Ladies and gentlemen, thank you for standing by. Welcome to today's telephone conference in conjunction with RaySearch's Q2 Report 2020. At this time, all participants are in the listen-only mode. There will be a presentation followed by a question-and-answer session, at which time, if you wish to ask a question, you will need to press star one on your telephone and wait for your name to be announced. I must advise you that this conference is being recorded today, Wednesday, the 26th of August, 2020. I would now like to hand the conference over to your speaker today, Johan Löf. Please go ahead, sir.
Thank you very much. Good afternoon and welcome to RaySearch's Opening Conference Call for the Q2 of 2020. My name is Johan Löf, and I'm the CEO and founder of RaySearch. I have here with me our CFO, Peter Thysell, and together we'll try to answer any questions that you may have after my presentation. First off, I'll give you an overview of our Q2.
The COVID-19 pandemic has led to a temporary shift of focus of healthcare organizations all over the world, which in turn has resulted in a lower demand for RaySearch products in the Q2 of 2020. Market conditions were quite challenging in North America, while we noted a recovery in the Asian market. In the Q2, net sales amounted to 164 million SEK, which represents a 14% decline year-on-year.
We have taken measures to reduce our selling expenses. Due to the lower license fees, our operating profit declined to minus SEK 11 million compared to plus SEK 29 million the previous year. This means an operating margin of minus 7% compared to plus 15%.
The operating profit was negatively affected by currency conversion effects. When adjusted for these, the operating profit would have been plus SEK 60 million compared to SEK 25 million, so in reality, a less dramatic decline.
Despite challenging market conditions, the cash flow was strong and amounted to SEK 66 million in the Q2 compared to SEK 4 million. The COVID-19 pandemic is affecting people and companies all over the world. As a software company, RaySearch is well-equipped for remote collaboration, and both our research and development activities, as well as our delivery capacity, have remained relatively unaffected by the pandemic to date.
However, the extraordinary measures taken by governments and authorities to prevent the spread of the virus have made it difficult to drive sales and marketing campaigns. Instead, RaySearch has mainly conducted training and marketing via digital channels. As a result, in the wake of the pandemic, we have developed new methodologies for reaching out to customers that will also be useful going forward.
The future effects of the ongoing pandemic are difficult to assess at present. Several countries have started to reopen, but it is still difficult to say how the pandemic will evolve. We expect that the pandemic will continue to have a significantly negative effect on the company's sales and earnings for several months to come. RaySearch is monitoring the situation and the effects of the pandemic closely and is prepared to take action and align the company's operations if needed.
Despite the short-term challenges, we remain optimistic about the future. The underlying need for efficient software solutions for cancer care remains unchanged, and obviously, all cancer patients still need to be treated. We therefore believe that the market conditions will get back to normal when the pandemic is under control again.
One effect of the pandemic could be the further acceleration of the ongoing digital transformation. The pandemic has clearly shown the major potential and benefits of digital technology. This could be positive for RaySearch operations in the longer term because the company's software solutions make it possible for cancer centers to increase their efficiency. This has been illustrated by cancer centers such as Mälarsjukhuset in Eskilstuna, Sweden, and Leeds Cancer Centre in the UK, which quickly achieved dramatic time savings by using our machine learning algorithms for tumor contouring.
Our products have thereby helped to reduce the effects of the current resource shortage, which has also been worsened by COVID-19. RaySearch's long-term strategy remains, and our high pace of innovation will continue. RayStation and RayCare are already the market's leading systems for simplifying and streamlining the highly complex workflows of cancer centers, and we are determined to increase that lead.
More and more cancer centers are now introducing RayCare for clinical use, and in May, we achieved a very important milestone by signing an interoperability agreement with Varian to connect RayCare with Varian's TrueBeam linear accelerator.
Interoperability with Varian's TrueBeam will significantly increase the market potential of RayCare while improving the workflow of our existing customers. The development of RayCommand, our treatment control system, and RayIntelligence, which is a system for analytics and machine learning, are both progressing according to plan. Both will have commercial launches in December 2020.
Our teams are also developing tools to support surgeons in planning surgical procedures to remove tumors and to support the processes in the operating room. In the long term, the goal is that RayStation and RayCare will form a single system for planning, optimizing, and managing comprehensive cancer care within a range of treatment modalities, medical oncology, surgical oncology, and radiation oncology.
Overall, we see both challenges and opportunities, even though we're currently living in a turbulent time due to the ongoing pandemic. This concludes my presentation. Peter and I are now ready to answer your questions.
Thank you. Ladies and gentlemen, as a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, please press star one if you wish to ask a question. Your first question comes from the line of Kristofer Liljeberg from Carnegie p lease ask a question.
Yeah, hi good afternoon. When it comes to the order situation and customer demand, have you seen any improvement when it comes to interacting with customers for new deals during the quarter so that the situation might be better now than when the quarter started? And related to this also, do you think it's fair to assume the Q2 was the low point when it came to sales and orders, or are you concerned the Q3 could be even worse? Thank you.
Okay. The second question, first, I think it's hard to say. It's hard to predict what will happen in Q3. As we have expressed, we are concerned that COVID-19 can still have a significant impact. Regarding your first question, I think we see some improvement, actually, regarding interaction with customers. For sure, in Asia, we see Asia has been very strong, actually, compared to all our other regions in Q2.
We see signs in both North America and in Europe that the customers are starting to be more responsive a nd in fact, I'm going on my first business trip for several months now next week to a customer in Europe, a potential customer, and that would have been unthinkable in May or June so, clearly, we feel that there are things that are improving in that regard. Although I think Europe seems to be improving more quickly than the United States because they are having huge difficulties there.
When it comes to the lower demand, hopefully temporary, you see this mainly being an issue of practical problems, hospitals having had to focus on other items, you have travel restrictions, etc.? Yeah. Or is it also a factor of maybe not in Europe, but in the U.S., that hospitals are stopping investments due to financial difficulties?
It's a factor that all the practicalities that you mentioned, in some cases, there are budget freezes. It just doesn't mean they don't want to open up the budget when things get back to normal because obviously, they need the assistance t hey probably need the assistance to an even larger extent now when there will be built-up demand. There are many cancer patients that don't show up.
They don't have their cancers diagnosed. And obviously, there should be as many new cases this quarter as compared to the quarters previous years a nd of course, these are pretty stable numbers, the number of new cancer cases per year in every region. And this means that we have unexpected stories from customers in Europe, for instance, where they see now patients coming in with cancer, and their tumors are bigger than they have ever seen.
That's a sign of this that people are just delaying their visits to the hospital to get whatever problem they have investigated. What it means in the long run is that when things normalize, we should have at least the same for some time i t could even be an increased demand to handle all the stuff. There's a number of cases of patients that have to be treated t here is no choice y ou have to treat them regardless.
I think our software, to a very large extent, focuses on efficiency t hat's one of the main themes for our various products is that it allows centers to treat more patients per day in various ways. It's just a matter of time t his demand will come back, for sure. The question is just when.
Your comment about Europe seemed to improve quicker than the U.S. Is that because of the budget issues among U.S. hospitals or more about the number of?
In general, it's more under control in Europe.
Yeah. Okay. Okay. Okay. Thank you.
Thank you.
Your next question comes from the line of Kirill Kutlukov from Avaron Asset Management p lease ask your question.
Hello, and thank you for the presentation. I have two questions. So first of all, could you please specify how you are adapting the go-to-market strategy in the current situation you've mentioned this in your talk and the report as well, but could you please provide some details on this?
Yes. In general, we attend more than 150 conferences and trade shows around the world. There are four major conferences that we have a big presence at. Basically, all of these conferences have been canceled or postponed, and several of them have been converted to virtual conferences.
That's one way that we participate in these virtual conferences where customers can, in a similar way, not as efficient, but in a similar way as they go into the conference hall, they go through the conference hall, and they go to a booth, and they schedule a demonstration of the system.
The customers can schedule these demonstrations online instead so, during the summer, instead of AA 10, that should have been in July in the United States, for instance, we did a lot of demonstrations for customers online. And that works quite well given how the system works. We can do those demonstrations quite efficiently, and the message comes across. We do a lot of training online. So we have classrooms in California, in New York, and in Stockholm. Customers don't want to, can't travel here.
So we provide training classes online instead. That has turned out to be much more popular than we had expected. And I think this will be more common going forward because sometimes the clinical staff, it's a big hassle for them to leave the hospital for several days to attend a class. So if they can do this, they can do this much more efficiently by if we give the classes online. I'm not saying the regular classes will go away completely, but I think they will be complemented to a very large degree by these virtual classes.
And then regarding sales processes, we interact with the customers via phone, Teams, various technologies, Zoom, etc., to have discussions, to have meetings, and also demonstrations. But as I mentioned in my answer to Kristofer, now, exactly now, we start to see especially clinics in Europe opening up to visits as well, physical visits.
Obviously, it will be very interesting in the future to see how I think it will be more common with virtual meetings for the customers than before. But especially for the initial contact, I think it's, yeah, it's much better if you can visit in person than if you just have a conference call or a virtual demonstration.
Okay. I see. Thank you for this a nd historically, did you quantify what share of your new orders comes from contacts obtained via conferences, for example, or is it not quantified?
No, it's not quantified. And it's not. We follow this, of course, internally, but it's not public information no.
All right. Fair enough. And then another question I had is, say, what sort of actions do you talk about when thinking about the scenario where sales and orders take longer than expected to recover? So this was also mentioned in the report, and I was curious to hear what sort of cost-cutting measures or organizations you are potentially considering as a fallback scenario.
Luckily, so far, we have had tremendous cost cuts. I mean, it's both good and evil at the same time that the trade o f course, we need the trade shows i t's not great, obviously, that they are having canceled or turned into virtual equivalents. But the not being physically present on those big events have led to huge cost cuts and also all the traveling associated with those shows.
So that has led to a natural cost reduction. Another thing that we do now when we monitor how the situation evolves is that we postpone and we very carefully recruit new people. So there have been a number of quite large number of delayed recruitments where we want to just see how things pan out before we take on more people.
Obviously, if the situation gets much worse, if something unpredictable happens, we have to act accordingly a nd in the end, the last resort, we will have to reduce our organization to adapt to the situation.
But i should say that we are very far from that situation. So far, we have very good cash flow and good liquidity and it's very good that we see that some markets are coming back, A sia is really coming back, and we have a lot of new customers in China this quarter, which is very pleasing a nd as I mentioned, signs that Europe is coming back a little bit.
I think if nothing new happens, like a huge second wave or something unpredictable like that happens, we should go back to normal step by step. May take a year, may take two years b ut if it doesn't get worse than this, then I think we don't have to resort to very drastic measures w e can just, yeah, think of a plan and just be very conservative when it comes to adding new people.
All right t hank you a nd finally, I wanted to talk about the new products that you mentioned, the RaySearch Intelligence. So, a little bit, I'm a little curious about what sort of potential you see for it in the market, and how does it fit into your other, say, product family? What are your expectations with regards to when it will be launched and how you will be marketing it?
We see already that it is a complement to all our other products, especially to RayStation and RayCare, also RayCommand on the line, but that's a much more narrow product, in a sense, but if you talk about RayStation, the treatment analysis and RayCare, what RaySearch Intelligence will do, RaySearch Intelligence consists of three products: RayData, RayAnalytics, and RayMachine, and what RayData is doing is that it is extracting full data from everything that happens within RayStation and within RayCare, everything that is related to the treatment planning of the patient, all the diagnostic data.
From RayCare, everything that's been done to the patient in terms of workflow, administering of drugs and radiotherapy and follow-up, all of this data is sort of sucked out of, extracted from RayStation, RayCare, and later on RayCommand into RayData, which is a big huge repository where you can store everything and also index everything.
RayAnalytics is a way to provide smooth to visualize data, to see connections, and look at population data because if you talk about RayStation, these are one patient at a time. With RayAnalytics, you can extract data covering, let's say, just the size of prostate tumors over 2,000 patients w ith RayAnalytics, you can have that data at your fingertips, and you can look at it and understand connections.
RayMachine can, based on all of that structured data, create machine learning models that are used to drive machine learning algorithms within RayStation and RayCare. We see already that it's huge. We have several of our clinical partners that use already prototypes of early versions of RaySearch Intelligence to work on, to do real research t hey are extremely happy with the ability to look at huge amounts of data in a seamless fashion.
It's a necessary complement i t's not to unleash the full power of both RayStation and RayCare, RayCare was built from the beginning as a machine learning system that will learn from past experience on how we treat patients to improve methods and protocols. For that to be possible, RaySearch Intelligence is a necessary component.
So to say, I can't say now in numbers what the market potential is for RaySearch Intelligence, but it's both an enabler of both RayStation and RayCare to be what those systems should be. But it's a viable product in itself that, of course, creates a revenue stream for RaySearch. That clarifies the picture. I can, unfortunately, not give you numbers, but I can tell you that this is given also that the whole field is moving into a more scientific, more machine learning era. These systems are, yeah, required to happen.
Okay t hanks i just have two follow-ups s o, it does sound like RayIntelligence is more of a product for big clinics, with RayAnalytics being a big part of it. But say, when you extract data, do you pull this data from all of the customers? Or is it customer-specific? So the data is contained within their server, and people cannot access it?
That's a very good question. Yeah c an i answer that first before we ask the next question?
Yeah y eah. Sure. Sure.
Yeah. So we don't collect the data ourselves, but RayData resides within the walls of the hospital or center or the virtual walls in the cloud. They decide where the data should reside. But it's within RayData. So we just make it possible to store this huge amount of data.
The hospital can, with that being said, they can still collaborate across institutions and across countries and across continents. And the beauty with machine learning is that you can train models because hospitals are usually quite protected for their data. That's where they, that's their edge, and that's where they can get a competitive advantage, and that's how they feed their research and so on s o data has this sort of huge value. So they are quite protected.
But the beauty of machine learning is that the models that train on data can be trained on data without the data leaving the premises. So a machine learning model can, so if it's a cluster of hospitals across the world that decide to collaborate on a certain aspect in cancer care, the corresponding machine learning models can go from hospital to hospital and train on the data within the respective hospital.
And the thing with machine learning models is that there is no, you cannot deduce the identity and the structure of the actual patient data is lost in a machine learning model s o it's completely anonymized. And so they can share without sharing the actual data s o that's how we do support that behavior. But it's more of a political decision by the hospitals if they want to collaborate or not. But our infrastructure supports such collaboration.
Okay. So leading into my second question, your answer, I guess, clarifies this s o I was wondering whether the output of RaySearch Intelligence would be the, say, treatment model that can be shared within the RaySearch ecosystem and sold by larger hospitals to smaller hospitals i remember one of your team mentioning in some of our conversations, this especially I think applied to RayCare. Is this the direction that you plan to head to?
Yeah w e are already there, actually. So it affects not only RayCare i t affects also RayStation. So a very good example, we have a collaboration with MD Anderson in Houston. So we'll take their treatment protocols and the entire workflows for all cancers, head and neck, breast, prostate, lung, etc., etc. And those projects are running right now a nd it will result in complete workflows that are viable options for both RayCare and RayStation. So a clinic in India can mimic the MD Anderson way of treating any cancer.
So it will be like a step-by-step procedure a nd it's so much information in such a protocol i t's exactly how you define the tumor, how you define the margins, which structures to include in the treatment plan, how much dose should be given to various areas, what's the maximum dose to other areas, and what's the quality assurance procedure, etc., etc., etc. all of that is embedded in a complete workflow.
And this is extremely powerful that we can spread the highest standards of care that are developed in these most advanced centers in the world. And they can be easily applied to a much smaller clinic with much less resources anywhere in the world. And RayCare and RayStation will be the vehicle of that, combined with RaySearch Intelligence.
All right. This is clear. I guess a lot of questions, so thank you very much.
Thank you.
Do you have a follow-up question from the line of Kristofer Liljeberg ? Please ask your question.
Yeah t hank you. It's regarding the RayCare agreement with Varian. Do you believe the current agreement, which is the TrueBeam, is enough to start driving more meaningful sales? Or would you also need a broader agreement for other Varian Machines.
No, not this t his isn't in itself. But I think it will be involved into other machine types as well b ut this is a very strongly selling machine, of course. It has a big base s o it's an extremely good start.
But I guess most clinics have other machines themselves s o that means you can't still comply easily on RayCare.
Oh, yeah. There are quite a few clinics that have only TrueBeam within our installed base. So we start there, and then we can grow into other machines as well, expand the collaboration into other machine types as well.
So do you see hospitals acquiring RayCare now for the machines and then hoping that the collaboration will be for all RaySearch Intelligence machines in the future?
Yeah.
Okay. So you don't believe that hospitals want to see that agreement in place before ordering?
I think RayCare is also useful even without any machine connection w e have RayCare for.
Yeah. I know. I know.
It's not like a binary situation like that b ut if so, then at least the clinics that are pure TrueBeam clinics, they TrueBeam clinics combined with an IBA machine or an Elekta machine or some other combination, they are and that's where we have a good target, the first target customers. But we have to start somewhere, and this is where we are now t hat was still a challenging situation and something we achieved a nd now we have to just build on this and continue with other machines and also other vendors, for instance, Elekta.
Yeah. Yeah. And the combination now seems to help in acquiring Varian d oes it still have any impact on the timing of broadening the current agreement?
No, I don't think so i think Varian is supposed to from what has been communicated, it is supposed to be the company will run quite independently of the rest of Siemens, as has been explained to me. So they will keep Varian pretty much intact. And so far, we haven't seen any collaboration, integration with RayCare and TrueBeam is proceeding exactly as before, even after the announcement of the Siemens deal.
Okay t hanks. Another question when it comes to cost and the expansion of the organization, which has been very extensive in recent years. Now you're being more careful, of course, adding more people w hat do you need to see to start hiring again?
That the situation goes back to normal and we can start to visit our customers. From our point of view, it's very concrete i t's the United States. There is a large number of discussions, ongoing projects that have been put on hold. It doesn't mean that we lose anything w e haven't lost any deal in that sense. When those discussions restart and things are, we start to see the sales picking up again, then we can start to consider hiring the people that we need.
Okay. Thank you very much.
Thank you.
Your next question comes from the line of Matthew McNeill from Fiera Capital p lease ask your question.
Hi. Thanks for taking my question. Most of them have been answered already. But I just have one if you can talk about the interest that you're seeing for hosted versions of RayStation on a subscription basis? and then whether or not that varies by region?
Okay y eah w e see an increased demand of that, increased interest w e have some deals like that already. And hosted and subscription can be unrelated because we can have the subscription is just a payment model. And the hosted or not hosted have to implement the system a nd they can be combined in any way. But for some time, we have taken subscription orders.
And those are, I would say, increasing in popularity. It's both good and bad i t's good in the sense that the threshold to enter into a new hospital is lower. But it also delays the cash flow, of course. So yeah, for us, it's quite good that both models coexist now a nd by far, the most predominant model is the regular license and support fee model.
By region, I would say hosted solutions is most asked for in the United States w e see very little of that elsewhere, actually w e don't see it at all in Asia or Europe yet, so in these two regions, the hospitals still want to have their service on-prem, but we are supporting all of these different models, and of course, in the long run, a few years out, everything will be on the cloud, and that's just a matter of time.
And then a follow-up. A follow-up, if I may, when it comes to your pricing model for RayCare and then your new product launches for RaySearch Intelligence and RayCommand, do you plan to have a subscription pricing offering as well?
Yeah. Yeah. Okay. That's subscription for all our products. The subscription option will be there for all products.
Okay. Thanks very much.
Thank you.
Once again, that's the one to register a question in the queue for the conference call. At this time, you have no further questions p lease continue.
Okay t hank you very muc i think we should then conclude this conference call and I appreciate all questions and wish you all a great day. Thank you. Take care. Bye-bye.
That does complete our conference for today. Thank you for participating. You may all disconnect.