All right. Good morning. Welcome to Optomed Q3 investor call. My name is Sakari Knuutti, and I'm the CFO of Optomed. We have also Seppo Kopsala, our Founder and CEO, on the line. Our Q3 release came out this morning, and the presentation that we will go through in this call is available on our IR site. Note to everybody that if you want to unmute yourself to ask a question, you can press star six. All right, Seppo, please go ahead.
All right. Thank you, Sakari, and let's go through the Q3 numbers. In the presentation, we go to Slide 2. First of all, we had a strong quarter in the devices segment, so we are back on a growth track driven by the strong growth in the Western markets. However, we still are struggling to find growth in China. China market remains challenging and closed at the moment. Regional lockdowns affect that, and we have not been able to rebuild our sales channels as expected in China. We are currently evaluating various options, but what we are doing with the China market to get it back on track.
Software segment is at the moment focusing strongly on development and finalizing those Aurora AEYE AI system that is ongoing FDA approval process. Providing the documentation and support for that, making the final adjustments, and at the same time finalizing Avenue Flow software product development. That is affecting currently and in the near future software segment revenue. FDA process for our Aurora AEYE camera is ongoing, and I cannot give comments at the moment, but it is proceeding according to the plan. Sakari.
All right. Moving on to Slide 3, which is the key figures for Q3. Seppo will go to more in detail through the business drivers and the relevant details. I would like to comment on a couple of items that are affecting our P&L on group level. First of all, I would like to highlight the non-recurring item. As we disclosed in our release, we terminated a product development project in relation to a product in China, or the target market of which is in China. This meant that we had an impairment of EUR 1 million that's affecting our EBIT. In connection to the same matter, we had received a loan from Business Finland to develop this product.
We get a waiver for the loan, which is EUR 840,000. That loan was basically forgiven, and that's shown in the other operating income of our P&L. Finally, we had a third item affecting this. We also made an inventory provision of EUR 200,000. This is partly related to the same product termination or project termination, and the EUR 200,000 is affecting our COGS and thus gross profit as well. Secondly, we haven't been really commenting on this category before, but I would like to say a couple of words about Forex items and how they are affecting Optomed and first the top line.
As you can see from the release, we only receive limited support from Forex in spite of the USD being actually quite strong at the moment. On the software side, there is virtually no effect on our software segment. As it comes to devices, the positive effect of the Forex is 5.2% on revenue. Secondly, the cost side. It's good to note that, as most of you already know, we pay in USD to manufacture the devices. This means that our COGS are increasing due to the increased USD-euro rate. Also, we have just increased in the U.S. our marketing and sales personnel. This is done in anticipation or expectation for the FDA approval.
Those costs, those salaries are already burdening our Q3 results, and they are paid in USD. The net negative effect on our EBITDA, taking into account the increased revenue, is a low six-figure number. Also, finally, it's good to note that unrelated to the Forex, we have also cut costs, especially on the admin side, on the group level, but they are not visible on our Q3 yet. Moving on to Slide 4, the year-to-date numbers.
Here I would like to simply shortly point out that it's good to note that if you look at the revenue change, we are still 6% behind last year, and this is due to the issues or difficulties in the Chinese market. This is also the reason why we put out a profit warning last week.
Okay. Thank you, Sakari. I will continue going through the segment highlights. We continue to Slide 6. The revenue grew 45% in the Devices segment, driven by the strong performance and strong demand or growing demand in the Western markets. All channels performed well except China. China markets continue remaining down. As mentioned, we are currently assessing different strategic rebuilding alternatives. We do believe that there is still a tremendously large demand for our products and need for our products in the China market. It's a channel question. We are currently looking for a new large strategic partners in China.
However, our own investments and own fixed cost they have been downsized recently during this year, and they remain for time being in relatively low level. Strong USD has provided a little bit support in our U.S. revenue, but that is still not that big part of the revenue. Almost all other business we write in euros, as Sakari mentioned, as a revenue. However, the strong USD is affecting our production costs, meaning COGS and also we have hired the U.S. sales team. That is now visible in a higher fixed cost in this segment.
There was this one-time item related to our ROP camera. Maybe I could tell a few words about this camera product which we terminated. This is first generation of our pediatric camera meant to be screening and diagnosing one specific disease of newly born infants called ROP, retinopathy of prematurity. This product was developed especially for the Chinese market. This is a challenging product. It's a direct sales product. It requires very much trained sales force and expertise. Selling volumes are low, and the unit prices are high, and the sales cycles are long.
In a current market environment in China, it is not possible for us to sell this type of product and to maintain profitability with the sales team. We don't have good prospects for that product. At the same time, that product would need further significant investments to develop it further. It's not a doable or rational choice in this market situation. That's why we terminated that product. We got a waiver from Business Finland for the loan that was invested earlier for development of the first generation of this camera. Going to the Software segment, Slide 7. Nothing significant changes.
Business as usual, very much, in terms of Software segment. The big effort is currently finalizing our Aurora AI product development and Avenue Flow product development. This has been announced earlier that those two products will take quite much our focus during this summer and later this year. This is now temporary affecting the segment. Otherwise, no big news from that segment. Business as usual.
Seppo, do you want to still comment on Software segment, or shall I move-
No, you can continue to the Slide 8.
Very good. On the cash flow side, I have a couple of two items that I want to highlight. First of all, the non-recurring items, they have been netted in the cash flow from operating activities, so that is a valid number. It's something that you should be looking at. Then secondly, if you look at the comparison period net cash from financing activities, we had that share subscriptions there, where it's EUR 500,000 , and then a loan of EUR 1 million, which we didn't have supporting this year our cash flow. That's good to take into account when you are assessing the figures here. Moving on to Slide 9, which is our outlook. As you most likely noticed that we took last week down our outlook.
Previously, we said that the company is going to grow on the top line level, but now, we think that the revenue is actually going to stay on the same level as it was last year. The reason is for this, the decrease in outlook is the previously touched upon subject of China. The Chinese market has not emerged back like we expected earlier during the year. Even though all devices sales channels but China and the Western market definitely is doing really well. We would need also support from the China to reach the last year's revenue level or exceeding it. We have also the second item, which Seppo just mentioned, is that the software segment has been focusing on R&D.
That means that our utilization rate for the software segment is down, and that means again that the revenue is down. That's again burdening our top line growth. In midterm, we do have coming up new product launches, for example, if you think about the Aurora AI, but that doesn't have an effect on this year's revenue prospects as we are moving to the recurring revenue OpEx model when we are selling the product as OpEx. The revenue will be divided by the term of each of the lease contracts. That even if we got the approval today, it doesn't have a major effect within these two remaining months of the year.
Okay. Thank you, Sakari. I will continue to Slide 10. This is a reminder about our key business model, what we intend to implement in the U.S. once hopefully we will get the FDA approval for our Aurora AI. Earlier we have sold our cameras as a capital equipment to the clinics and in the future, they will be leased or rented as a complete solution, including camera and the usage of our software and AI service. That will be a fixed annual or monthly based fee for the clinic. Pricing has not been published yet, but it will be very competitive so that even the smaller clinics who have only very low amount of patients can do it profitably.
Benefits of this solution is that we have clinical trials have shown a very high sensitivity specificity imageability rate compared to any solution. There is a new reimbursement for the clinic, and with our pricing, even the low patient volume makes it profitable for the smaller primary care clinics. Overall, we do believe that this is makes the biggest difference in our future growth prospects and profitability in Optomed. It is estimated that within next 5-10 years, there will be around 50,000-100,000 fundus cameras that are connected to the AI in the U.S. doing these screenings and early diagnosis. To give a little bit perspective about the market size in the U.S. and market opportunity.
Right now, globally, it is estimated that globally there is about 200,000 installed base in the world. Almost none of these cameras are still AI connected. Out of these 200,000 fundus cameras, almost half is in the United States. Estimates vary that at the moment, installed base in the U.S. is probably around 80,000-90,000 retinal imaging devices. New installations are made about 10,000 units a year, and about 5,000 units every year are retiring from this installed base. The installed base is growing about 5% a year overall.
There are different segments or categories of the devices which are growing faster, and the screener products are growing very fast at the moment in the United States, and the speed is expected to accelerate in screener product category significantly once the AI is taking off. Part of these existing installed base, which are mainly optometrists and eye clinics, are expected to be connected to the AI within 5-10 years. Even more bigger effect will be that primary care clinics, which means that there is about 250,000 primary care clinics who are not yet providing the screening service, but who can and who are interested to start providing it once the AI products are available, widely available.
This is the way the installed base is expected to grow, and we intend to take a majority part of that market opportunity, especially the primary care. This is where this estimate 50,000-100,000 cameras is going to be based. Going to Slide 11. We continue implementing our strategy. We are expanding to new geographic markets, especially the United States and Latin America markets. We are expecting long-term growth in those new markets. Opening the new customer segments, which means bringing retinal imaging to primary care. That's also where the market is going and the healthcare wants to take the screenings.
The enabling technology besides low-cost portable cameras is combining those cameras with the AI services, diagnostic AI services. This is the key product what we bring. Especially in the United States, providing this AI-connected cameras to primary care clinics, that's our target. I will be happy to answer questions now.
Remember, it's star six to unmute yourself.
Hello.
Yes.
Hello?
Yes. I can hear you well.
Hi. Hi. Jon Berggren from Kepler Cheuvreux. I was wondering how much growth in the Devices Segment, is related to screening products in the U.S. in this quarter?
We are not publishing the numbers, there are various competition related reasons, but U.S. this quarter and every other quarter this year has been the key market driving the growth.
Okay, fair enough. In terms of the FDA approval for the Aurora AI software, is it still reasonable to expect that you'll get the clearance before the end of the year?
This is with the strong recommendation by our FDA consultant. We are not allowed to, unfortunately, comment. I was hoping that I could give you some interim comments during this call, but I'm not able to.
Okay. I understand. If you assume that you get clearance before the end of the year, when can we expect the software-related growth will be visible in your numbers related to this launch?
Okay. Yeah. That one I can. That we have all the readiness now in terms of product and marketing team and the sales team. We do believe that you can see the growth coming. Because the business model and the pricing is not published yet, we will later on explain in detail how we write the revenue in different segments. In a group level, the revenue growth and the installed base growth should be visible in one quarter.
Got it. Thank you. Last question. You mentioned significant recruitments in terms of sales and marketing positions in the U.S. Can you quantify growth of the U.S. team? How many people did you hire, and how these hires affected OpEx in the quarter? And lastly, you know, if we should expect this cost base to increase. I mean, do you expect to hire even more people in Q4 as well as next year? Thanks.
Right now, we have about 10 people in our U.S. sales and marketing team, and half of that team was hired during the summer. They are very, very experienced team.
Okay, thank you. What about the Q4 and expectations for next year in terms of hires?
Q4, we are not looking to hire any more people at the moment. Now the team is complete and trainings and introductions are ongoing at the moment.
Okay. That was everything from me. Thank you.
Can you hear me?
Yes.
This is Gustaf Meyer from Redeye. I have a couple of questions here. Thank you very much for the presentation, first of all. What are your expectations for the Chinese market during the next year? And do you see an improved situation and would you have a lower focus on that market,as you have a higher focus on the U.S. market?
We will have a very much higher focus on the U.S. market because the current stock market situation doesn't allow us to spend any more cash than what we have at the moment. So we need to focus all our available financial resources to secure the Aurora AI product if the approval and further commercialization. So the option to reinvest aggressively in the Chinese market will be a hard option at the moment. So that is how to present for the time being. So that means that our best bet is to seek for key strategic partners in China, and we are looking at those at the moment and having some discussions. But when that will be back to grow track, it's hard to estimate. It will not happen this year.
Okay, thank you. And I would also like to know more about your current work in the U.S. What is the strategy there right now before approval, and have you had any contact with the primary care clinics? So what is your view of the demand interest for the product?
This interest is significant. Well, first of all, every quarter, we make growth by simply selling the cameras without AI solution. A market demand for our Aurora camera has been steadily growing now, already, since last year after it started recovering from COVID, and it continues that way. Even though it is not used with AI yet, in the U.S. market, there are a lot of telemedicine operators and traditional diabetic screening operators, who really like portable devices, and it's also cost-efficient device. The team is selling those products there, at the moment.
At the same time, we have been training the team by what it means to change from capital equipment sales to rental camera model and to provide the service. It's a more complex product initially, too, than just providing a camera. The training has been mostly completed and so the team is ready whenever we get the approval. Same time, we have been working with key opinion leaders. They are very important that they get familiar and excited about this solution. This is big part of the job what we do in the United States at the moment.
Contacting key opinion leaders, working with them, looking at the product, and its features. We hope that we will have a wide amount of key opinion leaders' experience with that product, and they're going to talk with different conferences of their experiences once it's available, and we can do that.
Okay. Thank you. I also wonder, if you receive the FDA approval, will you start directly with the new U.S. business model, or do you believe it will take some time before the rollout?
We will focus very strongly immediately to the new business model. However, there is always a certain amount of natural demand, purely just the cameras. Everybody is not going to run using the AI immediately. For example, eye clinics and optometrists will probably continue working on a traditional way for a long time, continue screening and buying just the cameras, and then eye doctors continue reading the images as well. Our sales team the active effort will be directed quite strongly towards the rental cameras in a primary care.
Okay. Thank you. One last question. What is your general view of the fourth quarter?
We do expect the full year revenue to remain in the same level, roughly, compared to the last year. That means that we expect the revenue to continue growing in Q4 as well.
Okay. Thank you.
Hello, this is Joakim from Inderes. Hopefully this is my turn now. A couple of questions. Most of them have been already answered, but wondering about your investments. Now you are focusing on Aurora AI, naturally, and Avenue Flow. How large have your R&D investments been in other areas? I'm just wondering how much is there to cut or to reallocate.
We have needed to little bit slow down on our other R&D projects, unfortunately. We don't want to end up in a situation that we would have to take on more financing in not ideal terms. That's a trade-off, unfortunately. Anyhow, we have a couple of new products are in very advanced states of development. Typically, our device projects, they last between 3-5 years. That's a normal period. We have already been close to 4 years developing a new product. It's very close to completion.
Now, the next few months at least, it will be a little bit slower speed now until we have clarity about the possible timeline of our Aurora AI FDA approval.
If I may continue on that, could you comment on anything about the new products that we're working on now, about the readiness, needed investments, their potential sectors, countries, whatever?
We do retinal imaging devices for different purposes. Quite much our cameras have more and more AI capabilities. Yes, it's a retinal imaging device coming mainly for the screening purpose. It's a handheld hardware device. Yeah, we don't want to publish anything too early. The product is over 80% ready at the moment.
All right, fair enough. Also related to R&D and your interest-bearing debt, I'm just wondering how much there are similar projects where the loans could be waived if unsuccessful. How much is actually the real debt, or interest-bearing debt that you are going to have to pay eventually?
At the moment, this was probably the last one. If you refer to those Business Finland loans, Finnish government loans, at the moment it seems that all other loans are related to the products which we are currently selling or are going to sell in the future. Probably not any material amounts anymore.
All right. Final question for me. You said that you have cut your admin costs, but it wasn't visible in third quarter yet. Any guidance on that, on how much are we going to see a lower cost in the fourth quarter?
The full U.S. team is now included in this Q3, so there is no significant changes on that. From admin side, if you remember, our CFO was left the company and then Sakari took over, and then our VP of Marketing. Those two people. From the other positions, there was a couple of others. We are talking about reduction of a bit more than EUR 500,000 on an annual level. Yeah, more than EUR 500,000 on annual level.
All right. Thank you very much.
Hi, this is Pia Rosqvist-Heinsalmi from Carnegie. In the report you did, you mentioned something about the promising case you won in Egypt. Can you share any details on this? Should we expect to see, you know, revenues to be recognized over a longer period of time?
There has been a couple of larger new screening programs that has been relaunched or launched after COVID started going away. This Egypt case is one good example of these positive cases what we have been looking for quite the years, but that they are usually takes a very long time since the governments announce these type of plans until they really get implemented. This is the first wave of the bigger implementation. This one specific Egypt project is, for example, they are looking to screen 1 million people in certain regions in 10 locations, and each location takes 10 cameras. It's about 100 Aurora cameras from us.
If it's successful, that will expand in the future. Egypt. There are a lot of diabetics and a big population country. Also, it's one of those examples that will hopefully encourage other countries also to implement similar projects. These type of portable cameras, especially when you connect them to AI, can truly be a solution for emerging countries and developing countries to tackle in a very cost efficient way the highly needed screening volume. Yes, it's a very good example of the potential in the long term.
I just build a bit more on that. It's also good to note that those kind of like the deal in Egypt, they also enable us and provide us with an opportunity to also sell our software solutions in combination with the deal. It's not about only the devices that we are selling. There are also the software elements that's a great opportunity with respect to the national screening programs like the one in Egypt.
Yeah. Yes. That's true. Usually when the publications and the news are made and published, what you find on the internet is, they usually only discuss about the cameras, but actually, in our case, the opportunity is at least as big on a software side in the coming years.
Okay. Just to be clear, so you have won this case, but the deliveries have not yet started.
Deliveries have been started already.
We should expect to see revenue support from this over the next quarters or years.
Yeah. Yes. That's correct. No need to wait for the years.
All right.
During this year.
Sorry, could you repeat that, Seppo?
Mostly during this year already.
Okay. Good. You also mentioned something about the OEM channel being very or some of the OEMs being very active. Is there anything new happening in the OEM channel or just a recovery of the pandemic?
It's a recovery of the pandemic. No, nothing significant. Yeah.
Okay. Looking at your revenue development in a longer perspective, what would be needed for you to reach, say on group level sales in devices of, yeah, what we saw in 2019, so before the pandemic. Is it, you know, likely that you're able to exceed that level, say in 2023 assuming that the FDA approval would be given, so getting back to some, yeah, over EUR 7 million in sales in devices in the near term?
Well, either market, the U.S. market or the China market, could easily do that if either market would develop as expected. If the combination both of markets, for example, if we found a new strategic partner in the China, for example, that could recover within a year. Yeah, I must emphasize that right now we do not have yet such a new channel there available, and I don't give a forecast when that could be found. That alone could take us back to where and exceeding the previous levels. The United States, that's a little bit different thing.
The question is that we are more looking at the recurring revenue now. It is not that the revenue growth will not come in a static quarter. Obviously, when we deliver the devices, it comes steady monthly flow, which is growing, and that's the primary objective. Within a few years after receiving the FDA approval, we do expect thousands of units in the installed base, and that should give significantly a larger recurring revenue than what we have had earlier.
All right. Okay, that's all for me. Thank you.
All right. Is there any further questions? star six for unmuting.
Hi, it's Pia here. Again, sorry, I actually missed one of my questions regarding the visibility into software and you guide or talk about the declining sales in software in the near term. Can you specify this near term? Do we talk about Q4 or also 2023?
We still need to use our software resources quite much in R&D. We are talking about at least Q4. The work what especially we need to do there is this pure software product Avenue Flow development, what we are doing and where we are investing together with Finnish University Eye Clinics, finalizing that and then making the needed documentation for CE and later FDA approvals. Then there is this Aurora AI product and the service. There is a lot of documentation and software work is ongoing on that. This takes at least Q4, maybe Q1 as well.
All right. Thank you so much.
Thank you, Pia. We still have time for further questions. All right. It seems that we are concluded for today. Many thanks for participating in the investor call, and we hope to see you again in our Q4 next year. Thank you very much.
Thank you.