Welcome to this earnings call for Q1 with Mentice. The company reported a very robust start to 2023 this morning. The speakers will be the CEO, Göran Malmberg, and CFO, Gunilla Andersson. My name is Christian Lee, and I will be the moderator after the presentation. Welcome, Göran and Gunilla. Please begin your presentation.
Thank you.
Thank you.
Thank you a lot. Good morning, everyone. I will try to move to the presentation. We have someone that can mute maybe.
Yes. Can everybody mute your devices, please? Thank you.
I'm gonna start by going through some of the highlights for the first quarter. Starting with order intake, which is, I mean, a leading indicator of what we do. A historically very strong first quarter. The people that follow us will remember that we had a very strong quarter as well first quarter of 2022. Despite that, we managed to beat the previous year. Again, people that follow us for some year can see that if Q1 is typically a weaker quarter, if we go back a couple years, we're probably more in the SEK 30 million level than what we are now. That's a very nice start.
Very strong order intake for the medical device industry. I mean, a 63% up compared to the first quarter last year, which is also very nice. I mean, last year was a bit of a slow year for medical device on the back end on a very strong 2021, not to make it too complicated. This is really good and promising for 2023. We had a couple of major orders from large manufacturers exceeding SEK 30 million in the quarter. Net sales at a record high, 22% growth on year-over-year. Reducing the currency effect is 15%. That's an extraordinary strong start of the year, SEK 65 million.
Order book maintained at same level as when we came into the Q1, SEK 126 million. Again, comparing that with a year back or a couple of years back, a significantly strong order book. They're obviously building for the future. Half of that is scheduled for 2023. Very important and that we can maintain a positive operational cash flow for the quarter, even if it's slightly lower than last year. It's really a good position as well for the year. Net gain in-income, slightly negative, but significantly better than last year.
Most importantly, starting off with a very solid EBITDA margin for the quarter, 11% of our net sales for the year compared to negative for the first quarter last year. This is all in all something that we're very pleased of or with for the first quarter. Some details on the order. As I said, I mean, this Q1 is really only surpassed by some of our recent Q4s. Medical device industry, as I said already, up 63%. Medical device order intake is actually on the same level as Q4, which is unheard of. Q4 was a good quarter, but we maintained that as Q1, which is very, really good.
Healthcare system and strategic alliance is slower, but we see that as quarterly, basic quarterly variations. We see that there's a continued strong demand from that. That's nothing that we need to worry about. Net sales, as I said, 22%, 50% organic. Americas region, obviously, there is a strong link between medical device and Americas. But both that is very dominant for the quarter. EMEA as well, a good, very good quarter. They had a fantastic quarter for Q1 last year. A strong order intake there and slightly lower on net sales, but still solid. APAC, lower than last year.
I would say mainly due to we had, if you remember, the Siemens corporate Corindus order in the first quarter that sort of skewed that result a bit. Overall, we see a good demand from the APAC region as well. We can see, as I said before, if you look back three, four years, we have a significant increase in the first quarter. This is what I was going to say. You look at the business segment, which is system software and services.
We can see that we have a growth across all of those three, and as well a significant bump of in the annual recurring business. Gunilla, maybe you do this.
Yes. You already spoke a little bit about the order book. This is giving you a little bit more detail on the order book. We can see then that we are SEK 126.2, and in the graph on the right-hand side, you see that this is spot on the level we had at year-end as well. Of course, it's a huge growth compared to SEK 91.4, which was end of Q1, 2022. We see that SEK 66 million of this is scheduled for 2023. We can also see then that we have quite significant amounts in the software subscription. This is then where we take ourselves into the annual recurring revenue as well. This is for us really important as the growth. SEK 50.3 in there.
There is also including the Ankyras. If you look at the graph on the right-hand side, it's about SEK 9 million. That is the Ankyras piece of the software subscription. About SEK 2.5 million of the SEK 11.4 million is then for Ankyras during 2023. We have a solid, stable development order book of SEK 11 million. The service is then on the range of SEK 30 million, SEK 27.1. Coming to an annual recurring revenue, we are really on a strong path here. We are now at SEK 61 million at the annual recurring. We have a monthly recurring now, surpassing SEK 5 million. It's really both the system and rentals that we do as annual recurring, which is then growing SEK 15 million compared to Q1 2022. Another SEK 14 million for the software licenses.
A solid performance, and we see very limited churn on these contracts as well.
Good. Thank you. I want to continue here.
Conclusion on the quarter. We can really see the 22% growth, which 15% organically. It's really our strongest first quarter historically. We have also 1% of this that is the Ankyras acquisition inside the 2022 or 22%, sorry. It's still a very strong continued gross margin. We see that we are now above 85%, which is very much more than we had a year ago in Q1, 2022. If you look at our reports for the second half of the year last year, you will see that we were up against these levels, 84% and a half, 55% during the second half of the year. This is a continuation of that.
We already seen that we have positive EBITDA for the quarter, positive SEK 7.3 million, and we had - SEK 1.3 million a year ago, despite that we were really strong on sales in that quarter as well. This is then, of course, a two-folded reasoning for that. It's first of all that we get more gross margin or gross profit from the extra sales that we have. We also have cost levels where we continue to save on the external expenses, and we keep the personal cost increase to SEK 5 million in the quarter. This, as you can see, consists of course, increased salary levels compared to the 2022 level. We need to remember as well that the adjustment for salary for 2022 was included in its entirety in Q2 last year.
There is an impact there of about SEK 1 million comparison. We also did capitalize a bit more of expenses from personal cost a year ago, SEK 1 million on that. Then we have, of course, then our variable personal cost level, which is in our world called commission, that is higher as well because of the higher sales. Again, back to cash flow as the last point. I think it's really positive to see that we kept the cash at end of the period at close to SEK 46 million. We ended the last year at SEK 47 million. This means on the real cash flow level, taking everything into consideration, we were just negative of about SEK 1 million. We have positive cash flow from the operating activities and very much so from the profits that we are making, falling through in the cash flow.
The change in working capital is really from liabilities. We generated the positive cash flow from accounts receivables in the quarter.
All right. Thank you. Just have a bit of reflection on the business areas, medical device. I mean, as you see, very strong in the quarter, but just a general reflection that we see really good acceptance for what we do. We see a lot of opportunities to scale with our larger clients. We see larger clients and divisions with larger clients scaling in systems significantly, which obviously helps our margin as well. We already now in Q1, we have two clients that already have passed 10 million SEK. Historically, I mean, a large client, for Mentice , says maybe 15 million SEK-20 million SEK.
This really gives a good view for the year generally for what the medical device side do. On the healthcare side, hospital side, we had a slower intake, order intake in the quarter, but a lot of good activities, a lot of good support. I mean, clearly, we're continuing from what we said in the end of the last year that we are really through the pandemic, obviously. Really we see a strong general demand from healthcare operations of hospital systems across the world from all of our regions. This also bodes well for the year. Strategic alliances, I mean, we have a lot of interesting discussions around the activities in China.
Both Siemens and Philips generates a lot of interest in across all the three regions. As well then with the Siemens robotic side with the CorPath GRX, where we know that they really use our technology in every single situation where they interact with a client. That opens a lot of interest in the market for our products. We really feel good about that mix between these three business areas. Last, yeah, I mean, I just, I already said, I mean, we had from the these two largest clients in the quarter, around 30 million SEK in orders, which is also a fantastic start of the year.
lastly here, we established a fully owned subsidiary now in Spain. We are fully integrated in Spain, and the Ankyras business is now in Mentice fully owned subsidiary. This is obviously very relevant for the Ankyras business. I also want to make a point, and I think I did that when we did acquisition a year ago, that we also see Barcelona as a very strategic position for us or a strategic location for us from a point of sourcing talent. We really see this as an additional development hub for Mentice.
Generally, Ankyras is generating, yeah, a lot of interest from the different markets, but we're still in process for getting FDA approved in the U.S., and it's unclear when that's gonna happen. I can't really say anything about that. It's a lot of activities around Ankyras, and I think the combination of our three main legs here between Ankyras for precision medicine, the physical sim from the New York-based business, and the legacy virtual simulation product really provide a fantastic portfolio of products that serves our clients very, very well. That's sort of what I intended to say, actually. Yes.
Yes. Thank you. Thank you, Göran and Gunilla. Very good presentation and very informative and giving us a good guidance for where you're heading at. Let's open up for questions if we have anyone online that want to start. Okay. Rickard, please go ahead.
Hello, guys. Do you hear me?
We hear you well.
My main question is could you please elaborate a bit on the development of your gross margin and the reason for the quite high number? Is it mix?
It's a mix, obviously. You want to take it first stab.
He.
I can add.
Yeah. Yes, it's a mix. The more we sell of software only, Ankyras is one of those products, for instance. Also that we have more sales on the sort of development side, which is also a higher margin zone. I think what we need to take into consideration as well is that we have some currency impact as well inside our gross margin. I would, I would argue that it won't go to the heavens, would probably stop here around 84%-85%, something like that, our view.
I mean, I clearly see that the product mix and the, and the scale we see with some of this client that acquire more systems and more software in relationship to the amount of development they do with us, that obviously helps the margin. We can move more and more into software-dominated or even software only solution will also help the margin, such as Ankyras, but also on the VIST side. It's a combination. I mean, to Gunilla's point, we probably have a couple of % that is kinda currency related.
Yeah.
We don't present that, and I don't think we have that number exactly.
Yeah.
That's, but an 83%-ish level is probably a relevant level, which is better than we had a year ago or had where we were around 80%. Sure.
Yeah. Correct.
Okay.
I have.
Yeah.
Question on that? I was thinking about the supply issues that you had before.
Yes.
It seems to have eased, and you have better access to components and so forth. Is that supporting your gross margin as well?
Not really yet. I mean, we are working with revisions of our products, that will reduce costs, but we haven't really leveraged that yet. That's still to come, I would say. I can't reveal when we can start selling that updated version. I think we have managed the supply related issues in a good way, but we live in a new era, a new world. I sort of learned, been taught that that's not gonna stop. We're gonna have more of those coming up as we go, and we need to deal with them each and every one as we go. Yeah.
Okay. All right. Do we have any other questions? In the meanwhile, I can continue here. The order intake for medical device industry was quite strong in Q1, while healthcare systems and strategic alliances were a bit slower, you mentioned that it was due to quarterly variations. Would it be fair to expect stronger development now in Q2 already?
That would be fair, yes.
Okay. Very, very short and good answer. Thank you. You reported sales growth of 22% in Q1, of which 15% organic.
Yeah.
That is quite strong in my view.
Yeah.
Your financial target is to grow by 30%-40% per year, on average. Is this feasible in 2023, given the good start to the year?
y too much about the forward-looking statement there. I still think that we still operate with an ambition to improve the profitability and improve the efficiency of what we do. We are not scaling the organization at the speed we did before. Generally, I think that the expectation to be upwards to 30%-40% is going to be a challenge. But I think with the start we have had in the year, it is not in any way impossible. It is
Mm.
It's still possible.
Yeah.
That was sort of, navigating that answer, but that's sort of what I think I can say.
Okay. Fair enough. Thank you. I was thinking about China, which is opening up again.
Yeah.
Still APAC underperformed in Q1. Could you please elaborate?
Well, we had a Corindus order in Q1 of 2022, of eight and a half, SEK 9 million. That's obviously skewed the numbers a bit for this year. Generally, the business on the device side was okay in the first quarter, and I think that we expect a good second quarter in APAC. That's again, I mean, we finished very strong in Q4 or the end of last year for APAC as well. We took a couple of orders in that maybe were expected in the first quarter, so that works the other way.
We certainly had something that slipped over, for APAC, it was actually the other way around, that we had had a strong end of the year. I would really relate this to quarterly variation only.
Yeah.
Mainly.
Sure. Could you please give us an update on the delivery of Corindus order? They haven't received any regulatory approval for CorPath GRX yet.
True.
Could you please give us some where we are right now?
I mean, that obviously means that they have delayed the start of the project for us as well. I mean, the dialogues we have is extremely positive. I mean, as for the rest of the world, the leaders at Siemens in China really see Mentice as an integral part of their go-to-market strategy. It's probably premature to say when they will get approved, but the indications we have heard is that that's gonna happen during the second quarter. I mean, it's always very hard to forecast that when it comes to China and how their regulatory processes or their government process work.
That's the belief that that's gonna happen in Q2. We know that they already have a backlog of mature projects or even orders that will make as soon as they get the approval, I think we can get going fairly rapidly.
All right. Okay. let's take questions from Christian.
Yeah.
Online. Please go ahead.
All right.
All right. Thanks for taking my question. Two things regarding Ankyras. Can you elaborate a little bit more on... As you said, you don't know when you could get FDA approval, but after the approval, can you elaborate a little bit more on how do you expect orders and sales to ramp after that? The second aspect, can you elaborate on, you know, shifting some development resources to Spain? How much do you plan to shift over time? For example, what's the difference in labor cost, for example, for software developers?
Always very detailed and good question, Christian. Thank you. On the first question, on Ankyras and the what will happen when we get approved, I would say that the nature of the Ankyras business is that we believe we can take early orders. As for the order we presented end of last year or in Q4 of last year, we have an order intake, then the revenue is distributed over time because the revenue is really allocated when the customer utilize the product or use cases, licenses related to cases.
I think that we would be able to get an order intake, hopefully, relevant order intake fairly rapidly, but I don't think that will have a net sales effect, limited in 2023, if any, and then that it will be delayed into 2024 and onwards. That's the characteristic of that business. With that said, we already obviously have started dialogues with many of the main device companies. They are ready in the blocks, so to say, to get going. We have an aspiration of being able to move fairly quickly as soon as we get the approvals.
On the Barcelona thing, we don't have any concrete plan to move or relocate development at this point. It's just when we can start initiate growth again, we believe that the it's viable to increase our organization down there. We think that there is a lot of technology of the technology that I think makes sense to do that. For instance, we're talking about cloud and similar, that is a resource that is relatively easy to find. I don Gunilla, I think we would distribute our VIST, so our legacy product, the virtual simulation development to Barcelona. We sort of after multiple years decided as yet to consolidate what we had in the U.S. to Sweden from a developer point of view.
That I think we will continue drive from Sweden, from Gothenburg, but then add on to new technologies, new applications, and also maybe things like the cloud or the or similar. That's the idea. In terms of cost levels, it's hard to say exactly. I think the main thing is that there is a lot of talent in Barcelona. It is easy to source talent in Barcelona. The cost of living in Barcelona is much lower. I mean, significantly lower than U.S., obviously, but also lower than Sweden. If you compare to U.S., I would say the cost of an individual is probably half.
Mm.
Sweden and Spain is a little bit maybe 25%-30% lower...
Yeah.
if it will be relevant.
Yeah.
Just to give you rough numbers. Don't hold me accountable for those, Christian.
All right. Got it. That was all from my side. Thank you so much.
Was those the three questions? I think it was, right?
Mm-hmm.
Yeah.
Thank you, Christian.
A follow-up question on Ankyras.
Mm-hmm.
If you could please, comment on the demand, if you compare the demand in the U.S., versus the European markets.
U.S. is by far the largest market as we know. I mean, there's absolutely a market in Europe, and with a large company in this space. I mean, all of the big blue chip ones in the company, in that market for neuro. U.S. is significantly larger and a lot of the decisions, since most of those companies are U.S. headquartered, the decisions are originating in U.S. in many cases. I think a lot of these initiatives will be driven from U.S.
We have a couple of them that do separate projects with us in Europe and starting reviews in Europe. I think a lot of this will be driven from US.
Mm-hmm. Sure. I'm jumping back to the Q1 report. You reported positive EBITDA of more than SEK 7 million in Q1. You have never showed positive result in Q1 before. Is this the beginning of a new Mentice? Are you right now about to reach a high ground of profitability?
I will let you answer that, Gunilla. Then I could, I can if I need to, I need to follow up. Yeah.
Yeah. I think, as they say about the flies in summer, I'm not sure that I would want to be more than celebrating, of course, that we made a positive result. We have really changed our mindset to profitable growth rather than just growth, which I think is now walking through the whole of the organization. Yes, our ambition is high. I still would want to say this about the fly. Don't expect this to be summer yet.
Yeah. Sure. You're still far from reaching your short and medium-term target for EBITDA margin of 30%. What can you do to accelerate reaching this target? Are there any more initiatives that you are considering other than those you have already implemented?
Yes, absolutely. I mean, we are working with an internal project where we, where you look at all different areas of our business, and we also look at the interface between the different parts of our business. It's sort of a lean production exercise that we've initiated in beginning of Q4 of last year. We have a lot of these things. I mean, one example is that we are implementing now an e-commerce platform to move the low-ticket items over to an e-commerce structure that would make our order and delivery process more efficient. I mean, allowing for people to order using a credit card, for instance.
Those are things that we're working on and implementing over the year. We also have a lot of IT and system-related things that we can improve the way we're doing things, avoid doing, you know, double input of the same information in several systems. There clearly we have ways to do. As I think we talked about during last year, I mean, it's for me, it's really thinking about productivity per head, per person, and if we can scale in terms of... I mean, if we can maintain a higher gross margin, if we can sell more software, we can sell more system per $ of development-
Mm-hmm
... we can maintain that top-line relationship with the number of heads that we need to deliver that.
Mm-hmm.
It's really a mix of that. It's in no way we have stopped that activity, and in no way we are done. We have a lot of things to do, and I think we just scratched the surface of the opportunity we have to be more efficient, really.
Yeah. Sure. I also noticed that you increased annual recurring revenue quite significantly in the Q1, up 93% year-over-year and now accounting for more than 26% of rolling 12-month sales. What is the ambition for annual recurring revenues going forward, and will this support higher EBITDA margins?
I mean, definitely, it will support higher margins if we can continue. I mean, you know, I think everyone on the call here know that there is a sort of a break-even point between perpetual and a SaaS model around 2.5-3 years or even 2 years. Obviously, if we can show, we've been operating now with this since end of 2019, so really 2021, 2022, 2 years. We are at that point now that we should start benefiting from that bump. Absolutely, that is the idea. As you know, we have not moved yet for the medical device industry to a SaaS model.
That's something that we carefully need to do.
Yeah.
Eventually, I want to move there, and I think we should get more scalability. My ambition really is to, I mean, ideally, and I think I joked about that before, it would be good for my heart, at least, that we can come into a year with maybe 60%.
Mm-hmm
we know what we have...
Yeah
... to logically and avoid coming up, coming into Q4 and need to generate 40% of our orders in order revenue in the end of the year. If we can come into a year in, say, a couple of years with over 50%, maybe 60% of our revenue already allocated for the year-
Mm-hmm
that's really where I want to be.
Excellent. Another question from my part. The cash flow is one of your top priorities, of course. Given the positive start to 2023, do you feel confident about showing positive cash flow for the full year, and what will be key for that?
I will start, and you can follow on, Gunilla.
Yeah.
We. That's absolutely our main ambition. It's very clear. We made a statement, both me and Gunilla, to the board that that's the primary focus this year. We know that that's the expectation from the board and the owners.
Yeah
... that we should generate positive cash flow. That's also why we are so focused on not, increasing cost levels, before we know that we can support that.
Mm-hmm.
We also have a continued focus on making sure that we get paid in time. We had a lot of scrutiny on how we take orders, how we get paid and all of that. All of that is, I would say our highest priority across. I mean, we want to grow. We want to demonstrate that we can organically grow in 2023, and I think we will. I would say that positive cash flow for the year is priority one, and I'm certain that we can manage that.
Okay.
Gunilla, would you want to add something?
You want to add something, Gunilla?
I think, we did a really high effort during the Q4 to really get paid for some of our really old receivables. That extra bump that we did in Q4 last year, I don't expect to get this year. At the same time, I think we will be generating cash flow more over the year rather than.
Yeah
... so much focus on it in Q4. I echo Göran's mind here that, yes, we definitely need to be profit- or positive cash flow at the end of the year.
More related to our actually running business.
Exactly
... than last year. yeah.
Yeah. Yeah.
Yes. I have one final question, and it's regarding the competitive landscape. I mean, there has been some moving parts since Surgical Science acquired Simbionix. Are you still gaining market shares? Have you seen any changes to the dynamics of the markets? Have you seen any other competitors emerging?
We see some smaller competitors emerging in especially in the emerging markets if I dare to call it that way. I mean, China and Asian market, which we see some smaller startups coming, mainly focusing on the hospital market. We have since before a couple of others focusing on the Eastern Europe and the Russian market and so. Nothing that really changing the landscape in a significant way. A lot of them have a very academic focus or have an academic focus, and they also approach the market similarly to what CAE and Surgical Science does, i.e. to become or to be a one-stop shop for an academic training center.
As I've said before, that's not our focus. If you look at the European and U.S. market that is, I dare to say, a bit more mature, our interaction with hospitals are almost entirely through the specialty department. We are not really talking to a client that want to have simulation equipment in other areas. The competitive landscape there is a bit different. With that said, I mean, obviously, Surgical Science clearly is the strongest competitor in the market that require bundles, that you build a new hospital in China or in India or wherever, and they want to have everything that you need for a skill center. Simbionix and Surgical Science is a very tough competitor there. They have good solutions.
There are a couple of other companies, CAE, VirtaMed, and a couple of others. We don't really compete there, and we really can't compete there. Still, if we can circle out the endovascular part of a tender, we are doing that or successfully doing that in a lot of cases. Then we compete on the merits of our product. We're pretty confident that we have a strong position if I'm trying not to be arrogant, but I think we have an extremely strong technical position. In the industry side, we have some incumbent clients with these two main competitors where we try to get our products to replace the incumbent in the incumbent player.
With respect to new clients, we rarely see competition to that level. I think that what I usually say, and that's been true for a number of years, that if we have a client with an experience of what they need and maybe used simulation before, I would say we will be the selected vendor in most of the cases. We see that obviously some of the larger deals we presented last year, beginning of this year, come from client that have moved from another vendor to Mentice. We see a lot of opportunity for that both this year and in the coming couple of years to replace some of these incumbent players. From a competitive point of view, hospital side, absolutely. Less so on the device industry side.
Mm-hmm. Okay. Very good. I don't have any more questions, and it seems like your presentation was crystal clear. Don't have any more questions online. Thank you very much for coming here and answering all our questions.
Pleasure to be here.
Thank you.
Thank you. Bye, everyone. Thank you.
Bye-bye.