Good day, and thank you for standing by. Welcome to the telephone conference in conjunction with RaySearch's interim report for Q3 2021. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Johan Löf. Please go ahead.
Thank you. Good afternoon, and welcome to RaySearch earnings conference call for the third quarter of 2022. My name is Johan Löf, and I'm the CEO and founder of RaySearch. With me, I have our CFO, Peter Thysell , and together we'll try to answer any questions that you may have after my presentation. I will start by giving a brief overview of our third quarter. The COVID-19 pandemic had a negative impact on RaySearch also in Q3. Market conditions remained challenging in Europe and North America, while the market situation improved in Asia. In the third quarter of 2021, our order intake was SEK 108 million, representing an 8% decline year-on-year. However, our net sales increased 15% to SEK 136 million. The change is mainly explained by a 37% increase in license revenues.
In addition, our recurring support revenues rose 20% and accounted for 49% of our net sales. However, because of increased operating expenses, our operating profit amounted to -SEK 22 million, corresponding to an operating margin of -19%. Our cash flow was -SEK 10 million in the third quarter, mainly due to investments in our new headquarters in Stockholm. We are now increasing our sales activities. For example, we participated in ESTRO in Madrid in August and ASTRO in Chicago in October. Historically, these trade fairs have been important for our sales. Since it's uncertain how long the pandemic will have a negative impact on our revenues, going forward, we will focus even more on our costs. For example, our travel expenses will be significantly reduced by holding virtual meetings with customers and partners whenever this is a good alternative to physical meetings.
In a normal year, RaySearch will participate in about 160 market events all over the world. Going forward, we will reduce our participation in trade fairs and focus more on virtual marketing events. Moreover, until the effects of the pandemic subside, we will not engage consultants or recruit any new employees. Despite these actions, our operating expenses will increase year-over-year in the short term, mainly because several product launches during the past year have resulted in increased depreciation. Therefore, we expect our profitability to remain under pressure before sales return to normal and the cost savings take effect. Still, the pandemic has caused significant challenges for RaySearch, but we still believe strongly in our strategy for comprehensive cancer care, and we will continue our important product expansion and investment in our product portfolio.
At the end of last year, we launched two new products, RayIntelligence and RayCommand. RayIntelligence is our platform for data-driven oncology and machine learning. This software as a service platform is fully integrated with both RayStation and RayCare, and it enables cancer centers to consolidate, structure, and search data to individualize treatment protocols and hopefully improve patient outcomes. RayIntelligence is our first system that is only available via annual subscription. This allows customers to pay on an ongoing basis and avoid a substantial initial investment. RayCommand is our treatment control system, which offers unified management and control of the main systems in the radiotherapy treatment room, such as the treatment machine, the treatment couch, imaging systems, and patient positioning devices.
The goal is to ensure safe and effective treatment delivery by offering a more consistent user experience and a more efficient workflow, regardless of the type of treatment machine. The development of RayStation and RayCare also continues at a fast pace. One of the main uses for RayStation is that we have introduced support for Accuray's CyberKnife machine. We already support the TomoTherapy and Radixact machines, and thereby RayStation provides complete support for the entire suite of Accuray machines. The focus for RayCare has been improved workflows and the integration of RayCare with various treatment devices. One of the most important new features in RayCare 5B, which is scheduled to release next month, is that users will be able to configure their workflows on their own, something that previously required assistance from RaySearch.
This will make it much easier for cancer centers to implement and adapt RayCare to their specific ways of working without the help from RaySearch. Another important area is the integration of RayCare with various treatment devices, one of the key features of an oncology information system. For example, in October, the first patient was treated with Accuray's Radixact device combined with RayCare at the clinic in Switzerland. Regarding the integration with Varian's TrueBeam, the work with Varian has intensified during the fall. When Varian releases a new version of TrueBeam, validation tests are planned. RaySearch primary clinical partner in this testing will be Iridium Netwerk in Antwerp in Belgium. After a successful validation, Iridium Netwerk plans to connect RayCare to all of their TrueBeam machines and to transition to RayCare as their only oncology information system.
This will pave the way for other clinics who are interested in RayCare and who have been waiting for interoperability with Varian's TrueBeam to be validated. Because of the large number of undiagnosed cancer cases during the pandemic, there will be a surge in new cases post-COVID. That means that clinics will need to treat more patients per day with the same resources. Efficient resource utilization in cancer care has long been a focus area for RaySearch. Our software enables fast and automated preparation of treatment plans. It also shortens treatment duration while retaining treatment quality and provides more efficient scheduling of the treatment machines and health professionals. It's RaySearch mission to show cancer clinics, large and small, how they can improve their activities through software-driven innovation, a strategy that will ultimately deliver workflow efficiencies while giving more patients access to the best possible cancer care.
With our product portfolio, our stable and loyal customer base, and our very strong team, we have every opportunity to succeed in both existing and new markets. This concludes my presentation. Peter and I are now ready to answer your questions.
Thank you. We will now begin the question and answer session. To ask a question, you will need to press star one on your telephone and wait for your name to be announced. To cancel the request, please press the hash key. That's star and one to ask a question. You have one question from the line of Kristofer Liljeberg from Carnegie. Please ask your question.
Yes. Yeah, thank you. Good morning. It's Kristofer Liljeberg from Carnegie. Three questions. First, could you maybe explain a little bit more how you see demand here following the pandemic? You said in the report that you still expect a negative impact short term. Do you see any sort of improvements? Because if I hear from some of your competitors, maybe they are a bit cautious on sales near term, but seem more optimistic when it comes to orders. What do you see there? My second question relates to the cost savings. Is it possible to quantify them in any way? If you could describe how we should think about operating costs in 2022 versus 2021.
I wonder when it comes to cash flow, will there be any large investments, additional investments in the new offices here, in the coming quarters? Thank you.
Okay. Thank you, Kristofer. The first question regarding demand. We see obviously Asia has recovered quite well. I would say there's a lot of activities going on there, and also from a revenue perspective, it's our strongest market right now. It used to be our weakest, now it's our strongest. We see much more optimism in North America. There are more sales activities. We get to visit some hospitals, still not all of them, but more hospitals than before. We had the ASTRO conference in Chicago that you know has been virtual lately. Unfortunately, Swedes were not allowed to go there.
Now that ban has been lifted, so we will be able to travel during the rest of the year to the United States. I think the pipeline is much more active now, if you will. It's hard to say when exactly all of this will be converted to orders. Overall, during this whole pandemic, we haven't really lost any orders, but they have been postponed over and over again. It's quite obvious that when a hospital is completely absorbed by treating corona patients, they don't have the resources. They focus on that, and they don't make investments in new software.
I think there is an important difference between us and, for example, the linac manufacturers in that the software, so to say, lasts forever. If you have a working, let's say, treatment planning system, you can continue to use it. There is, as opposed to a linac which has a certain period after which it has to be decommissioned and replaced. It is really consumable, even though it's a long time consumable. There is a difference there. We really see already some really positive signs. I would say if I rate the markets, Asia strongest, the U.S. is coming next, and Europe is coming last, I would say in that order.
For sure, I mean, this at some point the pandemic will go away, and then the market will open up, and all of these orders that haven't come in will come back. There's no other way. It's just a matter of when it will happen. I personally hope that it will happen sometime during 2022. There was a question about cost savings. It's hard to quantify. We of course have quantified it internally, but we haven't communicated these numbers. Some things can be, you can model yourself in terms of the depreciation. It's quite easy to think all necessary information is public to be able to do that calculation.
If you look at selling expenses, they will, thanks to quite drastic cost cuts, we'll be able to keep those flat, which is, sounds like a contradiction. We will be able to keep those flat going from 2021 to 2022. But of course the reason why they only become flat and not reduced is that we compared to 2021 we will have a lot of sales activities, in one way or the other during 2022. That's obviously a necessity to be able to, when our markets open up, we want to sell our systems.
We'll do it in different ways so that we can still maintain the relatively low costs that we had during 2021 for sales because there were basically no marketing activities or no travel at all during 2021. In terms of large investments, most of these investments have been done and will be done during the rest of 2021. No significant big investments are planned for 2022. I think.
Yeah, sure. Thank you very much. The new offices, does it come with higher cost or lower cost? If I remember correctly, they are lower than the previous ones or the current ones.
Yeah, they are. We'll sublease quite a lot of space to other companies so that we can call back in the future when we need to expand.
Yes, Kristofer, it's Peter here. The new offices is more than double the size, but then again the square meter rent is about half. So, all in all, the total rent goes up, but we will have an opportunity to sometime during 2022 find the areas that we can sublet to someone until we expand into that part of the office. All in all, we hope that we can keep the rent at a similar level in 2022 as in 2021. At least, by the second quarter, second half of 2022, we will be at the same level as 2021.
Okay. Thank you very much.
Thank you.
Thank you. You have a next question, comes from the line of Ilja Ivanov of Avaron . Please ask your question. Sorry for the pronunciation.
It's okay. Hi. Can you hear me?
We can hear you.
Thanks for taking my question. I have two. The first one is, can you maybe discuss the feedback you got from the ESTRO and ASTRO this year?
Okay. I thought you had several.
Just one other one.
Okay. That's good. We had very positive feedback both in ESTRO and ASTRO. It's always such a boost for us to go to these trade shows because you know, it's been a tough year or period for us. When we meet the customers, that's when we always get extremely good feeling because they are so enthusiastic and happy with everything that we do. That's just a fantastic energy boost for us to meet with customers and interact with them. We are completely re-energized just thanks to these two conferences. This will of course increase during 2022. We have really missed that contact.
Very positive in terms of RayCare, we get positive feedback. People are excited. You know, this integration with the TrueBeam, which is the most common machine for Varian, and Varian is the biggest linac vendor, of course, is a huge step for RayCare. When we have a clinic that is treating using RayCare and TrueBeam, that will open up doors to other linac vendors, obviously, because then we have an extremely strong example of how this integration can move forward. Also customers have an alternative when they go to tender and they want to have RayCare, they can just decide to choose on the machines.
They can choose machines from Accuray or Varian that are integrated with RayCare. It can be disadvantageous for a linac vendor that hasn't opened up interface to RayCare. That's something that we get good feedback on. RayIntelligence, this was the first time we showed RayIntelligence at trade shows. The people are very excited about RayIntelligence. We showed online adaptive together with Accuray in Chicago, and that was also very well received, I would say. All in all, very positive.
Thanks. If you compare it to, let's say, pre-COVID times, is the, let's say, lead amount or the amount of potential deals the same at the fairs or it's less than that?
I'm sorry, I didn't hear the question. Can you please repeat?
If you compare the current, let's say, potential leads you got from the fair or potential new contacts in the clinics, would that compare well with the pre-COVID times, or is there-
Something structurally has changed?
Okay. It's less in these shows because the attendance is still very much down. I think ESTRO was like a third of the usual number of participants and similar at ASTRO. There's less activity, but it's a huge increase from nothing. Yeah, the simple answer to that, compared to a normal year, we get less leads from. There are less demonstrations because there are less people there. Yeah, that's the simple answer to that question.
My second question would be, you mentioned that how fairs and let's say exhibitions and face-to-face are important for you, but at the same time, you're pulling back on sales, I mean, on costs, especially in sales, traveling, face-to-face meetings. It's just a little bit conflicting because the world starts to reopen, and you're pulling back at the same time. Is there a structural reason for that, or why now? Why now?
Yeah. Again, I didn't completely hear the question towards the end, but we will have more face-to-face meetings, but we can still do it in a much more careful way. For example, for customers and partners that we have met with several times and know well, it's not as important to have a face-to-face meeting. When it's the first time we meet the customer, it's good to have a face-to-face meeting. We can be much more careful with when we need to travel to be much more selective in those choices. In addition to that, we have become much better at virtual demonstrations and virtual meetings. Not only like everyone with FaceTime and Zoom, et cetera.
We also have a studio, so we can have a more, let's say, exciting presentation in a much more professional way than just rectangles on a screen. It is more like a, let's say, I wouldn't say a talk show, but it's more interactive and more a professional experience. Now these virtual meetings are a much stronger alternative to a face-to-face meeting than it was before the pandemic. We can rely more on those. If you wanna initiate a relationship, I think you have to build trust. You have to have a face-to-face meeting early in that process. We can still overall reduce the travel very much, and that's our intention.
The freezing of hiring plans, you stopped any consultants. Is that also temporary or something you think this will go on for, let's say, in the longer term?
Yeah, it will for sure get rid of consultants almost completely for the entire future of RaySearch because except for very special circumstances, we will not hire or rely on consultants going forward. In terms of recruitment, we will not recruit new employees. I mean, there is a natural turnover as well with our employees, with our staff. The staff will over time, over 2022, decrease. We'll keep it like that until we have a stable, a more stable revenue situation, a more stable normal market, then we can see what needs to be done.
Of course, this is a good experience for us also to try to do the same things with a bit less staff. I think it can be an opportunity for us to become more efficient overall. I mean, we try to see the positive, take the positives out of this situation and see if we can come much stronger out of this when things are back to normal with a more efficient organization and more efficient ways of working. Then, of course, when the revenues come, it's going to be a very good time for RaySearch.
Thank you for that. I understand. Good luck.
Thank you.
Thank you. There are no further questions coming through on the line, sir.
All right. Thank you very much. Have a good day, everyone. Bye-bye.
Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.