth in the distribution channels.
We don't have too many cameras in the channel at the moment, so channels are pretty lean at the moment. This demand is coming from the end users, meaning eye clinics, optometrists, and more and more primary care clinics.
All right. Good. Thanks. In the second quarter, can you discuss a bit more about the gross margin? I mean, excluding the grants, in the comparison period, do you feel any pressure from higher input costs, or has there been a change in the gross margin of OEM sales? Or I'm also a bit confused about the software. You say that there has been, you know, a solid license sales in the second quarter, but yet the gross margin in software was also lower. Can you add any color to these themes, please?
Sometimes when we make these project deliveries, there are also one-time costs from our side to deliver these projects. They are a little bit visible now in the software segment. That was lower than normal, but this is more like a random variance. We do believe that software gross margins in the long term, if you look at whole years, will remain roughly on the same level as we have used to have. No change in the fundamentals on that or in the business. On the devices segment, production cost and the cost of some key components have increased within last 12 months quite much.
That has been a little bit visible in our gross margins. We do expect that devices segment gross margins will continue in a level of between 50% and 60% in coming future as well. This was a little bit exceptionally low. There was a bigger proportion of lower margin OEM deliveries in this quarter compared to the earlier quarters. That's more like a random, not a trend.
Right. Thank you. You say you have some people back on the ground in China. What kind of costs should we expect from, you know, rebuilding the distribution channel in China?
We do expect that if you look at roughly the average cost in China within last 12 months, so that's about a similar type of expenses what we can expect. The team is about-
Okay.
Similar size and the other marketing and those costs, they are not that tremendously big in China normally.
Okay. No major
Yeah. No, no.
Yeah.
Cost will not go up in China in that sense.
Okay. If I still can continue with a couple of questions. You say in the report that the profitability should improve or will improve in the near future. Can you comment anything more on the time frame when you expect to turn, you know?
Yeah.
decrease losses or turn even profit-making, on, you know, EBITDA level?
Now during the second half of the year, a lot of our main business development, project marketing activities and also investments in new product developments, they are coming to an end in main parts, or the heaviest parts, by end of the year. We start seeing towards end of the year, mainly I could say Q4, already decreasing expenses and which will further continue decreasing in Q1 next year. The full next year should be significantly better in terms of EBITDA compared to earlier.
Okay, thanks. I have still a couple of more, if I may. You say you have renegotiated the payment schedule with the Chinese clients. What makes you assess that the risk for credit loss has not increased despite the renegotiated payment schedule?
We got sufficient amount of financial information about the company. The company has had a positive development within the last six months. Earlier we had a payment schedule that was a little bit lumpy. Between every six months or so, there has been bigger single payments. Now it's more stable. We receive these receivables every month in a faster rate than earlier. It's good for Optomed and good for this new company. Now it seems that the company, at least what we see from the documentation, is that the company is getting into a positive development track.
Okay, good. Thanks. Finally, my last question is on the changes in your management team that we've seen now during the second quarter. Larger changes. Isn't it a bit worrying that in this phase of your journey, you have larger changes to your management team who should take the company to the next level?
This is more like a natural development of the company. It is made in a mutual decision between the people. Basically the situation where we are at the moment is that, for example, when it comes to financing and the CEO and Lars' position. Lars' main job, as an experienced CEO from Stockholm, was to help company to get IPO ready and make the IPO, help the company to get public listed and establish the reporting processes and team. Mainly all those work was very much done.
Of course, after that IPO there came COVID and so that changed a little bit and caused some extra work. Now the company is in a stable track in that sense. That work was well done. That was the reason behind the change in the CFO position. There was this marketing. We are now shifting the focus quite much towards the United States and there is a local team that we have built, and the focus will shift quite strongly there. That was the second maybe what you are referring.
Yeah. All right. Good. Thank you. Thank you, Seppo. That's all from me now.
All right. There are still more time for questions, so if you have any, please press star six to unmute yourself.
Yeah. Hi, it's Pia here again. If I still may continue with a question or-
Sure.
No other questions. Yeah. Good. I've noted that Baxter is also proceeding now with its handheld camera for the U.S. market, and they also seem to have an AI solution in the making, which is pending FDA approval. From an outsider's perspective, again, Baxter with its significantly larger, you know, sales and marketing resources makes me really, you know, question why you are so confident that you will be able to, you know, proceed well in the race for handhelds in the U.S. market should Baxter also enter the market with their solution?
That's a very good question. First of all, we see that as a tremendously positive thing. The biggest challenge is how to kickstart the market and increase the awareness among these 500,000 primary care units or point of care units. Companies such as Baxter so they can really speed up the development of this market and pick up of the market. When it comes to purchase decisions, we do think that we will be very strong. We have been competing against this camera, this Baxter camera. It's a Volk camera made in Taiwan by the Taiwanese subcontractor. We have been competing with that camera in U.S.A and international markets for the last five years, maybe six years.
We are very confident for our product. This product, when any customer have done head-to-head comparison, we win these cases, and that's simply because the features of the camera and performance of the camera and quality of the camera. In camera-wise, we know that we have a much better product. The second component is the AI solution. The AI solution is coming from company called Digital Diagnostics. It's the first FDA-approved AI solution, but it's already, I would say, pretty old. Their sensitivity and specificity numbers have not been that high.
In that time when they received 2018 FDA approval that was best in class, but it's not best in class today anymore. Now they are basically combining AI solution that is not the latest technology anymore with the camera that is not the best in class. That's why we do believe that they will not be that competitive when the customers compare head-to-head. Of course, they have a very big marketing machine. That is a different thing.
We have seen earlier in the United States and other markets as well that customers still want to have the best performing product. In that sense, we will be doing well.
Just to build on a bit what Seppo said is that, they are just starting their clinical trials. There is a long journey to actually.
Yes.
get products approved and to the market. We have a significant head start as compared to them, which is a great thing.
Yeah. That's true. Exactly. Yeah, it's also we will see if it's how many years it takes before they possibly can get that combination approved, exactly because the performance of the camera and usability of the camera is not, you know, same level like ours.
All right. Thanks for the answer. Finally now for me. On the FDA approval process in the U.S., do you have any, you know, interim steps, any signals? I mean, what are you referring to when you say that the process proceeds as planned or as expected? Have you received any, you know, interim signals from FDA that things are proceeding well?
We work together with our AEYE partner, AEYE Health, with the appointed consultant company. It's a legal firm or FDA consultant who has helped us with the FDA application and the process. It means that we get the constant feedback from this consultant and their expert estimates if there are concerns or how the process and the application is looking based on their constant interaction with FDA authorities and their experience with the other similar devices. At the moment, everything is going as expected, and there are no red flags or major concerns.
Just a normal additional questions and what we receive from the FDA. I need to emphasize now that I don't want to provide estimates or any guidance to the market. FDA is very sensitive on that. We don't give too early ideas how the process itself is going. So far so good. No red flags and everything going as we would expect as a company.
That's clear. Thank you so much.
Do we have any additional questions? Star six for unmuting.
Hello, gentlemen, this is Juha from Inderes. Hopefully, you can hear me.
Yes, I can. Hi, Juha.
Yeah. Sorry, I was late for this party, but perhaps my question has been asked, but I'm just wondering about your outlook because you are saying that the Chinese market is still creating uncertainty regarding the guidance. I'm just wondering if the Chinese market doesn't open up or the Chinese say don't recover, are you able to reach your guidance this year?
Yes. Our guidance is obviously for the full year, and then the first half of the year was weak, so there is a lot of things to catch up during the second half. At the moment, even without the Chinese market, the second half looks very strong. We do need some sales in Chinese market also in order to grow this year.
All right. Fair enough. Also about Aurora AEYE, naturally, the FDA hasn't approved it yet, but they're saying that it's going to increase your growth in the coming years. Should I understand that you don't expect any sales this year from Aurora AEYE?
It depends on the schedule of the FDA approval, which I cannot comment. As soon as the approval comes, we do have a good idea who will be the first customers, and we do believe that the sales will start pretty fast once the approval is received.
Any color on the lead time, let's say, like this, how long it will take to launch the product and get some sales from the FDA approval?
We do believe that the first installations will be done within a month or two after receiving FDA approval.
All right. Thank you very much. That's all for me.
We do still have time for further questions, so star six please if you have any questions. All right. I suppose there are no further questions at this stage, so this concludes our Q2 investor calls. Many thanks for joining and welcome to our next investor call after Q3.
Thank you.
Thank you.
Thank you.