Welcome to the Surgical Science Q1 2024 report. For the first part of the conference call, the participants will be in listen-only mode. During the questions-and-answer session, participants are able to ask questions by dialing pound key 5 on their telephone keypad. Now I will hand the conference over to the speaker's CEO Gisli Hennermark, CFO Anna Ahlberg. Please go ahead.
Good day. My name is Gisli Hennermark, I'm the CEO of Surgical Science, and I also have our CFO, Anna Ahlberg, with me. I will start off this presentation by some general comments of our first quarter 2024 and a bit of how we see the rest of the year, and then Anna will provide some details. Afterwards we will have time to address any questions you may have. Educational Products started the year really weak. No, it sounds perhaps a bit harsh, but that's what it feels like when your revenue decreases by 45% quarter-over-quarter last year compared to this year. We are experiencing customers that are a bit anxious after last year's experience or budgets that didn't work out, criticism that they were running a deficit. Now they have fresh budgets, but they kept a tight grip on their wallet initially.
We also see that among our markets, the United States performed rather well, which is a direct sales market, but the big delta was in our distributor markets where we sell our products, our Educational Products, through partners, through distributors. And looking at the delta, and with the delta I mean the difference between 2023 and 2024, the first quarter, the largest part of the decrease, the delta, was the fact that we did not have any large tenders in Q1 this year. Usually every quarter we have some multi-simulator large tenders, which is a really strong part for us, Surgical Science, as we have such a broad product portfolio. This year the year didn't start with any, and last year we had three, one in Europe, in Poland specifically that was large, we had one in Asia, and we had one in Latin America. Another factor was the backlog.
The comparable included SEK 17 million, that was sales that were made in the end of 2022 but delivered in the beginning of 2023. We did not have this effect this year, and we previously disclosed that effect. China, the delta was SEK 12 million. It doesn't mean that we didn't sell simulators to China this year in Q1, just as we did last year in Q1, but we sold for SEK 12 million less than last year. Really the market keeps on being a bit frozen in China, and it's related to the anti-corruption initiative by the government, specifically aiming healthcare and teaching institutions. China is always a bit hard to predict, but we believe that this effect will ease up during the year.
Finally, there was an SEK 8 million difference in India, and that is a completely frozen market right now because they're doing elections, and then it's illegal for government purchases. But we do see the demand, we do see the needs, we have a really good visibility on our pipeline, and we rather recently had our annual sales meeting where we meet all of our partners, we go through the pipeline, we know what's coming, and it does look good for the year. If we summarize it, I can say that Q2 will be better than Q1 for Educational Products, and 2024 will have a growth. So we expect Educational Products to come back during the year and end up on a positive note. If we then move on and we look at the really positive part of our report, it was the Industry OEM that grew very strongly.
And actually our simulator sales, when we sell both hardware and software with customized simulators for a specific product training, those revenues grew by 300%. They actually ended up at the all-time high of SEK 35 million. So we're very pleased to see this, and I am personally very pleased to see how we're able to combine different products and different technologies in our broad portfolio and our broad competence to deliver solutions to these customers. And we have built up a healthy backlog there, and we see this trend continuing with strong growth throughout the year. And if we then move on to license revenues, where we are compensated from our surgical robotics customers for utilizing our software that's embedded on their robots, it started the year with SEK 63 million.
So it's a slight decrease, SEK 7 million, actually back at sort of what was the all-time high in 2022, the fourth quarter. And this bumpiness is something that we are expecting, and it's specifically tied to new entrants who buy their licenses in bundles. So it's not exactly tied one-to-one when they were having their sales. We are noting that Intuitive has disclosed more about their da Vinci 5 rollout plan, and what they've said is that it will be a very controlled rollout with 2024 focus on existing customers that have been part of the clinical trials and doing more research after the FDA clearance, and next year increasing supply and also more of a broader rollout.
We're extremely excited about this because it's a big step in surgical robotics when Intuitive comes out with a new platform that has added functionality such as haptics, and it increases our chances of implementing more technology and more simulation that can bring customer value. We also note that there is what could be a start of a consolidation within the robotic-assisted surgery segment. Recently Storz announced that they've entered into a non-binding agreement to acquire Asensus Surgical. Asensus is a customer of ours, and we believe this trend will be positive for Surgical Science, if it is a trend, it's early days, because as large med-device companies are entering into surgical robotics, they will add significant financial muscle, but perhaps more importantly, they will add sales channels and sales organization and customer service and support.
That means more customers will be exposed to the technology and can access it, and volumes go up, and we receive more license revenue. I have traveled extensively during the spring, and one of the highlights was that I visited SAGES, which is a yearly conference in the United States for the association with the same name, and there was a magnificent 10-year anniversary celebration of the FES program. The FES program is what's called Fundamentals of Endoscopic Surgery. This is a long, long collaboration that we've had with SAGES, where over 13,000 surgeons have been certified on our simulators for endoscopic maneuverability. It's just a beautiful thing when you see what that adds to patient safety.
For us as a company, it's also really important to remember that when we work with these end users, we work with the academia, and we're closely embedded with medical associations, we gain so much knowledge that we can combine together with our technology in order to deliver solutions for our med-device customers. So that's sort of the core foundation of our strategy, and this is the reason why Industry OEM can grow like it did this year. For those of you who read our quarterly reports carefully and listen to what we communicate, we actually said last year that our sales strategy for Industry OEM is working, the key account strategy and the people we've hired to work and meet our large med-device customers globally is starting to generate, and we're expecting to see sales in the coming quarters.
That's what we said, and that's what happened, and we see this trend continuing for 2024. So after a bit of a rough start for Educational Products, we're optimistic and we're confident for the full year, and we see a really strong trend in Industry OEM. And with that, I will hand over to Anna for some further details.
Yes, thank you, Gisli. Continuing a bit on the revenue side, on the slide you see the split in percentage between the two business areas. The summary for Q1 is, as you've heard, that Educational Products was weak, having a notch in the curve, while Industry OEM had really strong development. In total we had sales of SEK 188 million. That was down 18% both in Swedish crowns as well as in local currencies. As you know, we are heavily dependent on, above all, the US dollar, where we have more than 80% of our sales, and we've had some positive effects from the dollar strengthening for the past years. However, as you see now this quarter, it's even between Swedish crowns and local currencies.
So we had record sales within Industry OEM, the highest revenues we've ever had, both for the business area as a whole and for simulator sales within the area. And as Gisli said, we had a very focused strategy since one and a half years back, which is now starting to pay off. However, Educational Products declined more than Industry OEM grew. We had very tough comps, but we also saw several distributor markets being weak, such as China then. We talked about the anti-corruption campaign for quite a few quarters now, India now being frozen, awaiting a new administration, and several markets in Europe where we didn't see any tenders closing. One market that did exceed last year's numbers was then the U.S. on the EDU side.
If we look at our revenue streams, we see for the license revenues then that they are a bit lower in absolute numbers for this quarter compared to Q1 2023, but at a good level, and being then a larger part of our total revenues, 34% compared to 31% in Q1 2023. Again, emphasizing what Gisli also said, that these revenues are a bit bumpy between the quarters since the new entrants purchase the licenses in batches. And we also have a certain seasonality effect also on the subscription side. Simulator sales being 48% of our total sales for the quarter, down in total approximately 32%. Again, then EDU being down more and industry showing very good development and all-time high. And as Gisli said, we do expect a degree of recovery for Educational Products in the second quarter.
There are a number of major tenders on their way, even though it's always hard to know exactly when they will be completed. Regarding China, again, we've said that we expect normalization in the second half of the year at the earliest, and India will still have an effect in Q2 waiting for a new administration. Development revenues were higher, and that is, of course, an effect since simulator sales within Industry OEM were higher. They are often tied together, being projects where we do adaptations and sell simulators. And these revenues are also, of course, tied to robotic projects. Service revenues continue to be stable and growing with the installed base. And new in this report is that we also now divide our regional sales per business area, and you can find that in note 2 in the interim report. Costs and EBIT margin for the quarter.
We continue to have good cost control. If we look below the gross margin in absolute numbers, all those OpEx cost lines were below both Q4 and Q1 of last year. On the sales and marketing side, we had two of our largest activities that we have during the year. They were in the first quarter. Our largest congress within Educational Products is the IMSH. That was in January this year in San Diego. We also hosted, as Gisli mentioned, our annual distributor meeting. That was in February this year in Budapest, where we had over 100 of our distributors, people from them in place from more than 40 countries. All in all, sales and marketing costs were 21% of sales, admin 8%. R&D costs were on par in absolute numbers if we compare to Q1 2023, 24% of sales, and we activated slightly less than SEK 10 million.
The line other was in total a slight negative, -1%. That is costs for our option programs, and it's also FX effects on current receivables and liabilities that end up on this line. Going back up a bit then to our gross margin, that was 66% for the quarter compared to 69% last year. The increased share of license revenues has a positive effect on the gross margin. However, the product mix was unfavorable, and the fact that we sold fewer simulators also meant that we had higher fixed costs per simulator, also affecting the gross margin in a negative way. EBIT was then SEK 26 million or 14%. Organization-wise, we increased with five people during Q1. We were 260 going out of 2023 and then 265 people going out of Q1.
Next, we had an increase of 3 people in the U.S., 1 in Sweden, and 1 in what we call other, which is primarily Germany and China. The Adjusted EBIT, where we have our financial goal of 40% in 2026, was 17% for the quarter or SEK 32 million. The finance net was SEK 2 million. We had a positive of SEK 6 million for interest income and then a negative for revaluation of internal loans towards subsidiaries and also the IFRS 16 effect. Net result for the quarter was then SEK 24 million. Looking at our cash flow, cash flow from our operating activities was +SEK 28 million. We did have a negative effect in working capital since both inventory and accounts receivable increased somewhat. That was partly offset by the fact that current liabilities also increased somewhat.
Cash flow from investing activities for this quarter was primarily investments in development costs and from financing primarily related to IFRS 16. The grey line you see there on the graph is our accounts receivables as a percentage of rolling 12-month sales. That is something we follow closely and have worked hard with, and it remains at a good level, also then helping the fact that we increased cash with approximately SEK 25 million during the quarter, which we think was good in view of this quarter, and we ended with a cash position of SEK 660 million. With that, we conclude the presentation and can open up for questions.
If you wish to ask a question, please dial pound key 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from Simon Jonsson from Berenberg. Please go ahead.
Morning, Gisli. Morning, Anna. A couple of questions from me. The first one is on education. And really, how can you be so confident that we will see growth in 2024? Do you have a stability on larger tenders over the next quarters? It just goes a bit against your comments that customers are holding a tight grip on its wallet. And also related to that, what are you hearing about your customers' budgets for 2024 if you compare that to 2023?
All right. So, Simon, the confidence comes from years and years of reviewing pipeline numbers and knowing all of these distributors. It has been a tough start of the year, and customers are a bit shell-shocked from 2023 when the budgets didn't work out. So they've been very cautious. But we see the actual deals in the pipeline. And we also note that macroeconomics are, again, favorable for us. Inflation is coming down, and we are really confident that many of these deals will take place in 2024. And when we add all that up to a big picture, we are confident that Educational Products will grow in 2024.
All right. To follow up on that, could you maybe help us understand the sequential development a little bit better? How much of this will rely on Q4? I mean, it's the seasonally strongest quarter. I'm just thinking that maybe the budgets are better, but they will still likely wait in order until then, or how should we think about that?
Well, it's not like we're not selling anything. Even if a decrease from 140+ down to 79 is a big decrease. But also, if you look at how we broke down and disclosed a lot of detailed information for everyone to understand that bridge, you also see that there aren't that many factors. I mean, the comparable was tough. There's nothing to do about that.
But a lot of it is attributable to large tenders, and we have really good visibility on large tenders. We know there will be a new government in India, even if that is perhaps not the biggest delta. It was SEK 8 million. And we do feel confident that at some point, China will bounce back. We've seen that many times historically. But it's a bit more tricky with China to know exactly when. But all these things combined make us see a strong, solid 2024.
All right. Perfect. And second topic is robotics and license revenues. Could you also help us sort of get more color on the 11% decline here year-over-year? You're mentioning that it's partially because customers are buying licenses in bundles. Is that the main reason, or could you sort of comment on the underlying development if we exclude this effect?
There is some inherent bumpiness related to, 1, customers, especially new entrants, are buying licenses in bundles. 2, there is also some bumpiness in when the recurring revenue in terms of subscriptions are renewed. So these two things contribute to some bumpiness. What we see in the market is a brand new robot from Intuitive. We see advances among many of the other surgical robotics companies. And we are embedded on 15 of these companies with our software. Of course, there are some varying degrees of success as they're starting to enter the market and they get regulatory approval and so on. There was actually a Chinese company that got regulatory approval in Europe just recently.
All these factors mean that there is some bumpiness, but we don't see any difference in the outlook of the strong trend of surgical robotics moving forward and our role in supporting those customers within that niche. So we feel confident about the surgical robotics portion of our revenue streams.
Okay. In terms of the da Vinci 5, you're commenting in the report, it's clear that that will be more of a 2025 story. Do you have any more sort of visibility on how this might affect your license revenues in 2024?
Nothing that I can comment on. Of course, we have a very close working relationship with all of our customers. But I note that Intuitive themselves, and that's why I'm quoting it, has talked about a phased controlled rollout and limited supply throughout the year and supply increasing in 2025. I also comment on the fact that for us, as a simulation company, it's really exciting to see all that added functionality that means that we are in a position to add more meaningful technology to such a platform without making any sort of further comments or drawing any conclusions or disclosing anything about Intuitive's plans going forward.
All right. That was all from me. Thank you so much.
Yeah. Thank you, Simon.
The next question comes from Christian Lee from Pareto Securities. Please go ahead.
Yes. Good morning, and thank you for taking my questions. The first one is a follow-up on the da Vinci 5 adding more features. Does this mean more project development opportunities for you in the short term?
I really can't comment that specifically on one customer, Christian. But on a more broader level, the more complex features being added in the technology from surgical robotics companies means that physicians can do more things with the robots. And then for the sake of patient safety, they also need more training. And we outgrew the market in an amazing way last year where our license revenue grew by 50%, whereas the market certainly didn't grow by 50%. And we have no reason to believe that this trend over time is going to change because customers are also increasingly moving towards simulation because simulation is advancing and we're able to do things that we couldn't do before because also we are investing in our technology. And also from an ESG perspective, it really doesn't make sense to use a lot of living animals or cadavers, meaning deceased humans, to practice.
All this combined makes us really excited about the future.
Okay. Great. Second question is also regarding da Vinci 5. It seems like the robotic systems will include simulation by default that the customers previously had to purchase separately. Is this the reason for why you expect the license revenues to pick up significantly next year?
Again, I cannot comment specifically on one customer. I simply can't. I'm not in a position to do that. But if you look at how the robotic-assisted surgery industry is developing and new players are coming to market, and really, simulation is becoming a de facto standard. Everyone expects it in a way to be included on the console. I mean, that's what surgeons, physicians, and other hospital staff are coming to expect. And the supplier of that world-leading simulation is Surgical Science. So that's a positive for us.
Yeah. Sure. And my final question, would it be possible to disclose how much of the license revenues that are subscription-based?
We know that that is something that would be interesting to see. As you know, we try every year to add more information to our reports. This year, it was the geographic split that we have in a more granular way. We have not disclosed the split, and we cannot do so yet. That is our judgment from a sensitivity point of view. The only thing we said is when we acquired Simbionix that the larger part of their revenues from Intuitive were subscription-based.
Okay. That's clear. Thank you very much.
Thanks.
As a reminder, if you wish to ask a question, please dial pound key 5 on your telephone keypad. The next question comes from Ulrik Trattner from Carnegie. Please go ahead.
Great. Thank you very much. Good day, Gisli and Anna. A few follow-ups. You're referring to a rather tough situation in China. Previously, you've sounded more upbeat. I know it's a tricky one, but if you could help us decipher how transparent can it be that the market will improve despite sort of historical pattern? As well as you're referring to India in Educational Products and the lack of opportunity to capture orders there. For transparency reason as well, could you help us provide some more granularity on what sales were derived out of India for Q2 and portfolio in 2024? That would be my first question.
Sure. India is pretty simple. I mean, after they've elected a new government, they will start business as usual again. And we have a great distributor there, a great partner, great visibility on business and tenders and so on. We haven't disclosed absolute numbers for the markets. But the fact that the deviation was SEK 8 million, we really tried to add some transparent data points in order to understand the dip in Educational Products, at least tells you something. When it comes to China, Ulrik, I travel extensively to China. It's a very important market for us, not least in the Industry OEM, where we really see big opportunities. And we're strengthening our organization there. We have our own office. We have our own people. But it's really tricky to know.
We commented in one of the Q reports last year that we saw the Chinese market potentially opening up in the beginning of this year, and it didn't happen. I will just bite my tongue in terms of exact timing. We do really know the end users there and the medical community. We are confident that it will come back, but the exact timing is difficult. We anticipate it to be on the second half of this year, but it is difficult to know with China.
Again, just emphasizing that that is on the educational product side. On the Industry OEM side, we see a lot of activities in China and a lot of positive development.
Fair enough. You also talked about that you're seeing tenders out of the Edu segments. Correct me if I'm wrong, but I interpreted it as these have not been finalized in Q2. So you have one and a half months left for Q2 for these tenders to be finalized and for you to deliver products on these. What's your confidence in that? As well as if we're talking here potentially at best flat organic growth for the educational segment for the full year 2024, do you think that you will need to revise your financial targets on sales and margins as well for 2026? That would be my final question. Thank you.
Yeah. But what we said, Ulrik, is that Q2 will be better than Q1 for Educational Products, and 2024 will have growth over 2023. When it comes to the tenders, and there was one specifically mentioned here, we said that it was a large deal in Poland last year. I mean, this comes from years of work and EU financing, etc., etc. So I really do feel that we have a good grip on major tenders. The exact timing, we have not said anything about, but we typically always have large tenders in any quarter. And we haven't said anything specifically on Q2 or if there are large tenders or not in Q2, but we said that we know that Q2 will be better than Q1 and 2024 as a whole. And when it comes to the 2026 financial goals, there is no change in that.
We are as confident as we were before Q1 of 2024 that we will accomplish our goals by 2026 of SEK 1.5 billion in revenue and 40% Adjusted EBIT margin.
Okay. Great. Thanks for taking my question. I'll get back into the queue.
The next question comes from Christian Binder from Redeye. Please go ahead.
Hi. Thanks so much for taking my question. I just have one quick follow-up. You mentioned vascular surgery as a particular area of strength. Can you elaborate a little bit on where you're taking market share there and how you see the competitive environment developing as kind of your position improving relative to competitors there?
Thank you, Christian. Yeah. We noted that our strong start of the year and what we anticipate to be a strong continuation of the year for simulators, hardware and software to med-device customers had a good portion of revenues within vascular surgery. And that's a competitive market. I know you follow our competitor, Mentice. And we have been winning a lot of business. But even if we are competitors, sure, we are in direct competition in some tenders. But it's also a little bit of a customer mix. We have some different customers, different strengths, and we're deeply embedded in different customers. Of course, we want to gain market share and win over them. And I can't remember exactly, but I think their start of the year was a bit weaker in that segment.
It's more that I feel that we are coming out with our technology, and we're able to combine our technology within our different products to deliver really meaningful solutions to the customers.
All right. Perfect. That was all from my side. Thank you so much.
There are no more questions at this time, so I hand the conference back to the speakers for any written questions and closing comments.
So let us look at the written questions. There is a question around capital allocation and the strategy going forward regarding this since our cash position, yes, continues to increase. And what we've said all along is that, I mean, we have the same strategy as we have had over the past years. We do not need a lot of capital for our running day-to-day business that is generating cash, meaning that that would be for other projects. And as you know, acquisitions have been a successful part of our strategy in the past, and it continues to be something that is an important part of our strategy going forward. And so that is still the same answer to that question. Then I see a question if there were any surprises or misplanning happenings during the quarters.
Let me see if I can interpret this question. Of course, I mean, it is a big mishap that the revenues decreased in Educational Products, which is such a significant amount. And like I said, it was a nosedive. It felt like a nosedive. And what you do after that is you get up and you look ahead. Now, did we see that happening? A lot of our deals come late in the quarter, and visibility of the exact timing, if a deal is going to be in March or in April or something like that, it usually happens rather late. So I wouldn't say we expected it. But it was in line with what we communicated also in the Q4 report, that we do see a healthcare system, and this is the same for all over the world, that is having a tough time.
The inflation that hit them last year and budgets not being met meant that a lot of them had a really tough time. So that they were holding on to their wallets initially. Maybe we could have sort of figured that out, but we did not know that until it happened, so to speak.
There is a question around DV5 that I hope we answered. We talked a lot about DV5. Then the last written question, there is one around the Gaza conflict, if we have lost orders or market share due to the conflict since we do have half of our staff in Tel Aviv.
The short answer to that question is no. The bit longer answer on the war in Israel is that it continues to be tough emotionally for our team, for our colleagues, for our friends in Tel Aviv. But we also see that being a Swedish, Israeli, U.S. company, really global company, it's an amazing team spirit that just got stronger after the conflict, how people are backing each other up, how we, as a very diverse company with all sorts of religions or political opinions, are really pulling together as one team. I also note that if anything, with a bit of a downturn in the Israeli economy, it's been easier to attract and retain talent there. So as you can see in our staffing statistics, we've kept on investing in Israel, and we will keep on investing in Israel. It's great competence in that country.
And even if we all think that the war is terrible, we all keep our fingers crossed that there will be an end to that. Nothing has changed in that aspect. With that, I think we are all done. We don't see any new questions coming into the chat, and everyone has had a chance to ask their questions. With that, I thank you all for listening and hope to interact and see many of you in the coming months and perhaps even some at our AGM, which takes place tomorrow in sunny Gothenburg. Thank you.
Thank you.