Ladies and gentlemen, welcome to the Sectra Q4 2019-2020 call. Today I'm pleased to present CEO Torbjörn Kronander. For the first part of this call, all participants will be in a listen-only mode. Afterwards, there will be a question-and-answer session. Speaker, please begin.
All right, so this is Torbjörn Kronander.
This is Mats Franzén.
And we have Fredrik Gustavsson on the line as well for presentation of our new model. Welcome to this year-end report meeting. Next slide, please. The agenda today is highlights and trends, which will be done by me, financial development done by Mats, and then we will have a deep dive into our new subscription model for software licenses, that will be done by Fredrik. And then I will finish off with our way forward, and then we'll have a question session at the very end. Next slide, please. Highlights and trends. Next slide. We are happy to see that we made our best earnings so far this year. The earnings this year have been up by 18% or 19% almost. And our cash flow is also solid and stable, which is important these kinds of difficult times. Cash is king, as someone said.
Next slide. We have seen no significant impact from COVID-19 on the financial outcome. Our deals are long-term, and we also have a substantial part of our business in recurring revenue, and recurring revenue will be there almost whatever happens. It's only when the customers go bankrupt or enter Chapter 11, and we haven't seen much of that at all in our market. We are dealing in healthcare. Now, we would like to point out, though, that we have, as very often the case, but even more pronounced this year, we had large variation between quarters. We don't do much guidance, etc., but we guided a little bit that the beginning of this last year would be weaker and that we recover that in the end of the year, which is exactly what we did.
This year, the coming year, we will continue to have large variations, even though a little increased because of COVID-19. Some go-lives and the go-lives triggers a large bulk of the revenue recognition have been postponed as many hospitals in the U.S. are simply shut down and they cannot take on a lot of IT products, go-lives in that period. Now, that will, however, be true later in the year as we see it now. But we are guiding that the first quarter will be weak also this year. Next slide. We have come back to where we have all our financial targets for the group fulfilled. The first equity-to-assets ratio should be above 30%. We are at 54.1%, which is a healthy situation to be in. Profitability, that's our sanity check that we do reasonable business. We do not intend to be substantial above 15%.
If we make more than 15%, we should reinvest that in the most important target, which is growth of profit per share over five years. That should be above 50%. And it's nice to see that we are now well above that target at 90.2% growth in EBIT per share over five years. Next slide. Secure Communications, which is our cybersecurity division. Next slide. We have seen good growth, but the margins are not adequate. We need to get the profitability up in that business and grow profitability as well. We have expanded secure mobile communications offering, though. We are adding products and we are adding customers all the time. We also grow in critical infrastructure, which are monitoring of the most important parts of society, whereas we have built a more and more sensitive society from cybersecurity aspects. This is a growing market.
Our growth initiatives in that sector is Mobile Secure Ecosystems, where not only mobile phones that we used before, but the entire workplace. Critical Infrastructure product area, and we're also starting up in new geographical markets, and notably Finland and Norway. Next slide. We have seen now that over the last quarter, we have seen an increasing demand on mobile secure workplaces. And that has been partly because of COVID-19. People working from home, they need to be able to work securely from home as well. But we also see a general increase in awareness that we need to be protected against cybersecurity threats, both from foreign states and foreign governments or countries, but also for cybercrime. Next slide. Imaging IT Solutions. Next slide. There we have a trend of adding new customers, especially in the U.S. We are extending and increasing contracts with existing customers.
We have strengthened our delivery capacity. We have invested in quite a large growth in people. It takes people to deliver. And some example of growth initiatives, new markets, direct and indirect, digital pathology, and integrated diagnostics. I'll come back to that. Cardiology, as part of our general imaging offers, and we have focused a lot on the United States. Next slide. We also initiated a Dutch AI collaboration with the University Medical Center Utrecht, where we will add an AI-based app store to our portfolio, which has been developing in collaboration with Utrecht. Next slide. We also got a new order from Canada. Canada is one of our newest subsidiaries, but we had a head start there. First with Trillium, which was announced last year, and then now Mayfair Diagnostics, which is also our first sale based on the new subscription model in North America. Next slide, please.
We have a growing customer base in the United States. We have new orders from University Hospitals in Ohio, and we have from St. Elizabeth Healthcare, which is a member of the renowned Mayo Clinic Care Network. Next slide. Trend in the United States. We have had a special focus, and we have been speaking about this for several years. We have the most happy customers, and we don't have a massive market share. In Sweden, for instance, we have a market share around 70%-80%, and it's kind of difficult to grow from that position. We can add more things to the existing customers, but it's difficult to add a lot of customers in such a situation. In the United States, we're the happiest customer, and clearly below 10% in market share, we have a huge growth opportunity, and we now see this delivering.
As you see on the curve, we are growing rapidly in the U.S., and the United States has now passed Sweden as our largest market. We have had recent orders from luminary customers, and we have also received FDA approval for digital pathology, which is a very interesting market going forward. The opportunity is the world's largest market. Normally, you say that about half the world's medtech is actually half of the medtech revenue of the world is in the United States. That is not perfectly correct, but on the order of it's correct. Sectra, we do top customer satisfaction. We even increased this lead in the last year, and we have a small but growing market share. And next slide, please. I will say a little more about digital pathology. This is the last frontier in digital medical images.
Other medical images, radiology, cardiology has been digital for a long time, but pathology and microscopy images have been very difficult because they are very large. We started a product in this seven or eight years back in Sweden, and Sweden is today the leading market in digital pathology in the world. We are by far the largest penetration, and Sectra has a dominant market share in Sweden. We do see rapidly increasing sales in the U.K. and the Netherlands. Very common in medtech is that in new technology, Northern Europe leads down the development of new technologies, and we see this happening here again. We received FDA approval, as I said before, which means we now can begin to sell our digital pathology solutions in the United States, also for primary reading.
We have been able to sell it before for secondary reading and consultations, but of course, a big market when you actually can do without the microscope for a primary reading instrument. Our growth strategy is a single system for pathology, radiology, and cardiology without having different backends and service, and we are currently the only vendor in the world who can deliver a fully FDA-approved system with pathology, radiology, and cardiology primary reading in the same system, which saves a lot of money for the hospitals because of less service and maintenance and also investment in the backends. We see also an increasing trend of integrated diagnostics, and that means that the pathologists and radiologists, for instance, work side by side instead of just doing a pipeline for diagnosis.
They work side by side and agree on the diagnosis of especially cancer patients before it goes to the surgeons or the clinicians, which is a very important way of speeding up the diagnosis and also increasing quality, and we are growing in the United States. Next slide. As we said before, we have the digital FDA approval, digital pathology FDA approval in place now. The approval was together with a specific scanner from Leica, but that's also the market-leading scanner in the United States. So that's fine. We have had a customer in Hospital for Special Surgery, which is the most prominent orthopedic center, at least in the East Coast, probably in all of the United States. They are beginning, are using our digital pathology now and putting it into operation, and that's a very important reference in New York. It's in New York City, Manhattan.
Unfortunately, of course, they as well are affected by COVID-19, so it's been a little bit delayed of being able to use them as a reference. We are also expanding. We can now offer our radiology customers to expand into pathology without actually buying completely new IT systems. They can only add pathology to the existing systems they have. Next slide. Here you see a map of the current coverage of digital pathology, and you see, as I said before, Northern Europe very often is the case of leading a development in new technology. Next slide. Business Innovation, that's our greenhouse for small things or smaller things that might be big or might be nothing at all. We don't know, but it's an interesting greenhouse of things that might become very important.
For instance, digital pathology came out of this group, and we moved it into imaging IT when it became a real product offering. The new areas within orthopedics is we have two areas right now, or three areas. Orthopedics is medical education and research, and in orthopedics, we have something called Sectra Implant Movement Analysis, which is post-operative. This is to evaluate if a person who got a prosthesis needs a revision, needs a new prosthesis. That's a very expensive operation, and it's also a dangerous operation. You don't want to do this if not absolutely necessary. We have very positive clinical results for these trials, and we have CTMA, which is more or less the same product we have used for evaluation of prosthesis, and that is sold to the prosthesis manufacturers as a research tool.
And then in medical education, we have seen some very interesting developments during the COVID-19, where universities are teaching. As universities have been shut down, they have been forced to teach students from home or at home. And we have a very interesting way of doing that through a platform of clinical content. And our most prominent pilot customer in this area has been La Sapienza, which is the leading university of medicine in Italy, who has actually been very happy by providing this to all their students during the COVID crisis. And in research, which is our long-term operations, we have a large focus on AI for medical applications of various kinds. Next slide. We would like to present a little about the risks as we see them in COVID-19. Everyone is talking about this right now. Next slide.
If we take healthcare IT in general, of course, exhibitions or travels are canceled. This is actually short-term benefit because we save money with less travel and less cost for the exhibition, but of course, there is a reason why you participate in exhibitions, and that is to sell more later, and of course, long-term, this will impact our future sales. Elective procedures on hold. Almost all hospitals in the world have stopped elective procedures. For instance, orthopedics, cancer treatment, cancer screening, almost all of that is stopped, and that is where hospitals make the most part of the money and where hospitals are ready for profit, so of course, this has a huge impact on the ability to invest long-term. Now, that is, however, a snowball being pushed ahead of the hospitals, and all those procedures that should have been put in, etc., they are not gone.
And all that work needs to be done when the hospitals open up again. Telediagnosis, we have seen also, for instance, pathologists wanting to work from home with a microscope that is not possible. We have had a leap of interest in telepathology and teleradiology, where radiologists and diagnosticians want to sit from home and do the work. We have also seen that, of course, the imaging volumes may overwhelm hospitals when this kind of opens up again, and that will drive demand for efficiency further, and that is good for us. It will enforce good, effective IT solutions of the kind we provide. So there are some ups and some downs. In cybersecurity, the same thing. The Mobile World Congress was canceled, for instance. And of course, if we can't exhibit on large exhibitions, it's more difficult to see new customers.
Short-term, again, long-term, this will, of course, be less sales unless it opens up. But we think it will open up during the next year. As a good thing, increased demand for our cybersecurity products and mobile crypto solutions, as I said before, when people work from home, and also secure mobile workplaces. Next slide, and then I'll leave the word to Mats.
Thank you very much. Next slide, please. As Torbjörn you touched upon earlier on, the order intake is good, but it's up against a very strong comparative year with the huge order from New South Wales and Australia. So number compared with number is a 50% contraction, but taking the New South Wales out, it's a 50% hike, actually. And as for the sales in total, we see a healthy growth for the full year of a double-digit growth, also taking the weaker corona into account. As for the fourth quarter, the order intake is down some 35%. All in all, taking out New South Wales, it's actually up 31%. So the order intake in the fourth quarter is the second best ever when including also the New South Wales. Having said that, as we often reiterate, is that the fluctuations between quarters can be very significant indeed.
So one shouldn't make too much or very high or sometimes even quite low numbers in terms of the order in the deal flow. And the operations in imaging IT, so especially the U.S. and Sweden, are comprising the largest chunk of the order intake. And compared with last year, obviously, Australia is way less considering that big order. And in absolute number, order intake growth, it's between the U.S. and Sweden in terms of imaging IT. The communications group had a good quarter as well. And for net sales in the quarter, the growth isn't that impressive. However, the last year's fourth quarter was very strong. So we're up some 5% currency neutral. And the U.S. contributing with just about 50% of that growth, actually, and some SEK 60 million in absolute numbers in growth. Second being the Netherlands having a very strong quarter.
Whereas for the fourth quarter, the U.K. and the rest of Europe showed some contraction in that particular quarter, and again, both order and sales, we have grown used to, and we don't see that going down, as Torbjörn mentioned earlier, that the variations between quarters and between quarters between years can be quite significant. Next slide, please, and here pointing perhaps the obvious that the U.S. had a very good run this year, up 43.5% for the year. That's including currency effects and 52% in the final quarter, so there was a big push there, and as I said before, whereas the U.K. and the rest of Europe had a sluggish sales in the fourth quarter, we see on the full year that the rest of the world has grown.
And also when we look at the U.K. in terms of order intake, it shows a growing traction compared with last year. So we consider that to be a demand increase in the making. In the U.S., the contribution in the fourth quarter was especially significant, as I said before. Next slide, please. And when we go to the different segments, we see that pretty much the traction we had in third quarter, which we envisaged would continue, it has actually done so in the fourth quarter. So there's a growth with the U.S. being the main market. It's a very prolific growth. And the product-based sales for certain margins are lower, and they're in this portion of product deliveries. And obviously, there are small units. Internal eliminations have increased as the total business volume increased, as the internal sales between segments increase with the total business volume.
Next slide, please. Profit increase. Obviously, we get a good traction when volume increases. And speaking about the fourth quarter, we also had a stronger gross margin due to a higher software portion in that particular quarter. So that gives a good traction on the gross margin, which finds its way all the way down to the operating profits. And we see that the communications, we do see we have a job to do there, obviously, in terms of converting the different elements of the business from the project-based revenue stream to the other subparts of the business with higher margins. So next and final slide, please. As we said, for the first quarter, we had a very, very adverse impact on the cash flow, which we foresaw to be reversed in the second year. We do have that stronger expected flow in.
Fourth quarter was a good quarter, but not as good as the third quarter. As we tied up more capital in working capital, as we can see due to the big billing ratio we had in the end of the year, and as well, we had a quite significant investment in the fourth quarter. The total investments in the fixed assets was actually half of that compared with the first three quarters combined, especially to increase our base in our cloud operations, so that you can also see reflected in the depreciations for the quarter. The cash flow per share increased healthy, 17% about, and also in the quarter, so now it's significantly above the dividends projected, and so no big surprises as far as I'm concerned from where I'm sitting in the performance in the fourth quarter in terms of the cash flow for the year.
Over to you, Torbjörn.
All right, and then we will leave the word to Fredrik Gustavsson, CTO, who has been working a lot with the new subscription model, which will gradually be taken into account starting in North America. Now, this will not be impacting our financial figures in any significant way over the next few years, but long-term, it will have effect, so I'll leave the word to Fredrik.
All right. Thank you, Torbjörn. So I think we'll start with the next slide. Thank you. All right. Just going to make sure we're on the same page. Good. So thank you, Torbjörn. So I'm going to run through a presentation here of introducing you to our new business model called Sectra One, which is an enterprise imaging subscription. So I'll take you through some of the customer challenges that we've been looking at and hearing from the market, what we're doing about it, how we help our customers moving forward and help our future customers. And then finally, looking at some of the financial implications of this. And sort of as Torbjörn briefly mentioned, the impacts that we're looking at more on the mid to long-term perspective. So next slide, please.
So as we talk with our customers and healthcare systems around the world, these are some of the challenges that they've told us about. These are basically the reasons for which we've created Sectra One. So customers tell us when they're moving into digitization of new ologies, they're often faced with cumbersome procurements, steep investments, and a lot of friction. So they see, as an example of that, moving into digital pathology, it's kind of a bit of a hurdle. Also, for existing customers being stuck with old systems, going out asking for more capital to buy things that wasn't included, it was also problematic. Our users want to have the best tools to deliver the best care, and unnecessary friction in getting access to them is a problem.
On the whole, too many options and things to take into account make the purchase complex, offers a sense of not being in control as a customer. Capital investments have also become harder and harder. I think during these times, right now with the pandemic situations, operational expenditures are much preferred, so I will come back to the differences between license and subscriptions, but this is one way that we help, so managing ups and downs in business volume is equally important, and being either locked in or having to buy increments in two big steps is something they tell us is an issue, and finally, they say that aligning business-wise with the vendor is extremely important. They want to have a partner that supports them in improving and becoming even more successful. All right, so next slide, please.
So with Sectra One, we really set out to address these challenges, and we've been working with this for quite a while now. And we're really looking out to help our existing and future customers. And with Sectra One, customers will actually have access to all the great software that we produce for all ologies. And I think making it so much easier to start that journey of digitization, for example, pathology, cardiology, or other ologies. And in aligning with customers, they only actually are going to pay for what they use. So we're looking at a volume-based payment model, creating a strong alignment between customers and Sectra, focusing on joint success. And a great thing is that future versions and features are included, and so is our best-in-class winning support. Next slide, please. What this means is that we make it even easier to buy Sectra's great software.
We're really proud of all the effort that we put in every year into our products, creating new, I think, really wonderful functions, features, and supporting imaging out in the field. With this model, we were going to improve return on investment, both for customers and for Sectra. Again, creating this strong alignment around success and growth of our customers puts us, I think, on another trajectory for focusing on growth, focusing on expansions into new ologies, and really just making a great experience of being a Sectra customer even better. Next slide, please. We've been talking a bit about licenses and subscriptions. I'll just spend a few seconds here describing what we mean by that.
Historically and traditionally, software has been sold on a license-based model where customer gets an ownership, a perpetual right, and they buy that right, typically through payment in a lump sum. A subscription, on the other hand, provides the customer with an evergreen, future-proof right to use the solution whilst they're having an active subscription. Looking at payment models, cash flow-wise, it's a question about recurring payments for as long as the subscription is active versus the license lump sum. Again, we'll come to financial implications at the end of the presentation. These are the key characteristics of license versus subscription business models on a simplified level. All right. Next slide, please. Most of you will probably already be quite aware of this.
I mean, we as consumers today, just looking at the way that we purchase music or movies or a few years back, we bought CDs, music records. Now we have subscriptions to Netflix, to Spotify. We have subscriptions to great software from Adobe, Microsoft, or Salesforce. And looking at some of the industry predictions is that basically most licensing vendors historically will shift to subscription models. It's just a better way to sell software and licenses. And I think really underpins this question about ensuring that I as a customer have the access to the latest and greatest at all times. I don't want to be stuck with old solutions. And that's similar to being a consumer. And the same thing goes for our users. So next slide, please. As I mentioned earlier, we provide customers with, I think, and this is quite, I think, a drastic change.
We say that you get access to our whole portfolio. So you can start small. Today, I mentioned in the first slide, customers face challenges when going into new ologies. They have to make the decision to go full in. What we're saying now is you can actually start small. You have access to all the great software that Sectra produces. And if you're a radiology customer and you want to get your feet wet and you want to get started into pathology, to explore opportunities of using resources more efficiently across your enterprise to do telepathology reads, etc., we will take down the threshold for our customers and future customers to get started. And this is really, I think, transformational in the way that they're getting access to this portfolio. And we're taking down thresholds to get started.
And we really help customers on the journey of digitization, new ologies, not the least digital pathology that we mentioned earlier. All right. Next slide, please. Another thing that we've worked with quite diligently is to simplify. And we realize customers are different. They have different businesses, strategies, preferences, and different financial situations. They also range from mid to small customers up to major enterprise healthcare systems covering whole parts of the country. Mats did mention New South Wales. It's actually quite a significant part of the Australian market. What is common, though, is that they want to have the best solution for them, no matter their size or their other preferences, but they want to have what's right for them. And now we make it even easier for them to buy a great solution from Sectra.
So we provide them with four different subscription plans, allowing for differentiation of both features and content and capabilities. This allows customers to select their level of solution based on their specific requirements, needs, and their preferences, basically. So still not like 100 different options, it's four different options tailored to the different customers' preferences. So the subscription is also unified across all our offerings, which means that they can get access both to our traditional on-premise software, but also our cloud offerings. So with the Sectra One subscription, we provide them with a very easy way to get access to all the great things that we create. And again, best-in-class winning support, future versions are included in the subscriptions. Next slide, please. Did mention earlier as well the alignment around customers and vendors. And I think ultimately they're really looking for a partner that supports them in their mission.
And when we align with our customers, we also do that in the payment structure. So with Sectra One, customers will pay based on their actual usage, which is strongly related to the value that the customer is getting. So it means that they can start small, they can grow, and they'll have access to all that great software in Sectra from the get-go. And in terms of committing to larger volumes, there is ability for customers to do that, to commit to certain volume over contract periods, providing with a better unit price. But key here is ultimately they have full flexibility to grow continuously. And if they make commitments, they always will be able to pay for any overage above those commitments. So there is a high degree of flexibility to make sure that we are aligned and support customers on their mission. Next slide, please.
As mentioned before, we really believe that it's key having a future-proof and evergreen solution, not having to hear, "Well, that wasn't included." New features and improvements are made available continuously, and they're getting continuous benefits with the subscription, enabling them on their mission to provide world-class healthcare to their patients. From a Sectra point of view, the shift to a recurring revenue stream, as Torbjörn talked about earlier, will, in the mid-long-term, even out revenue variability to some degree. I'll come back to the financial implications again in the end, and we'll look at what that looks like. Looking at the financial implications, I want to make sure first, before we start looking at some graphs and illustrations, is our offering is different. What we're offering to customers with Sectra One, it's much more comprehensive. It's very elegant and simple.
You forgot the next slide there, Fredrik.
Oh, sorry. Okay, I missed that, so let's just resynchronize on the slides. All right, we're on the right slide. Sorry about that, and so our offering is different, and when we look at these comparisons that I'm going to do now, I just want to make sure that they are fictive. There are no real numbers. The relation between the examples are also a bit fictive, so the numbers and the examples are just for illustrating the principles behind revenue recognition and expected cash flow. Another key thing that I want to point out here is that professional services, such as training, elbow support, installation, are outside the subscription, so those are services that vary quite a bit between customers, and those are paid and recognized revenue-wise as incurred, so those are not included in the examples to come. All right. Next slide, please. All right.
In the top row, we see the license business model. In the columns, we see cash flow and revenue, respectively. Starting with the top row and just baselining with what a traditional licensing model looks like, looking at the cash flow, as I mentioned in the earlier description of subscription versus licenses, we can see that there is, in the first year, an initial lump sum being paid for the license. In consecutive years, we'll see that there is a smaller recurring level of payments, and those are in relation to provided support. On the revenue side, we see a very much pretty much just a line model. Of course, these are some simplified assumptions for the examples. I mean, obviously, things can be delayed in terms of cash flows and cash based on revenue recognition and when they go live, so forth.
But basically, these are the principles. The revenue is then recognized as the customer will be paying the license and starting to use it. So pretty much straightforward, the way that the software industry has been doing business for many, many years. If we then move down to the lower row, the subscription row in orange, we can start with the baseline numbers on the cash flow. So you see the first diagram. And what we see here is that the subscription fee from a cash flow point is the same for all the five years. So it's the same, and the customers keep paying the same amount of money unless we have growth and take that into account.
What I want to point out here, and I think Torbjörn has mentioned this in some earlier discussions and calls, is that as we sign up the initial contract with customers and as we're providing them with the software, we will have a performance obligation effect. So when we look at the revenue recognition side, you see that we will still pretty much look like the revenue on the licensing side. So what we want to point out here is that cash flow-wise, we will have a higher cash flow on an average, or rather, it's going to be spread out over the contract period. But on the revenue side, there is an upfront revenue recognition due to the fact that we have delivered on our performance obligations, so from an IFRS perspective.
Now, as we are adding new ologies in the example of the subscription, let's, for the sake of the example, say that we would add pathology. It would be added year four and would be paid year four and would be recognized year four. So nothing really strange there. So this is, in a short summary, I think the main comparison between the licensing and the subscription model. Again, cash flow being spread out in the subscription model as compared to the upfront license deal. And then, due to initial contract performance obligation effects, we will have a revenue recognition impact on the first year.
However, as we proceed to the next slide, if we look after the first five years, as customers keep extending their subscriptions, which we hope they do, given that they're getting all great features and benefits of a Sectra solution, the consequence will actually be, and if we look at this graph again, cash flow is the same for every year. Customers are paying for their subscription in the same way that we're paying for Netflix or Spotify. We look at the first five years. This example is the same as from the last slide. We're seeing we have the upfront initial performance obligation effect. But as they proceed through year six and seven, and as they make yearly extensions, you see that the revenue recognition is then aligned with the cash flow year six and seven.
So this is where, in a simplified example, we can start seeing that revenue recognition and the effect of recurring revenues will even out that type of recognition effects. And I want to point out here is that as a difference here, customers are actually getting all new versions and features. They don't have to buy additional licenses. It's really evergreen and future-proof. And for the customer, it's this operational expenditure set up a subscription, and we believe that's really beneficial in many different ways. So next slide. And all in all, we feel that this is going to be so much easier for customers to buy our great software. Again, we're spending so much resources and dedication into providing the market's best software. And we're just happy to have more customers get access to that.
And we're trying to really focus on that, make sure that it gets used, get it out there, help our customers improve their business, and obviously also get a better return on investment for customers and Sectra. And again, align with customers on their success and their growth. And next slide. It's really a true win-win for both customers and Sectra. So that was a bit of a deep dive into our new subscription model called Sectra One. So thank you very much. And I'll hand it back to Torbjörn.
Thank you, Fredrik. Next slide. I will finish off this with our view, our way forward. Next slide. We are focused on customer satisfaction and quality and delivery. It is our way of competing. Some of our competitors are giants with a marketing budget more than our revenues. We started this effort seven years ago with winning Best in KLAS. Best in KLAS is actually, KLAS, a survey institute who makes a living out of Salt Lake City, Utah, and selling reports of performance of medical IT systems. Today, they also actually measure performance of modalities and hardware, but in the beginning, it was only IT. Electronic medical record systems and all different various aspects of IT. What we are competing against is PACS, which is picture archival and communication systems. We have gone U.S. large PACS is our kind of soft spot.
We really want to address that market, the large providers of healthcare in the United States. Now, small providers have not been our focus, but we, of course, have a few of those customers as well. Now, this year, we won both large with an increased margin compared to last year. We also won small, which is not even our prime focus. And we also won Canada for PACS, we're, of course, very happy to be best-in-class in three categories. Next slide. Why do we win it? We receive an A-plus for our company culture. We have proactive services. We keep our promises. This is actually what KLAS mentions in their reports. So I'm just quoting what they are saying. And product works as promised. We try not to overpromise it. We'll only hunt you down later. Loyalty, that's an A-plus as well, highest graded.
We are part of customers' long-term plans. They have no plans to replace us. Of all, KLAS also measures and asks people, "Do you plan to replace this vendor long-term, or are they part of your long-term plan?" We are number one in that by a huge margin. We have the fewest customers who want to replace us of all the measured companies. People say they would buy from us again, and they are likely to recommend us to other customers. We internally, without making it public, measure a net promoter score. That, of course, is also measured. They would like to recommend us to others. Overall, they're very happy with us. In operations, services, relationship, and value, we are graded A, which is the second highest. Next slide. This is actually our grade versus our comparison names there on the left.
But you can see we're number one in large PACS in the United States with a total score of 93.9. And the next one is 90.5, and then this is hugely down to 80. And actually, the average in all IT is around between 75 and 80. Next slide. This is Canada, where our lead is even larger. We have never received such high praise, and it's very nice to have that in a new market because new markets are always difficult to enter. And we actually score 95.2, and the second one is 84.5. So we're in a solid lead in Canada. Next slide. And this is a quote from W. Edwards Deming, the consultant that taught the Japanese to have high quality and not only produce stuff. Profit and business come from repeat customers, customers that boast about your product or service and that brings friends with them.
It's very important, even in its speedy and fast and rapidly evolving market as IT, these old truths still hold, and that's what we try to live for. Next slide. Now, in order to deliver that quality customer, you need staff. You need competent staff. You need staff that likes what they're doing and likes to stay with the company. We need to attract good staff. We're very happy that we were voted number three of Sweden's Best Employers 2019, which, of course, is a very good thing if you want to deliver good quality as well. Next slide. Third important philosophy is to choose markets wisely. You can fight in a non-growing or shrinking market, and it will always be a dogfight on price. In a growing market, it's easier to grow because you can grow with the market without too much fighting on price.
That's where we are. We are in healthcare IT and cybersecurity. These are markets where society demands mandates growth. The market will grow. Next slide. Our philosophy for shareholders is in order of priority, if you have happy customers, if you have happy employees, good position in growing markets, and you have reasonable cost control, you need to be a little greedy and careful with expenses as well. Shareholders will be happy. It cannot be avoided. It comes in that priority. You have to prioritize in that order, and then shareholders will be fine. Next slide. We have seen in the year as we see, we have more recurring revenue, and PACS usage has, generally, as Fredrik described it, been found to deliver large value to both customers and vendors.
The customers get more up-to-date products earlier without a lot of hassle in buying new products, and you simply get the greatest and the latest all the time. Vendors, of course, get a more stable income, less influenced by pandemics or whatever happens temporarily. This will be an important role in Sectra's future, this new model, but we will, as I said before, the transition will be over several years and will not see a big impact either the next one or the next year after that. It will gradually come into operation. Next slide. COVID-19, I would like to emphasize that, again, will temporarily even increase already large seasonal variations. There is a huge short-term impact on U.S. hospitals' investment budgets as some hospitals have taken the revenue of the hospital down by 70%-80%.
Now, these are solid institutions, but even then, they become a little nervous. Now, there's been several studies done that the bottom will be quarter two, not our quarter two, but the calendar year quarter two of 2020, and that America, who actually went down quite fast, will also recoup faster. So there will be back to more than 100% revenues in the winter or even quarter four of 2020, and above that, to kind of work back what they lost in time here in procedures early next year. We haven't seen that yet, but this is predictions given by several large consultancy firms. Longer-term effects in Europe, we don't see those short-term liquidity effects as it's basically tax-based healthcare. Long-term effects might be seen in Europe one or two years down the line when there is less tax paid this year. We don't know that yet.
Now, as with governments and nations injecting massive amounts of money into the system with a quantitative easing, we might not see such a big effect on the tax-funded healthcare systems, but that is yet to be seen. Now, however, what we've seen now in the early phase of this year is that some of the go-lives we planned for in Q1 will be delayed and move into Q2 or later in some cases. These are delays. We don't think that will have a huge impact on the whole year, but it will actually have an impact on Q1 as we see it right now. Long-term, our new subscription model will reduce variations, but not significantly over the next few years, as I said before. Next slide. Little final words about being a shareholder in Sectra. Next slide.
We have proposed a share redemption proposal to the AGM, which is our way of paying dividends. We have a solid financial situation. We have good projections for the year, and we have not made any temporary redundancies or layoffs. So we are in a good position to continue to pay some of our earnings to Shareholders here. So we proposed an unchanged program to be decided by the General Assembly in September of SEK 4.50 per share. Next slide. Why should you invest in Sectra? We have high customer satisfaction. This is since capitalism was invented, the most important thing there is. We do have a high employee satisfaction, which is required for having high customer satisfaction. We have a strong brand in markets where its,[inaudible] If our systems stop working, hospitals go down. Entire hospitals stop. Nothing can be done.
And of course, you don't buy this from three guys in a garage, which is presenting barriers of entry into the market. It's difficult to get into the market, but when you're in the market and you have that strong brand, it's a very important asset to have. And the same in cybersecurity. We handle nation's most secret secrets, the top secret levels. You don't provide that to three guys in a garage either. The barriers of entry are large. We are profitable, and we have a strong cash flow and a solid balance sheet. We have substantial and increasing recurring revenue. We're positioned in niche markets with substantial underlying growth, where the cybersecurity, I mentioned before, with market's growth. And that's an easier place to grow in than into a dogfight on a non-growing market or even decreasing market.
All management owns shares in the company, and we have sustainable investment in R&D with exciting future opportunities. Not all of our growth opportunities will mature into large business, but some will or might. Next slide. Our upcoming financial reports and general meeting, September 4th, we have a three-month report and presentation that will also be done by video. Normally, we have this end of year as an in-person, in real life, as the unions say these days. Meeting about this year because of pandemic. We did this on telephone as well or video, and we will do that in the three-month report. Also, we have the Annual General Shareholders' Meeting in Linköping, September 8th. November 27 will be our six-month report. Next slide. Please remember your feedback is important. We don't do these presentations for our sake. We do it for your sake.
So we are trying to adapt these presentations so they become better for you every time. And the same way we behave to customers, we want to behave to our shareholders and investors. So please fill in the survey provided in this link, and we'll look into it, and we'll try to improve these presentations for the future. Next slide, and then we'll leave it over to questions. You can either put an email button, or you can send your questions by email, and we'll try to reply to your questions here online. And that means we should go into questions mode, moderator.
Thank you. Ladies and gentlemen, if you would like to ask an audio question, please press 01 on your telephone keypad. Now, if you would like to withdraw your question, you may do so at any time by pressing 02.
So once again, that is 01 on your telephone keypad for any audio questions. The first question comes from the line of Carolina Elvind from Danske Bank. Please go ahead. Your line is open.
Hi. So I have two questions. The first is on the pathology solution. Do you have your pathology solution approved for primary diagnostics in the U.S. earlier this year? Are clients familiar with the solution there, or what does the sales process look like for introducing a product like this? And how does the order side for this product look during the quarter?
All right. The sales process is, of course, we've been promoting this for several years already. So it doesn't start with FDA approval. FDA approval is when you actually can deliver things for or actually selling it for primary diagnosis. So we've been on exhibitions and fairs, and we are quite well known.
I would say that all the more prominent pathologists, most of us, most of them already know our name, and now they can buy it as well. And of course, we'll start with trying to promote this into our installed base because we can easily convert them into a digital pathology. But we also see some interesting or very large interest from some very prominent institutions in this area.
Perfect. Thank you. And the second one, more on long-term outlook. So you've managed to work with your focus markets over time and gain large market share and strong positions. You mentioned earlier a 70%-80% market share in Sweden, for example. And now you're targeting the U.S. and have built up a strong brand there.
What challenges and opportunities do you have to reach the same strong market share in the U.S. over time that you had on other markets? What does the competitive landscape differ?
Okay. Well, we'd love to have 80% market share in the United States. I think that would be a tough one, though. Now, United States, also, you must remember, realize this is not one market. They speak the same language and they have one president, but the variations between different U.S. markets are significant. So we aim to be large in a few areas of the U.S., and we will not likely reach anywhere near our market share in Sweden and a few other countries. But now, U.S. is half the world market share. A relative market share, which is on number one and number two, would be a very interesting place to be.
Now, we are not close to it yet, but of course, that would be a very nice aim to be number one or number two in the United States.
Thank you, and how large market share would number one or number two ranking be in the US?
Typically, I think today it's 20% or between 20% or a little less than that for number one, but we are not giving that as a forecast in any way, but it's interesting to have that as a vision, but you cannot aim for anything large in that, not in the United States. It's too competitive and too diverse market.
Okay. Thank you. That was all from us.
Thank you. Our next question comes from the line of Kristofer Liljeberg from Carnegie. Please go ahead. Your line is open.
Yeah. Thank you. Good morning. Three questions.
First, on the EBIT margin, once again, you are a bit above the 15% level. Last time that happened, margin fell down again towards the 15%. And you talked now about the importance of reinvest to accelerate sales. So how should we see this? When you talk about 15%, do you still aim in the next few years to be close to that level, or has something changed versus the past? And related to that, if you continue now to invest in growth, is it possible, as you see, to accelerate growth further? Because you have come from growing maybe 10%, and now you are close to 15% last year. Is that possible to accelerate that further, or it's getting more challenging? And particularly, I mean, in the U.S., which is an important factor for the better growth, how much could you internally handle when it comes to growth?
Because I guess there are challenges also if you grow too quickly, if you want to keep customers as happy as they are today.
Well, I can take that one. We see 15% as a sanity check. If we get below that, we do, that is not a place we want to be. We do want to do good business, but if we get above it, as we do now and then, that should be invested in future growth, not in revenues, but in profits, as we measure growth in profit per share, and we intend to continue as long as we have the opportunities we have right now. We are in a very good position to continue to grow. Exactly how much that growth will be varies between years. It varies more based on the market conditions than it does on our performance.
We'll try to grow as much as possible. Right now, we grow faster than anyone else in the U.S. market in our segment. And that's a nice place to be. Then you just need to do that for a couple of years. So, to be very to the point of your question, 15% is a lower bound. We will now then go above that. We are not at perfect control, but we don't intend to increase it before we run out of growth opportunities. Because long-term, it's better for shareholders. If we grow profits, then it grows margin and decreases the growth of profits. If that applies to your question, Kristofer.
Yeah. Thanks. You had fantastic growth last year of 80%, if I remember correctly. Is there a limitation to being able to continue to grow this much?
Well, growth is, of course, connected.
We will not compromise customer quality for growth. We will not. Because then it becomes one of these up as a sun, down as a pancake, as we say in Sweden situations. In order to keep the quality up, and you can be very large having quality up, but you need to train people before you send them out in the field. And that means they have to work with us for half a year to a year, not as primary product managers and so on. And of course, that is investment that costs money because they will not be completely productive for that first half year or year. So the major cost of our growth is to get people trained so they can continue to provide that very high quality. And that is what we use our money for.
Okay. One more question before heading back to the queue.
You talked about delayed go-lives projects in the second in the first quarter now. Is it possible to quantify these effects? And could you just confirm that you said you don't expect this to have any significant impact on the full year, i.e., that there would be a catch-up effect in the latter part of the year? Thanks.
I would say like this. We have seen a few, not a lot, a few products being delayed because the customers have simply stopped all visits to the hospital. Now, if they stop, even though we do remote training and remote installation and so on, when go-live happens, we have to be there to help them in a go-live situation the first week or so. And now, if you're not allowed to go even in the door of the hospital, that's impossible. Now, these restrictions are gradually being lifted.
You can't have them on. You will not have any hospitals left, so while they are lifted, we can go and restart these products again and just finish them off. It's very often just a very final go-live that is lasting, so we don't see a major effect of that. Now, there is another area, another cause of delay, which is actually the purchasing departments and the investment budgets being frozen because of COVID, and they simply do not dare to do large investments. Now, there, of course, Sectra One, a new model comes in very handy because that reduces the capital expense, and so we try to use that situation to promote that and, second, also that we will come out of that as well. There is a quote, I think, from King Solomon once said that this too will pass.
We very often forget that this pandemic will not go on forever. Then all those procedures and all those healthcare needs to be provided, and then this market will speed up again. Now, we don't see any significant impact on the full year from COVID-19 as we see it now. Otherwise, we will not have suggested a dividend. We think we will be okay. There will be impacts, but we see them both positive, negative, and not significant.
Actually, given your comment here that you need to be at the customer site for starting up projects, how does that fit with the subscription model that you have a lot of initial work to do before starting up?
Yeah. That's fine. As Fredrik said, the subscription model is only the license, the software license.
For work, for man -hours, etc., that is always required, we simply bill per the hour, and that is billed upfront, directly upfront. So part of the revenue from a typical product is licenses, and parts are professional services. The professional service we will bill as before upfront for the customer and not spread out over the time.
Okay. Thank you very much.
Thank you.
Thank you. Once again, for questions, it's 01 on your telephone keypad. And the next question comes from the line of Christian Lee from Pareto Securities. Please go ahead. Your line is open. Hello. Your line is open now. If your line is muted locally, can you please unmute yourself? Hello. Can you hear us?
If you can't talk, Christian, you can actually email to Investor Relations. We'll read your question from here.
Okay.
We do not have any more audio questions registered, so I'll hand back to our speakers.
Okay. We have had a few questions coming over in our email that Helena Pettersson will read here, and we'll try to reply to them as well. Please.
Yes. The first question is related to our imaging IT solutions business and regards which are your largest competitors in your large markets like Sweden, Netherlands, U.K., and the U.S.?
It varies by the market. There is a few international competitors of them. I would say that Carestream, that used to be Kodak in the old days, which has now been acquired by Philips, is the one we meet in large products in different countries most often. That's the only international competitor we really see often in these large products that we see. There are local players.
There are local players in Germany, in the United States, etc., and they might be very good sometimes, but they're very often local to that market, and there's a company called Visage in the United States. There is Intelerad in the United States. There is VISUS in Germany and several other a little bit smaller players by local for local each market.
The next question is also related to imaging IT. When do you win a deal, and when do you lose a deal?
Well, it's very difficult. Sometimes we win, and sometimes we lose. Very often, we win the deals where a lot of our logistics are involved, and that is, hospitals today won't consolidate. They have hundreds and hundreds and hundreds of IT systems, and it becomes very clear that connecting the different IT systems is needed in order to become effective.
Now, but the connection cost of all the different various IT systems is higher than the investment to buy in the IT systems from the start. So they very often want consolidated fewer contractors, fewer vendors of IT. Of course, we can provide a workhorse working next to the EMR. And the EMR is the electronic medical record. These have been consolidated. They're very often hospital-wide or even system-wide systems now. And we are more a vendor who provides a PACS next to the EMR that takes care of all the images. In these situations, we very seldom lose. If they are interested in pathology radiology and cardiology one single system, we're the only one who can provide that right now. That will change, but that is how it is right now.
Now, when it is specific for a given ology, for instance, specific to pathology, radiology, cardiology, there might be strong specialized niche players, and sometimes they win a prize, and sometimes they're better than us for some reason in some of these ologies. And then we might lose. But we very often win these as well. But that is typically we can lose in this situation when it's only one ology at a time.
That was what I had right now. But we have indications that one on the phone has more questions. So if the operator could check that again, please.
Thank you. We do have a follow-up question from the line of Kristofer Liljeberg. Please go ahead. Your line is open once again.
Great. Thank you very much. A few more. First, on the quarter, gross margin was on the high side, if you could explain that?
And also, on the other hand, amortization and depreciation combined were significantly higher than a year ago and also versus what we've seen in previous quarters. So I don't know if this is correlated in any way. Could you explain that?
Yes. Hi, Kristofer. They were actually not correlated. The higher gross margin pertains to the fact that the significant rise in the revenue this time, this quarter, had a significantly higher portion of software content, which has a higher gross margin. So that's basically the carry-on from that part of the business. And obviously, pertaining to the different parts of the business, that was mainly due to the final push in the U.S. As for depreciation, about just short of half of that is the IFRS 16 effect, the depreciation of rights to use or the leasing.
The second portion, to a large extent, is actually a higher installed base of tangible fixed assets, especially pertaining to our expanding cloud offering to the market. So that depreciation, the asset base has increased on a higher basis at the end of the year, actually.
Okay. But it seems a bit odd that it's going up so much quarter over quarter. [Inaudible]
Yeah. The investments in fixed assets has increased quite significantly from the mid-section, you could say, of the second half of the year. That wasn't sort of fully internalized in the third quarter, of course. So the underlying depreciations are on a higher level now supporting the business.
I can comment from that. Again, this is Torbjörn again. We are selling more and more cloud-based solutions. And these cloud farms, the server farms providing cloud-based solutions, they require investment.
Then we have to actually purchase hardware ourselves, which I think we don't like to do, but we are forced to do it in that situation. And they are then, of course, depreciated over the next years to come when we do these investments.
Okay. Good clarification. Then, if there's time, two more, and that relates to the new subscription model. The first one is the difference in cash flow and sales. So cash flow and earnings. Where will that show up? Is that going to be accrued income or accounts receivable, or is it going to be inventories? You mean the billings that are on a long-term basis? Yeah.
Yeah. And actually, we are having ongoing discussions with auditors as well. Where would that be the most appropriate place to record this?
Because a large chunk of that will obviously be for the longer term and, to some extent, have, let's say, what do you say, embedded interest component to it. So I think you would more like to expect it to be in the fixed or in the financial fixed portion of things. But we'll get back on that.
Okay. Yeah. That's fine. And also, how long time do you think it will take until, let's say, 50% of new U.S. sales has been converted to this model?
We don't know. And we knew it. We couldn't say it. But we don't know, especially now with the cash or the investment problems in the U.S. and liquidity problems for the hospitals. It's actually impossible to say. This might very well speed this up, but we don't know. We are available on both situations.
Actually, we have a strong equity-to-assets situation, which is a very good situation this year because we kind of finance the customer in a way here, and we are stronger in equity-to-assets than our customers are, and so it might actually speed it up, but we don't know.
This is okay with one more question?
Sure.
Okay. Thanks. Yeah. I guess, of course, it's very good with the subscription model being recurring revenue, but if you look at the business today, how common is it really that your customers are not buying a new license when they think it's too old? So I guess there must be very few customers that you are actually losing already today.
Well, you're right. You're right. Because almost everyone, I would say very close to everyone, has a software subscription agreement with us, including the service contract, which means they get upgrades.
But the difference is that we are moving a small recurring revenue, typically 18% per year, something like that, of the initial price. We're moving that to a larger portion, which is actually amortization of the entire system over those four or five years from the beginning. So that's a difference. But you're completely right. There is literally no customers who don't get the upgrade. They don't buy a new license. They pay for it by another type of recurring revenue.
Okay. Thank you very much.
You're welcome.
Thank you. And then we are going back to Christian Lee from Pareto Securities. Your line is open once again.
Hi. Can you hear me now? Yeah. Okay. Great. Apologies for the previous technical issue from my side. I have one question regarding your new subscription model. You said that this payment mod
el is volume-based.
If you could please elaborate what kind of volumes you are referring to? Thank you. Well, typically, there is a production per year. So this kind of is actually emulating what Microsoft does with their systems as well. We don't want to invent too much. We like to do what customers are used to. So the IT department are used to this model before. You do an estimate of the minimum volume we'll do in number of diagnoses or procedures per year. Now, that will normally be a little less than actually what you do. But the higher you promise that minimum volume to be, the lower the price per exam you pay. So you can pay a low such minimum volume will give you a higher cost. And if you promise a high one, you get lower. Then you pay the overage.
So if you, for instance, promise you will do 100,000 exams per year and you actually do 150, you have to pay for those. First, you pay upfront for the 100, and then you pay for the 50 afterwards to compensate. Next year, you will have to increase your minimum volumes because you overshot so much. So that's how it's based. So it's kind of based both in the prediction, which you promise and guarantee, which we can do revenue recognition on. And the overage, you have to pay for in aftermath. In general, that's how it works. A little different in the different tiers, E1, E2, E3, and E4. But in general, that's how I explained it now.
Great. Thank you for clarifying.
Thank you.
Thank you. And as there are no more questions registered, I now hand back to our speakers for any closing comments.
Okay.
We have no other questions coming in on email either. Thank you very much for attending. I remind you again to give us feedback on these presentations. We can make them better. And thank you very much. And I wish you all a very good and healthy, as you should say, this time of summer. See you back in September. Bye now.
This now concludes our conference. Thank you all for attending. You may now disconnect your lines.