Welcome to Sectra's financial report presentation with CEO Torbjörn Kronander and CFO Mats Franzén. My name is Helena Pettersson, Investor Relations Officer, and I will be moderator of the Q&A session later. The chat function is open from start, and you are welcome to ask questions during the presentations. Management will handle them after their presentations. With that, I hand over to you, Torbjörn Kronander.
All right. Thank you very much. We have our nine-month interim report, and we will start with the Q3 highlights, and then we'll go, Mats Franzén, our CFO, will take over a financial development presentation. I'll come back and talk about our way forward, and then we'll have a Q&A session at the very end. You can put your questions, as Helena said, in chat or in emails. The value we create for customers at Sectra is in medical diagnostics based on images primarily. That's by a huge extent our largest business area. We do Secure Communications, security on the highest conceivable levels for communications especially, and also monitoring of critical infrastructure. Then we have our greenhouse with Business Innovation, and that does orthopedics imaging, which is quite different.
That's more therapeutic planning and follow-up than the diagnostics part done in Imaging IT. We do medical education, which is a rapidly growing area all over the world. Q3 highlights, we are very happy that we for the ninth year in a row won Best in KLAS for large hospitals in the United States. We also won the small hospitals, we won in Canada, and we won in Asia/Oceania. Asia/Oceania is the first time we have received Best in KLAS. KLAS is a U.S. corporation that does evaluations of products in medical IT, especially in EMRs, other areas, but also our area in PACS, and that is in radiology PACS in the United States. Having the happiest customers is for us a very kind of encouraging and very motivating thing.
It's also good for business. Most customers will look in this when they buy a new product. A large product of this size or importance is something you want to see how others are doing before you buy it. The nine-month figures in general, net sales increased by 17.5% to SEK 1.3 billion. The profit per share increased by 49%, and the recurring revenue, which is increasingly important, and that we do measure and follow up now, as we're moving the entire company into recurring revenue based more than CapEx based, increased by almost 12% to SEK 800 million. The financial targets for the group were all fulfilled. They are in priority from equity to assets ratio, providing stability for customers and ourselves, of course. Profitability, that's operating margin. Our target is 15%.
That might seem a bit low on for a software company, but we have chosen to keep it there. Due to the cost reductions during the pandemic, it has increased, but we do not intend to have it at the current level. We want to invest this in the most important target, which is growth of profits. EBIT per share growth over a five-year period should be about 50%, and that we are almost 3x higher right now. Next slide. Specific uncertainties, of course, right now is the crisis in Eastern Europe, invasion of Ukraine. That is not affecting us a lot, at least not in the short range. We do not have any real, y ou know, we have very small business in the eastern part of Europe and Russia, and we have no sub-suppliers in Russia or in that part of the world.
Then we have COVID-19 pandemic, which is decreasing in importance right now, and how fast that goes is very different in different countries. Most of our business is coming back to basics, but the world had learned quite a lot. We don't expect the travel and the cost levels come back to where we were before the pandemic, but we will end up somewhere in between. In Secure Communications, we got a five-year framework agreement with the Dutch Ministry of Defence. We have more or less two home markets, Sweden and Netherlands. Through the Netherlands, we are approved also for NATO and EU.
It takes two countries to be approved for EU secrecy, and we have both Sweden and Netherlands to stand on. In NATO, we go through the Dutch to sell into NATO. We have, however, been having inadequate financial development in our Communication side. It has been heavily affected by not being able to travel and also not being able to deliver our most qualified product needs to be delivered by courier, and if you can't travel, you can't deliver. We also see very long delivery times of some strategic components. This is hardware, and that is also affecting us. We have a new acting president from January 1st. We are looking for a new permanent president as we are talking.
The Secure Communications impact of Ukraine, again, is increasing interest but slow market. We do see that the cybersecurity threats that are imposed by especially Russia has resulted in increasing interest for cybersecurity and cybersecurity product. But it's a slow market. We will not see any effects in the short term in the communication space on that. In Business Innovation, our Q3 highlights that we got the Region Vestfold, which is a substantial part of the west part of Norway, has ordered starting doing Implant Movement Analysis, which is a post-operative follow-up of patient implants. Which is very important because it determines if you need to re-operate or revision a previously done implant operation, or if you can solve it by some other means. We also see that results vary significantly between quarters in the relatively small business units.
Focus on the both of these is the increased recurring revenue. Top line growth will not be what it would have been in normal times as we are moving over to recurring revenue focus. In growth initiatives in this area is the new orthopedic area, which is, as I said before, Implant Movement Analysis, which determines if you need to revision operation or not. A revision of a previously inserted implant is extremely expensive and also quite dangerous. If we can reduce the number of revisions you have to do by seeing if the implant is indeed stuck or not, you can save quite a lot of money and time for surgery. We also have a version of that that is used by research. More or less the same technology, but you evaluate if prostheses are good or not.
That is also growing. In Medical Education, we're transitioning from a business where we sell this huge kind of iPhone-like tables for almost theater demonstrations for patients or for students into a service where we have cloud-based content subscription. We have quite an extensive set of examples of medical diseases and medical situations that will now allow customers to subscribe to, and that is a rapidly increasing part of that business. In Research, we are focusing on AI for medical applications in diagnostics, and we're also looking at the future application areas. We have 4-5 PhD students working in that area. They are PhD students on half the time, and they work in research for Sectra half the time.
In Imaging IT, Q3 highlights, Emory Healthcare, a previous radiology customer and one of the Ivy League hospitals in the U.S., expanded enterprise imaging to include digital pathology. This is an important trend that we see previous radiology customers extending into other ologies as well, becoming enterprise customers instead of just radiology customers. We have also Sectra One subscription service ordered by MUSC Health in the United States, also a very prominent university. Ophthalmology, which is a new ology for us in eye care, had been deployed and is now operational at a major U.S. customer, one of the largest chains in the U.S. In Imaging IT, we have growth initiatives in new markets.
We have contracted an indirect sales region to South America, which is an area where we have not been present before. We have enterprise imaging, and we are the only vendor who today can do all images in the hospital in one single IT system. This is important for both the CIOs as well as for the cost structure of the hospital. Digital pathology and integrated diagnostics between radiology and pathology. Cardiology is added, and ophthalmology is new. We are focused on the U.S., and that's by far the world's largest market in medical IT. We top customer satisfaction, but we have not a very large market share, and this is a place where we can grow.
We have more difficulty growing in countries where we perhaps already have 70%-80% market share. I leave the word to Mats Franzén for the financial developments.
Thank you very much, Torbjörn. As usual, for those of you who follow us, we start with the order intake. As you know, you have seen. We have, as previous quarters, a lower number to present. This is in line with our own expectations, considering that we had a tremendous comparable year. That goes for all four quarters. We do have good traction on sales. Now after three quarters, we're up 17.5%. Currency neutral, that's 1 percentage point below that. This is for this year, the first quarter when we actually have some tailwind on currency for the full period. For the first two, we had some slight headwinds against us.
As you know, the Swedish krona has deteriorated quite significantly in relation to a major currencies we trade in, and that's especially the U.S. and the pound sterling. You see the numbers on the slide, they're almost 10% for the U.S. dollar, which is big for us. As we speak, comparing now as we are pretty much halfway through the fourth quarter compared with balance sheet date end of January, we have seen a further deterioration of the SEK, about 4% against the euro and the pound, and some 6%-7% or 6.5% on the U.S. dollar.
Now, the sales by geography, we see that the U.S. is indeed a strong contributor alongside the United Kingdom and the rest of Europe, and the rest of Europe is primarily in absolute numbers, Norway actually, when it comes to relative numbers and percentage growth, although that doesn't contribute that many millions yet. That's actually the French market. So that is compared with quite insignificant numbers to start with. It's nice to see progression there. The sluggish trend in Sweden and the Netherlands is not related to Imaging IT. We're growing there as well in Imaging IT, but there we have the effects of that Torbjörn mentioned previously related to Secure Communications that is hitting us somewhat.
When it comes to the rest of the world, it's as it normally is the case, Australia, followed by the Canadian market, which also is progressing promisingly. As it comes to business segment, it's Imaging IT who carries the full weight actually on a net or on a gross level here. We do see that Business Innovation have in relation to the size, made some progress, actually. I would say this to a large extent, one should be aware of the fact that it's a small business segment and that we're up against a quite weak comparable quarter to start with.
When it comes to other operations, it's actually invoicing and eliminating group elimination, an uptick, I would say, in platform costs, especially on the IT side, to be able to deliver scalable growth in the coming years. As for operating profits, I would say three factors contributing to Imaging IT solution carrying the growth for us overall during these three quarters is the sheer size obviously. It's by a margin the biggest segment for us. Also, the sales development lately also helped with currency as of late.
That will also still, although the operating costs are increasing as we invest over the P&L in onboarding new resources in terms of personnel and travel and marketing, we do still have a slightly better operating margin in that sense. Business Innovation, as you can see, have a better traction in profit than in sales. I again, it's highly volatile in between quarter in terms of both revenue and cost trajectories for that quite small business segment. Getting to the cash flow, we do see that the obviously increased operating profit brings home a cash that is expected comparable with the comparable year. We do always. This is also comp.
Sort of compliant with previous year that the third quarter is normally a strong cash quarter for us. Also, this is the case for this year. Although we don't make any forecasts or do projections, I am cautiously optimistic that we will have quite a nice cash generation in the fourth quarter without going into specifics. Where we do see some cash more tied up is in current receivables, but that's no real surprise either. With that, back to you, Torbjörn.
All right, a little about our way forward. Focus forward is continuous, of course, high customer satisfaction. That is what drives especially our U.S. growth. You cannot have happy customers unless you have happy employees and a good culture, so we're working on that all the time. As we presented last quarter, we were voted to be the fourth best employer in Sweden, which we're very happy for. It comes for a reason. Without the happy employees, you cannot have happy customers. Profitable growth. We want to continue to grow, but in a profitable way. Stay ahead of the pack, which I will come back to a little bit later. First, I would say choose your markets. That's also very. We have chosen markets, which grows.
Growth is easier in growing market. Healthcare and IT and cyber security are both markets with societal dynamics and forces growth. Cyber security will grow because of increasing threats and increasing digitalization around us. Healthcare IT will grow because healthcare needs to become more effective and consolidation is very strong, and technologies provide more and more data that needs to be handled and managed in hospitals. We have also presented our new focus on increasing recurring revenue. We are moving over to the Sectra One subscription model will dominate future sales in medical IT. We see already a very large interest in uptake of it, but we won't see the impact for over several years.
During the transition, upfront revenue growth, top line growth will be smaller because we are kind of folding that initial large order and delivery into a recurring revenue model that will in combination be much larger than original sale, but it will be spread over years. We are now measuring also usage in our different areas because usage is actually driving this business. This is normal for IT. Almost all IT business around the world are moving over to a pay per usage, and so are we. I would say pay per usage or pay per time unit, one of these two. In the long term, the financial effects will be strongly positive for the shareholders of Sectra, but in the short term we will have reduced growth and profitability for a few years.
Order intake variation will continue to be very large. It's increasing due to healthcare consolidation. The deals are increasing. We see a very strong consolidation of healthcare providers and hospitals. In the U.S. they're buying each other. In Europe, they're working together more and more, or if it's one public medical provider, it's merged, so you create larger and larger regions, and they buy IT as a combined entity, which means order intake increases and it's also long-term. The deals will be very large going forward, but they will not come every day. Revenue and profit variation will gradually decrease because we get paid per usage and month, and that is more stable.
This can be seen as the quarterly variation for the nine-month this year has been less up and down or variational than our historical pattern. Skate to where the puck is going to be, we need to work on what we are going to make a business from in 3-5 years as well as providing good products today. We see the trends, the consolidated hospitals and IT systems, and that is why we have already early started up to work a lot with enterprise imaging. Hospital providers do not want 1,000 IT systems.
They want as few as ever possible. We are the only provider currently in the world that can do all the images in one single system, reducing costs for hospitals a lot, and more or less creating a parallel system to the EMR, the electronic medical record system, but handling the images which is normally never done in the EMR itself. Neurologists, pathologists, ophthalmologists are coming in here. Pathology is right now a very large growth area, even though it comes from a much smaller level than radiology of course from the beginning. Ophthalmology is brand new. We only have one, but it's a large customer in the U.S., and ophthalmology is becoming more and more important, though it's much smaller than especially radiology, but also pathology. In cybersecurity, people are becoming more and more mobile.
They want to work from home, and they've gotten used to working from home in the COVID pandemic, and of course, they want to be as secure at home as they are in the workplace or on the road. There we see a large uptick for the increase of secure mobile workplaces. Add to that the crisis and the growing concern for cybersecurity, we have a growth area there as well. We do very high level security network infrastructures, and we also see an increasing demand due to the crisis in especially Europe. In Business Innovation, we'll work on the entire image-based orthopedics planning and follow-up, orthopedic surgery planning and follow-up process, and we also see that the lifespan of medical knowledge is becoming smaller and smaller, and it's not only education of universities.
Becoming a medical doctor today or a nurse is to go into lifelong educational, continuous education, and that is a rapidly increasing market as well. Our philosophy of shareholders is quite simple. If you have happy customers, if you have happy employees, and that's needed in order to create happy customers, and if you have a good position in growing markets, reasonable cost control, then shareholders will be happy, and I think we have proven that over the years. Upcoming financial reports and the annual general meeting, the next report, the year-end report of this year will be June 3rd, 2022, and our annual general meeting will be in September 8th. In hopefully it will be physical, but that is not yet decided. Then I remind you that this your feedback is very important for us.
If you have anything or comments on this or what you think about this presentation, please drop us an email at info.investor@sectra.com. I leave over to questions.
Yes, we have a few questions from the audience online, and if you have more questions, please start writing them. I will turn it over to our analyst at Carnegie, Kristofer Liljeberg, to start.
Thank you, and good morning. Hope you can hear me okay. I have a number of questions, yes, but maybe start with three of them. The first one relates to order and whether you see an effect here on orders already from the transition of the revenue model, or and if you have an impact from Omicron in the quarter, i.e., that is having been delayed. The third question I have is regarding your comments about investments in medical IT. Should we see this bringing margin down to the group financial target now after a few very strong years? The reason I'm asking is that you, at the same time, say that operating cost will not come back to the pre-pandemic level.
Maybe you could give a little bit more flavor how you're thinking out, about margin with the, based on those two comments that you made. Thank you.
All right. I'll reply. With that first transition, the effect so far on revenue and profit is very small, but we see an increase coming. There are some effects already, but they are not significant. They will become larger, however.
Sorry. Is that also true for orders? Frankly, will this change revenue model impact orders, or will you book the entire deal in the order backlog? How are you thinking about that?
In orders, the order variation between quarters will be as large or even bigger than before because we also take a large responsibility if we go to the cloud. The order will continue to vary. The revenue and profit will be more stable but also move forward. Very often a hospital who orders this, they order for five, six years forward, and then they say, "We will buy that from you." It's a very large order for perhaps a very large system, but we get paid for every year going forward instead of a gross sum up front. The next question was, has Omicron or COVID affected our order intake. Well, some discussions has clearly become slowed down, but it's not a major effect.
Some discussions has been slower than it would be a normal year due to travel restrictions and also a very large burden on the hospitals. Third question was, the transfer. Can you repeat the third question again, by the way, please?
I just noticed that you have this margin target and, of course, in recent years, the last two years, margin has been significantly above the target. You still say that operating costs will remain below the pre-pandemic level, I guess, on a like-for-like basis. But also talking about that you want to invest more now in medical IT. These two comments combined, what does it mean for margin?
The main change in the cost structure during the pandemic has been fewer exhibitions, which are expensive, and less travel. Now, all that travel that we did before, for instance, teaching customers and education of customers will not come back to normal levels. However, we have very interesting growth prospects, and we need to invest. For instance, if we go into a new country or a new market, it takes several years before we get the first order, but we need to have people in the country. We will come downwards from what we saw before, but we will also see that we might not come all the way, and the cost structure will be different. We will not do as much travel as we did before, but we will invest in other areas.
What you're saying here, you're planning now to go directly in more additional countries?
Nope. I didn't say that. I said that if we do it and when we do it costs a lot of money. Right now we are still investing in some of the new ones, but we see them growing rapidly, which is, you know, two, three years later than we open up. Also indirect countries, we need to work with, and it costs money in the beginning. That's for sure.
Okay. Thank you very much.
Okay. Thank you, Kristofer. I leave the word to Carl Norén at Svenska Handelsbanken.
Yes, good morning. A couple of question from my side as well. If we start with two questions on the U.S., I'm just wondering if you could give any kind of indication of how the pipeline of larger contract is developing in the States. I think you wrote in a report that you have several larger procurement processes or that you are within several procurement processes. I'm just wondering if you could explain and elaborate a bit on how those ones are progressing and what kind of timeframe we should expect before this one closes. A question on the competitive landscape in the U.S. Have you seen any changes in the competitive landscape? Are there any new competitors in the market or any other dynamic that we should be aware of? That would be my first two questions, please.
The first one's very difficult to reply to. We cannot tell you that. I can inform you, and you can probably look at the net as well, and that there are several very large processes going on, not only in the U.S., though. There's some very large going on in Europe as well, and that comes from the consolidation into consortia or larger groups that buy IT together in order to get synergies from growth. I need to stop there. I cannot go forward on that question without making it more public than in the presentation. The second question was. Can you repeat the second question?
Yeah. It's on the competitive landscape in the U.S. and also in Europe. Maybe, are you seeing any new competitors in the market, or has the kind of dynamic changed, or how would you describe it over the last, let's say, year or so?
In the U.S., in radiology specifically, we have had a strong competitor, but we have recently won one or two deals against them. They are Pro Medicus, but we only see them in the U.S. They only have radiology. We are in enterprise imaging, which we see as our large growth area, where we actually handle all images in one single system. We do not have anyone that we know of in the world right now that has what we have. We are unique. Not all hospitals buy in that way. Some hospitals, then the radiology drives the business or pathology for instance. Sometimes the CIO gets involved much more and say, "No, we want to consolidate as few IT systems as possible." In Europe it's more varying competition.
We see Philips, which acquired a company called Carestream, that we compete with sometimes, but neither they have everything in one single IT system as we have. It varies very much per local market. In the U.S. the strongest competitor have been Visage, but we are gaining on them right now.
Okay. Thank you. There's the question on the outlook for Q4. I think you state in the report that earnings in the next quarter will be impacted negatively by Secure Communications and a continued strengthening of the organization in the Imaging IT. I'm just wondering, have we also seen this already in Q3, or I'm just trying to understand what's your kind of message is here?
We are not having adequate margins in Communications, as you can see in the report, if you look on the fine print at least. We need to improve that. Now, it doesn't mean the market doesn't exist. It's a heavily growing market, cybersecurity, but we have, due to various reasons, not been able to grow as we planned there.
Okay. It's not that Imaging IT margin will go down significantly because that's also my, maybe my last question on the long-term margins within Imaging IT and also relating back to Kristofer's question that if you look at the group, EBIT margins are, you know, still above your target, but if you look for, you know, Imaging IT, it's I think 28% on a rolling 12-month basis. I'm just wondering how we should see this developing going forward. I mean, you're saying that you are going to invest, but this is also your fastest growing business area. Is this a stable, sustainable margin level in Imaging IT, or should we expect it to decline back to maybe 20% again?
I cannot. We do not give forecasts and predictions like that. I can only say that the transition into cloud deliveries is also costly. We get revenue after a while when doing business on the cloud or in Sectra One, but we do have cost up front, as in normal delivery. That reduces margins as well. When most of the business is over in the recurring revenue model, we will, I think, and as most software has done, see very healthy margins, but there's a transition period before that happens.
Okay. Thank you.
Thank you, Carl. I will address some questions from the audience online, and the first one is, how would you describe the order pipeline in imaging compared to last year?
We cannot divulge anything about the pipeline in a presentation like that, unfortunately.
The next one is, where do you position yourself versus AGFA HealthCare? If I'm not mistaken, Amsterdam UMC has chosen you for radiology pathology software, but chose AGFA for enterprise imaging.
Well, AGFA is one of the old competitors we've been, you know, competing with for many years. They are large. They come from the film business. They have had a struggle, but they are probably gradually getting out of that. Enterprise imaging is, however, quite different to define in different areas, for enterprise imaging by our definition is doing all the images in the hospital in one system. For some, it's everything but radiology and pathology, and of course, that is not everything as we claim to be. I don't know the details of the Amsterdam bid, but by far the largest business in a hospital like that is in radiology, pathology, and cardiology.
I think maybe this is already answered, but as AGFA HealthCare won the enterprise-wide imaging platform, could you have provided the same service?
I don't know the details. My estimate, my guess would be yes, we could. As I said before, sometimes there are special departments with special needs that we don't even know about.
That was the questions from online. I don't know if any of your analysts would like to ask more questions.
Yeah, actually it's Kristofer from Carnegie. Could I have one more?
Yes.
Just, on the financial net line positive, with a big amount, is there some FX gains there or-
We do-
Anything else?
Yeah. Thank you, Kristofer. No, we do not enter into any FX position, so it's not driven by any derivatives but rather that we have internal loans quite significant in foreign currency to which we have which has helped us in revaluation in the quarter primarily.
Great. Thank you.
It's Carl here again, everyone. Just one last question from my side as well. On the financial targets, Torbjörn, I think we have discussed this a bit before, but when you now move into the cloud, do you see any reason to maybe revise your financial targets as of now given that, you know, this will impact revenue growth and also earnings growth? I guess that's quite reasonable to see, but how do you see this?
I think during the transition, we hope to fulfill our financial goals also, though we do a huge investment in future revenue when we're going to the cloud. We hope to keep the targets we have. Long-term, of course, it's a reevaluation you do all the time. When all customers are on the cloud, we have a completely different situation, and then it will be reevaluated at that time.
Okay. Thank you. Maybe just if I may one more because I listened to Pro Medicus earnings call, and I mean, they are also going in and focusing more on the European market. Can you just say anything? You said earlier that you don't really see them yet, but what do you expect when they do more of a target that maybe what is it entrance into the European market? I think they already have some contracts in Germany, for example.
Pro Medicus is the owner company of Visage that I spoke about before. We have never lost anything to them in Europe. That doesn't mean we won't do it in the future. We know they have the development department in Germany though, and they have some old relationship in Munich that they have extended, but we do not know what will happen going forward with them. It is a very different market for radiology PACS in Europe and in the U.S. Otherwise we haven't seen them in any large deals, and we haven't lost to them in any head-to-head deal that we know of.
Okay, great. Thanks.
We have no further questions from the online audience.
All right, we thank you for participating, and welcome back in June for our year-end report. Thank you, and goodbye.