CEO comments

“The overall aim of Sectra’s business operations is to solve major social problems that must be addressed in the foreseeable future. Helping customers to improve the efficiency and quality of patient care and increase cybersecurity in critical social functions is Sectra’s most significant contribution to a more sustainable society.”

Torbjörn Kronander, CEO and President Sectra AB
Annual report 2017/2018, June 28, 2018

“It is rewarding to lead and work for a company with satisfied customers and employees who do an outstanding job every day. The Group’s performance is a result of our targeted efforts to understand our customers’ environments and of our culture, with employees who truly care about and assume responsibility for our customers. I am incredibly proud of the Sectra culture and the way it is ingrained in every operating area in the company. This further strengthens our reputation and helps to boost our profitability. This ultimately benefits our customers, employees and shareholders—and, above all, the patients who benefit from our medical IT systems and the citizens of the democratic, open societies protected by our security solutions.”

Torbjörn Kronander, CEO and President Sectra AB
Year-end report 2017/2018, May 29, 2018

Archive

Nine-month interim report 2018/2019. Torbjörn Kronander, CEO and President Sectra AB, comments:

“Our financial focus on long-term growth continues, and we consider two of our goals—the equity/assets ratio and operating margin—to be hygiene factors. Any profit we generate above a 15% operating margin will be reinvested in growth opportunities—a strategy that has proved successful for Sectra’s shareholders in the past.”

We are growing as a company by making our customers successful. With all of our financial goals fulfilled and a strong cash flow, our aim is to continue growing in the long term. High customer satisfaction, favorable profitability and long-term customer contracts have laid a solid foundation for our future growth.

One highly positive trend for Sectra is the growing synergies between IT security and medical IT. Hospitals and healthcare are facing an increasing risk of data breaches and intrusions. Having both of these operating areas under the same roof is a strength and sets us apart from the competition. Sectra is unique in this regard. We are also seeing an increasing interest in digital pathology—which is growing fast—and we recently secured a number of strategically important orders in Europe. Sectra also has a unique strength in this area, because we can deliver systems that can handle both radiology and pathology in a single system. This increases efficiency and saves money for our customers.

A corporate culture for satisfied customers

Sectra is an established brand in niche markets where trust and stable products are vital success factors. We develop and sell products and services for critical operations. The disclosure of a nation’s most important state secrets or a long-term power outage could have serious consequences. The same would apply if a hospital’s radiology operations or medical imaging system stopped working. Building trust and developing stable solutions requires a focus on understanding and creating value for customers. Our success is, therefore, directly linked to Sectra’s corporate culture, where we put the customer and individuals first. A culture where we are on the customer’s side should anything go wrong, and do everything we can to solve the problem and get the customer’s system up and running again. A culture characterized by employees with sound values and a strong drive to truly make a positive difference. All companies and products make mistakes sometimes. What sets a company apart is how it responds when mistakes happen.

Our customer satisfaction surveys show continued high results. For the sixth consecutive year, major US customers have given our IT solution for managing radiology images, Sectra PACS, a top ranking. Satisfied customers are a testament to our success and I am extremely proud of this distinction. We may have outstanding products, but our main strength lies in how our customers perceive the stability of our products, our employees and our corporate culture.

Outlook

Helping customers to improve the efficiency and quality of patient care and increase cybersecurity in critical social functions is Sectra’s most significant contribution to our society. Healthcare and cybersecurity are growing and rapidly changing markets, where numerous opportunities are being created for companies like Sectra. Underlying operations with favorable profitability, a strong cash flow and a growing share of recurring revenue have laid a solid foundation for continued growth. In the US, where we are now experiencing our fastest growth in order bookings, we have secured orders through important procurements and received high rankings in surveys of the alternatives that customers would be likely to choose in the future. This has provided us with favorable conditions for sustained growth in the US market. We also have a number of exciting projects in the pipeline in such areas as digital pathology and cybersecurity for critical infrastructure and new geographic markets that could eventually become significant.

Our high customer satisfaction, our fantastic employees—who make a difference in society and for their fellow human beings—and our exciting future initiatives will serve as the basis for our long-term success. I am therefore optimistic when it comes to our ability to continue this positive trend going forward.

Six-month interim report 2018/2019Torbjörn Kronander, CEO and President Sectra AB, comments:

“The order volume in the second quarter was favorable, but as expected did not reach the exceptional level reported in the corresponding quarter in the preceding year. The US operation doubled its order bookings and accounted for the largest increase during the period.”

Many of the new customer contracts in Imaging IT Solutions pertain to solutions for consolidating medical diagnostic imaging across geographically dispersed enterprises. We offer outstanding products, but our main strength is nevertheless our customers’ experiences of our employees and corporate culture. It therefore feels particularly gratifying to meet new customers who openly and spontaneously tell other healthcare providers about how the actions of our employees set us apart, which is exactly what I experienced at an international conference a few weeks ago.

The trend for Secure Communications is positive. Among other developments, we have been entrusted to deliver our secure mobile phone Sectra Tiger/S to NATO. The operating area’s operating profit was burdened by long-term investments in the area of critical infrastructure and in the expansion of secure mobile communications—activities that are expected to continue generating favorable growth for a long time to come.

The order book is healthy. All operating areas and geographic markets reported an increase in sales for the six-month period. Although the second quarter was slightly weaker than the comparative quarter, we are used to relatively large fluctuations between quarters and are well above our financial goals for the most recent 12-month period.

A winning strategy

At the end of November, Sectra participated in the Annual Meeting of the Radiology Society of North America (RSNA), one of the world’s largest radiology trade fairs held annually in Chicago. Radiology has experienced a significant increase in workload in recent years, without an equivalent increase in terms of resources in the field. This increase is due to a continuously growing need for complex diagnostics and monitoring, not least in the field of cancer care, where most survivors become lifelong patients who are monitored to ensure the cancer does not return. Another prevalent trend is the consolidation of the healthcare sector, with geographically dispersed hospitals and healthcare units being merged. This trend is driving IT development toward scalable systems that do not need to be replaced, which is one of Sectra’s specialties.

RSNA devoted considerable focus to productivity in healthcare and artificial intelligence (AI). The latter is an area that is currently exploding in the field of medicine and where Sectra holds a strong position. We presented solutions that save time for our customers and support cancer diagnostics and monitoring as well as diagnosis of diseases affecting the elderly. Many visitors were also interested in our open platform for integrating AI applications from Sectra and other companies. Based on the response we have received from users and potential customers, I am convinced we are on the right track with our strategy for both our services and the product area—solutions that can handle all types of medical images, with a primary focus on cancer diagnostics.

We also took the opportunity to highlight Sectra’s work related to the IT security of our medical products. We are seeing growing synergies between our two niche areas as cybercrime is also becoming an increasingly serious threat in the healthcare sector. Hospitals have become targets for organized cyberattacks, and the US Department for Homeland Security recently drew attention to the serious vulnerabilities of medical imaging systems (PACS) of several other established suppliers. Sectra possesses unique expertise in computer security and has extensive experience of protecting information at the highest security levels both nationally and internationally. We also leverage this know-how when designing, implementing and, in particular, selling our medical IT solutions.

Outlook

Healthcare and cybersecurity are growing and rapidly changing markets, where numerous opportunities are being created for companies like Sectra. With stable underlying operations with favorable profitability and long-term customer contracts, we have laid a solid foundation for growth. We have secured orders through important procurements in the US, where we are now experiencing our fastest growth in order bookings. These successes have provided us with favorable conditions for sustained growth in the US market. We also have a number of exciting projects in the pipeline and new geographic markets that could eventually become significant, although, as always, there are no guarantees with such initiatives.

Our high customer satisfaction, our fantastic employees—who make a difference in society and for their fellow human beings—and our exciting future initiatives will serve as the basis for our long-term success. I am therefore optimistic when it comes to our ability to continue this positive trend going forward.

Three-month interim report 2018/2019Torbjörn Kronander, CEO and President Sectra AB, comments:

“The trend with respect to order bookings and sales remained positive. The order book is healthy and all operating areas reported an increase in sales. We are also benefiting from exchange-rate movements compared with the corresponding quarter in the preceding year, which has impacted our financial items. We intensified our focus on North America and on new product areas and geographic markets. The cost for this work was charged to earnings but is ultimately expected to generate a positive return. Cash flow was burdened by the signing of several major agreements with customers in Imaging IT Solutions and Secure Communications over the past year, which are initially generating more expenditures than income.”

Within Imaging IT Solutions, the US is currently our most exciting growth market and we kicked off the fiscal year with orders from new, reputable customers in the country, including Stanford University Hospital in California and Sanford Health, a hospital chain primarily operating in North and South Dakota. Agreements with such large, respected customers strengthen Sectra’s market position and will provide the company with solid future references.

In the Netherlands, we completed a unique national telepathology solution that will play a key role in the country’s efforts to improve cancer care through more extensive, improved national cooperation. We also initiated negotiations with one of Australia’s largest healthcare regions in New South Wales. This collaboration is currently in the proof-of-concept phase, which aims to demonstrate that the solutions provided by Sectra and its sub-suppliers work in the customer’s environment. Provided we achieve the desired result and a successful arrangement can be reached in the final negotiations, I firmly believe we will be able to grow quickly in Australia.

When it comes to Secure Communications, the market is being driven by the rapidly growing need for cybersecurity. Within secure mobile communications, we help customers to protect sensitive information, often pertaining to society’s critical functions or to national security in Sweden or other countries. In the critical infrastructure product area, we are continuing to build up a customer base for our analysis and monitoring services for companies in the energy sector. Although the costs associated with an increased focus on this product area will be charged to the operating area’s earnings during the fiscal year, they are expected to result in favorable growth in the long term.

While the operations conducted in Business Innovation are relatively small, we have a number of highly exciting products in the pipeline for our customers in the Orthopaedics business unit. Our products for medical and veterinary education are also attracting considerable interest in many countries, not least in Asia, where Sectra otherwise does not have a major presence.

Outlook

Healthcare and cybersecurity are growing and rapidly changing markets, where numerous opportunities are being created for companies like Sectra. With stable underlying operations with favorable profitability and long-term customer contracts, we have laid a solid foundation for continued growth. We also have a number of exciting projects in the pipeline that could eventually become major endeavors, although, as always, there are no guarantees with such projects. Our high customer satisfaction, benefits for society and future initiatives will serve as the basis for our long-term success. I am therefore optimistic when it comes to our ability to continue this positive trend going forward.

Annual Report 2017/2018. Torbjörn Kronander, CEO and President Sectra AB, comments:

“The overall aim of Sectra’s business operations is to solve major social problems that must be addressed in the foreseeable future. Helping customers to improve the efficiency and quality of patient care and increase cybersecurity in critical social functions is Sectra’s most significant contribution to a more sustainable society.”

The 2017/2018 fiscal year was characterized by successes that strengthened Sectra’s position in our niche markets. We have achieved all of our financial goals and are growing through collaboration with new and existing customers and partners. Our customers have entrusted us to execute projects with innovative solutions that could ultimately lead to new advances in critical social functions.

Our customer satisfaction surveys continue to show positive results. Within our largest product segment, Radiology PACS, Sectra secured a top ranking in the surveys conducted by the market research company KLAS, with the most satisfied customers both in the US and globally. The US market remains an exciting area for growth, although it is the most intensely competitive market.

Another gratifying development is that the profitability problems we have been facing in Secure Communications in recent years are being rectified. The operating area is growing rapidly and is profitable, although there is still some way to go before we reach the desired earnings level. Our new critical infrastructure security product area is displaying particularly strong growth, although the impact on our overall performance to date has been minor.

A culture we can be proud of

It is rewarding to lead and work for a company with satisfied customers and employees who do an outstanding job every day. We are not always perfect, we sometimes make mistakes. But one thing that sets us apart from the crowd is our company culture. This is most obvious when unexpected things happen. Take, for example, the WannaCry cyberattack that spread like wildfire from computer to computer in the UK healthcare sector in May 2017. When those of us in the management team were informed on the Friday afternoon that large parts of the healthcare system in England had ground to a halt due to the attack, our staff were already in the midst of investigating and rectifying the problems and informing customers. Our employees do not wait for orders from their managers or customers, but rather act immediately to help customers when necessary. This is how we want it to work. I am incredibly proud of this and the way the culture is ingrained in all of our operating areas. This creates satisfied customers and is a strong contributor to profitability, which ultimately benefits our customers, employees and shareholders. But the real winners are outside our organization: the patients who benefit from our medical IT systems and the citizens living in the democratic, open societies protected by our security solutions.

Unique combination

I am often asked why we have medical IT and cybersecurity in the same Group. The answer is historical chance and business choices in the company’s early development phase. Recently, synergies between these two areas have increased, however, not least as the healthcare system has become a target for cyber criminals. The combination makes us unique, although the operations are conducted as separate business areas, with their own resources for research, development, sales and support. My task here is to ensure that the Board of Directors has freedom for the future, either to retain the combination or to list the operations on their own merits. We are still not in such a position, but with the rapid growth of Secure Communications we have made some progress.

Developments in our niche markets

Medical IT and diagnostics

The major demographic problems faced by the West, and increasingly in Asia, represent a societal challenge where we can make a difference. Healthcare costs are soaring, even as a share of GDP, and this trend cannot continue indefinitely. Today, a crucial share of healthcare costs is attributable to caring for the elderly. The main diseases that are driving these costs are cancer and skeletal diseases as well as neurodegenerative and cardiovascular diseases. It is therefore here that society should focus its resources to remedy the trend of rising costs. This is why we have chosen to specialize in these areas. In Imaging IT Solutions, we must provide all diagnostic imaging and be particularly skilled in cancer diagnostics. In the Orthopaedics business unit, we are focusing on skeletal diseases. We are also working together with partners who provide solutions in the field of cardiovascular and neurological diseases.

Progress in the field of cancer

We have observed that cancer is transitioning from an acute, fatal disease into an often-chronic disease. This means that as the incidence of cancer increases, the need for diagnostics will increase even faster, since individuals living with the disease must be monitored, often for the rest of their lives. In cancer diagnostics, Sectra has a market-leading position within IT for mammography and radiology. This is also the case for the rapidly expanding field of digital pathology, where Sweden now commands a world-leading position and where Sectra holds a dominant market share. The challenge for us is to obtain FDA approval for digital pathology as soon as possible, to allow us to also sell our products for primary diagnostics in the US.

New model for medical education

The medical field is rapidly evolving. Old knowledge is being replaced with new expertise at a rate that is unprecedented in human history. In such a world, completely new demands are being made on medical education and continuing professional development for doctors and other healthcare personnel. Sectra is at the forefront of this field, with visualization solutions for anatomy education. To meet customer needs, we are expanding our offering to include training for other specialties, such as pathology and histology. Major synergies also exist between our medical education operations and other fields.

Cybersecurity

Within Secure Communications, we are positioned in a market that is rapidly expanding. There is an immense need to increase cybersecurity in society and there exists significant potential for our cybersecurity services for critical infrastructure. Cyberattacks constitute the third largest threat against society according to a global risk report from the World Economic Forum. Cyberattacks not only affect industrial companies, but also society’s critical functions, such as energy companies, hospitals and banks. The number of cybersecurity attacks has almost doubled over the past five years[1], and society was severely hit by multiple global attacks last year. Within cybersecurity, Sectra not only has its existing business focusing on secure communication for the most demanding customers, but has now also begun offering cybersecurity for critical infrastructure. The cybersecurity segment reported highly favorable growth during the year.

As I mentioned earlier, we have also witnessed this development when it comes to cybersecurity in healthcare. Three quarters of healthcare organizations in the US were targeted by ransomware or malware attacks in 2017.2 If critical healthcare systems stop working, then patient lives are threatened. That makes the healthcare system more vulnerable and increases the likelihood that they would pay a ransom to blackmailers. Naturally, this only increases the threats further.

Financial performance

A year ago, our order bookings looked somewhat worrying, but after the most recent quarter we are ending the fiscal year with a healthy order book. This will provide a solid foundation for continued growth. Sectra has stable operations, with favorable profitability and strong cash flow. We also have a number of highly exciting projects in the pipeline that could eventually become major endeavors, although, as always, there are no guarantees with future projects. During the year, we achieved our financial goals. Stability and profitability are our first and second priorities. These are viewed more as thresholds that we must cross. When the targets have been achieved, our focus shifts to the growth target of EBIT/share, which we consider the most important long-term target for our shareholders.

Outlook

Sectra’s success is attributable to the fact that we always put the customer first. We solve customer problems within our areas of expertise and help them become more efficient by having a deep understanding of their daily processes and needs. We are well positioned to continue delivering a strong performance and our goal for the future is clear.

When I think of what Sectra will look like five years from now, I see that we still have the industry’s most satisfied customers and that our employees are also satisfied. We have grown and advanced our international position through close, long-standing customer relationships. We have continued to achieve our financial goals. Within Imaging IT Solutions, we have captured a market-leading position in a greater number of countries, with a particular focus on growth in the US. When it comes to cancer care, Sectra’s solutions for digital radiology and pathology have improved diagnostics and helped to provide more people with highquality care. Within Secure Communications, we have created opportunities for increased growth by broadening our product portfolio and expanding our customer base, and the new critical infrastructure security product area has displayed particularly strong international growth. We have continued to initiate innovative projects with good profitability potential and strong underlying market growth, and divested less successful initiatives where necessary. Then we can look back on yet another five years with satisfied customers, satisfied employees and satisfied shareholders.

[1] The Global Risks Report 2018, https://www.weforum.org/reports/the-global-risks-report-2018

Year-end report 2017/2018. Torbjörn Kronander, CEO and President Sectra AB, comments:

The 2017/2018 fiscal year was characterized by successes that strengthened Sectra’s position in our niche markets of medical imaging IT and cybersecurity. We have achieved all of our financial goals and are growing through collaboration with new and existing customers and partners. Our customers have entrusted us to execute projects with innovative solutions that could ultimately lead to new advances in critical social functions. The overall aim of all our projects and business ventures is to solve major social problems that must be addressed in the foreseeable future. Helping customers to improve the efficiency and quality of patient care and increase cybersecurity in critical social functions is Sectra’s most significant contribution to a more sustainable society.

It is particularly gratifying to report that the problems we have been facing in Secure Communications in recent years are now being rectified. The operating area is growing rapidly and is profitable, although there is still some way to go before we reach the desired earnings level. Our new critical infrastructure security product segment is displaying particularly strong growth, although the impact on our overall performance to date has been minor.

Our customer satisfaction surveys continue to show positive results. Within Imaging IT Solutions, Sectra secured a top ranking in our main segment—Radiology PACS—in the customer satisfaction surveys conducted by the market research company KLAS, with the most satisfied customers both in the US and globally. The US market remains our best opportunity for growth and is currently our most intensely competitive market.

It is rewarding to lead and work for a company with satisfied customers and employees who do an outstanding job every day. The Group’s performance is a result of our targeted efforts to understand our customers’ environments and of our culture, with employees who truly care about and assume responsibility for our customers. I am incredibly proud of the Sectra culture and the way it is ingrained in every operating area in the company. This further strengthens our reputation and helps to boost our profitability. This ultimately benefits our customers, employees and shareholders—and, above all, the patients who benefit from our medical IT systems and the citizens of the democratic, open societies protected by our security solutions.

Outlook

A year ago, our order bookings looked somewhat worrying, but after the most recent quarter we are ending the fiscal year with a healthy order book. This will provide a solid foundation for continued growth. Sectra has stable underlying operations, with favorable profitability and cash flow. We also have a number of highly exciting projects in the pipeline that could eventually become major endeavors, although, as always, there are no guarantees with such projects. Healthcare and cybersecurity are growing and rapidly changing markets, where numerous opportunities are being created for companies like us. Sectra is well positioned in these areas, with stable solutions, a long-term future focus and high customer satisfaction. I am therefore optimistic when it comes to our ability to continue this positive trend going forward.

Nine-month interim report 2017/2018. Torbjörn Kronander, CEO and President Sectra AB, comments:

“With all of our financial goals achieved, we aim to continue growing in the long term. Our focus will be on growth initiatives that can contribute to a long-term and stable earnings trend, including cybersecurity for critical infrastructure and solutions for integrated cancer diagnostics. We are also investing in new geographic markets—including Canada and France, where we opened offices over the past year—and in increasing our market shares in countries where we are already established but are not yet the market leader. “

Sectra continued to deliver positive trends in terms of sales, order bookings, and profitability. The most significant sales growth during the period was reported in Sweden, primarily as a result of increased sales in the Secure Communications operating area. Within Imaging IT Solutions, we are growing in the Netherlands, the UK, and the US.

The increase in order bookings is attributable to several comprehensive, long-term customer contracts in both Secure Communications and Imaging IT Solutions. A significant portion of our expenditures arise in the early stages of the multiyear projects, while revenue and profit recognition are distributed over the entire duration of the customer contract. Accordingly, several of the new orders will tie up considerable capital during the installation phase, which will place a greater burden on cash flow.

Highest customer satisfaction

For a company such as Sectra, which competes with some of the largest companies in the world, it is extremely important to have satisfied, long-standing customers. Our success in this area is confirmed by the recognition of Sectra’s medical IT system (PACS) for having the highest customer satisfaction in the US for the fifth consecutive year, and globally for the fourth year straight. This is mainly the result of our corporate culture, where the needs and problems of our customers always come first. I am proud of the positive feedback we continue to receive from users across the globe and of our employees, who truly care about and assume responsibility for our customers.

Outlook

Sectra’s customers operate in some of society’s most critical functions. Trust is particularly important in these functions as is a strong brand, which is something Sectra has focused on throughout its existence. Our job is to help our customers become more efficient and give them the tools to—in turn—make people’s lives healthier, safer, and more secure. By following our vision, this is how we create value for our customers, our society, and our shareholders. Healthcare and cybersecurity are growing and rapidly changing markets, where numerous opportunities are being created for companies such as Sectra. We are well positioned in these areas, with stable solutions, a long-term future focus, and high customer satisfaction. I am therefore optimistic when it comes to our ability to continue this positive trend going forward.

Six-month interim report 2017/2018. Torbjörn Kronander, CEO and President Sectra AB, comments:

We continued to grow during the second quarter. This was mainly due to increased sales from products and development assignments related to secure communications, including the deployment of IT systems and services at new healthcare customer sites, such as the University of Pennsylvania Health System in the US. Sales growth during the first half of the year took place in our major markets, namely the Netherlands, Scandinavia, and the US. The earnings trend for the Group as a whole was stable, and our operating margin is well above our long-term goal of 15%.

Sectra continues to experience major variations between quarters, particularly in terms of order bookings. During the second quarter, we reported increased order bookings in both Imaging IT Solutions and Secure Communications. We signed agreements with several new US customers, and won a prestigious order in the Netherlands for a nationwide breast screening solution. Our greatest growth opportunities currently lie in the US market, where we have a high level of customer satisfaction but a relatively small market share to date.

Several of our new orders will initially be charged to earnings. A significant portion of our costs arise in the early stages of the multiyear projects, while revenue and profit recognition are distributed over the entire duration of the customer contract. We are also investing in the countries where we have established new offices, Canada and France, which entails higher initial costs but ultimately will contribute to our continued growth and earnings.

The technology of the future has arrived

In late November, Sectra participated at RSNA, a major radiology trade fair held in Chicago, for the 28th consecutive year. At the fair, I met with both existing customers and representatives of healthcare providers who are evaluating Sectra’s solutions ahead of future procurements. Based on their response, my assessment is that we have the best, most stable solutions in the market, and—most importantly—the best people in the industry. Decision support based on artificial intelligence (AI) and machine learning attracted considerable attention at RSNA. This area of technology will have a major impact on healthcare in general—and on diagnostic imaging in particular—and will offer new growth opportunities for those who act wisely. For physicians, for example, products based on this new technology could contribute to efficiency gains by offering a more powerful toolbox for diagnostics, and when choosing and monitoring treatment. Thanks to a new interface launched by Sectra at RSNA, we will be able to offer not only our own but also third-party supplier AI applications integrated into our own systems, similar to smartphone apps. This will enable us to provide our customers with greater freedom of choice, and accelerate their transition to the new possibilities created by machine learning. This is yet another example of how we work to remain at the forefront of development in order to increase the efficiency of future health and medical care.

Outlook

Sectra’s customers operate in some of society’s most critical functions. Our job is to help our customers become more efficient, and give them the tools to—in turn—make people’s lives healthier, safer, and more secure. By following our vision, this is how we create value for our customers, our society, and our shareholders.

Healthcare and cybersecurity are growing and rapidly changing markets, where numerous opportunities are being created for companies such as Sectra. We are well positioned in these areas, with stable solutions, a long-term future focus and high customer satisfaction. I am therefore optimistic when it comes to our ability to continue this positive trend going forward. Our financial goals remain firm: an equity/assets ratio of 30%, an operating margin of 15%, and 50% growth in operating earnings per share over a five-year period. However, I would like to point out that growth comes at a price. Our aim is to continue growing in the long term, but we will not be able to simultaneously increase our margins beyond our goal.

Three-month interim report 2017/2018. Torbjörn Kronander, CEO and President Sectra AB, comments:

Sectra’s operating areas continued to develop and the trend for the Group’s financial results was positive. Our Imaging IT Solutions business area got off to a much better start than in the comparative quarter, but we cannot draw any definitive conclusions based on the outcome for a single quarter. Sales in Secure Communications also improved, mainly as a result of development assignments and products for secure communications. Although the business area’s new venture in the area of cybersecurity for critical infrastructure has not yet generated any substantial sales, we have signed a number of strategic orders and are growing in the Nordic energy sector. 

Order bookings did not quite reach the desired level and we are continuing to focus on growth. In many of the markets where Sectra operates, we command such a large market share that our growth opportunities are limited.. However, this is not the case in the US, where, in addition to a high level of customer loyalty, we also have a relatively small market share. We have been commissioned by several prominent healthcare providers in the US over the past year, and I expect that we will continue to benefit from favorable business opportunities in the US market going forward. To achieve long-term growth, we must also enter new markets and channels. Over the past year, we have established ourselves in two new countries, namely France and Canada. Customer demand for the solutions we provide remains favorable, and we witnessed no changes to the underlying trends in our markets. We have a stable foundation, with a substantial share of long-term customer contracts, and more than half our sales comprise recurring revenue.

Strategic and business choices

Over the past few months, Sectra signed agreements with several customers who have chosen to use our medical IT solutions for cancer diagnostics—not only as a means of enhancing the efficiency of the work conducted in individual departments, such as radiology, breast imaging and pathology, but also to facilitate collaboration between various departments using our solutions for integrated diagnostics.

In addition to establishing a strong position in IT solutions for general diagnostic imaging, an important part of the growth strategy for Imaging IT Solutions is to focus on becoming a leader in cancer diagnostics. The fact that the number of cancer cases is on the rise and more patients are surviving the disease thanks to medical advances is resulting in an increase in diagnostic imaging and placing greater pressure on diagnostic care. Our focus for the future will be on tools for efficient cancer diagnostics, bringing together the subareas of radiology, breast imaging and pathology in a single system. This type of diagnostics is crucial when it comes to personalized medicine, an area that is undergoing rapid growth.

Outlook

Sectra’s customers operate in some of society’s most critical functions. Our job is to help our customers become more efficient and give them the tools to, in turn, make people’s lives healthier, safer and more secure. By following our vision, this is how we create value for our customers, our society and our shareholders.

Healthcare and cybersecurity are growing and rapidly changing markets, where numerous opportunities are being created for companies such as Sectra. We are well positioned in these areas, with stable solutions, a long-term future focus and high customer satisfaction. I therefore have high hopes when it comes to our ability to continue this positive trend in the future.

Annual Report 2016/2017. Torbjörn Kronander, CEO and President Sectra AB, comments:

We are well positioned in the markets for medical IT and cybersecurity. These areas represent changing, growing markets where agile, focused companies such as Sectra have the conditions to succeed. Our results for the previous year show that we are on the right path: customer satisfaction remains high, our profitability and cash flow have increased, we command strong market positions and offer innovative products.

Sectra’s customers operate in some of society’s most critical functions. Our job is to help our customers become more efficient and give them the tools to in turn make peoples’ lives healthier, safer and more secure. By following our vision, this is how we create value for our customers, our society and our shareholders.

The healthcare market

Essentially all developed economies are facing a major demographic problem. We are living to an older age, and due to a discrepancy between the number of young and elderly people, fewer individuals will have to provide for more people in the future. The costs for care and treatment of the elderly will thus play a central role for the national economy of many countries. Most western countries have some form of healthy aging program in place
– a program designed to keep the elderly healthy and allow them to live at home for as long as possible. And if these elderly people become sick, the healthcare sector needs to be able to diagnose and treat them as quickly as possible without compromising on the quality of care. In particular, society must become more efficient at handling diseases affecting the elderly, which mainly include skeletal, cancer, cardiovascular and neurodegenerative diseases. Diagnostic imaging plays a crucial role in diagnostics and follow-up in all of these areas.

While it would be impossible for Sectra to offer specialist tools for all of these diagnoses, we can provide customers with a platform for consolidated medical image management. We have chosen to specialize in cancer and skeletal diseases. When it comes to cardiovascular and neurological diseases, we work closely with our partners in order to offer customers complete solutions. With a broad product portfolio and extensive experience of improving clinical workflows with respect to medical images, we have a strong ability to help customers increase their efficiency, consolidate patient information and images, and facilitate cooperation among various players in the healthcare sector.

Cancer diagnostics

An important part of the growth strategy of our largest operating area, Imaging IT Solutions, is to secure a solid position in IT solutions for general diagnostic imaging and become a leader in cancer diagnostics. The number of cancer cases is on the rise, which is creating growing demand for more efficient cancer care. This area is also undergoing major changes. New, promising methods that focus on activating the patient’s immune system have shown revolutionary results in the treatment of certain types of cancer. Ten years ago, for example, the spread of skin cancer was basically a death sentence. Today, survival rates have improved dramatically. However, the fact that more patients are surviving is placing greater pressure on diagnostic care, since patients who have concluded their treatment must undergo regular examinations to check that their cancer has not returned. Combined with the fact that the number of cancer cases is on the rise worldwide, this is resulting in an increase
in diagnostic imaging.

When it comes to cancer care, Sectra is a major player in digital radiology, growing quickly in digital pathology and one of the world’s largest suppliers of imaging systems for digital mammography. Cancer care is also rapidly shifting toward more integrated diagnostics, where various disciplines, such as radiology, nuclear medicine and pathology, work together to arrive at the best possible diagnosis. The tools required to achieve this is one of Sectra’s main focus areas for the future.

Skeletal diseases

Skeletal diseases are increasing at a rapid rate, and thus so is the use of orthopaedic implants. In this area, the diagnosis of the underlying disease is seldom the main problem. Instead, the challenges for healthcare providers are to plan how the surgery should be performed in order to achieve the best possible result, which implants should be used, and to monitor the results of the surgery. Sectra has therefore invested in developing image-based IT tools for orthopaedists. The orthopaedic operations are conducted within the Business Innovation
operating area.

Business Innovation is also where we conduct operations that address the market for medical education. Drawing on our expertise in radiology products, we offer visualization solutions that can be used to replace or supplement traditional dissections. Modernizing basic and further education programs for physicians, nurses and veterinarians is a top priority for many universities.

Cybersecurity

Political instability has increased. Issues pertaining to network security have become more complex as more devices have become connected to IT networks and various companies’ dependency on digital communication has grown. News headlines about cybercrime are commonplace: eavesdropping, hacking and power failures due to cyberattacks are only a few examples. In fact, the past year alone has demonstrated society’s major need for secure computer systems and communications.

Historically speaking, our main customers in the Secure Communications operating area have been defense departments, police forces and decision-making bodies in Western Europe. A year ago, we introduced a new venture in the area of cybersecurity for critical IT systems, primarily systems used in the production and supply of energy. This area is now undergoing rapid growth and attracting considerable interest. The services we offer to customers in critical infrastructure are not limited by the same export restrictions that apply to our security-approved crypto products.

Secure Communications has experienced a number of years with less-than-satisfactory results. This year, we once again achieved growth and profit. With our new focus and a growing awareness of security in the world, we are now well positioned for the future.

Strategic choices

High level of customer satisfaction

As I look back on 2016/2017, I am most pleased with the positive feedback we continue to receive from users around the world. After all, operating a business is all about keeping your customers and users happy – and being paid to do so. The market’s view of Sectra reflects the high quality of our deliveries, regardless of where in the world our customers are located or the solutions they use. This high customer satisfaction is the result of our targeted efforts to understand our customers’ environments and of our culture, with outstanding employees who truly care about and assume responsibility for our customers.

For a medium-sized company such as Sectra, which competes with some of the largest companies in the world, it is important to have a clear profile and focus. Since these large global players have much more extensive resources, it would be difficult and costly for Sectra to attempt to grow through conventional marketing activities. However, many of the largest companies find it difficult to maintain a high level of customer satisfaction, which is something we excel at. Sectra has therefore decided to focus on customer satisfaction – the best marketing tool a company can have. The fact that our medical image management system for radiology, Sectra PACS, has received a top ranking for customer satisfaction for several years, both in the US and globally, is a testament to our success. This has enabled us to continue expanding our customer base in countries such as the Netherlands, Germany and, not least, the US.

New geographic markets

Our basic view is that it is better to be big in a few countries than to be small in many. Our goal is to be the largest or second largest supplier in the countries where we have subsidiaries. Over the past two years, we have started subsidiaries in France (medical systems), Finland (secure communications) and Canada (medical systems). We also plan to gradually open offices in other countries as we achieve growth in the countries where we already operate. However, it takes time to establish a presence in a country and the rate of expansion will thus be limited.

Recurring revenue increases with more customers

Our customer base is continuously growing, and more than 50% of Sectra’s sales comprise recurring revenue. With every new customer, our recurring revenue increases since our contracts normally comprise either multiyear managed-services agreements or multiyear service and upgrade agreements. The proportion of managed-services agreements is also growing as customers are increasingly looking to purchase IT solutions as a service. In the global market for medical image management, which is currently our predominant product area, the proportion of revenue derived from services is estimated at only 10%, but this figure is growing. Offering IT solutions as a service is thus part of Sectra’s long-term strategy.

Financial performance and sustainability

Quality is profitable

We have exceeded all of our financial goals and our performance shows that providing high quality pays off. The trends with respect to the Group’s sales, operating profit and cash flow are positive, despite the fact that our earnings were charged with long-term investments in future growth in such areas as digital pathology and IT security for critical infrastructure. As the markets mature, our hope is that a number of these activities will contribute to our growth.

In the short term, however, Sectra’s growth will mainly be dependent on our sales in Imaging IT Solutions, where our order bookings have not quite met our expectations. This was partly due to the trend in the UK, where we faced a falling British pound (GBP) rate and a shrinking market in local currency, as well as the fact that in certain countries we now have such a large market share in the radiology PACS product segment that it is difficult to continue growing at the same rate as we have in the past. However, in the US, for example, where Sectra so far has a relatively small market share and thus significant potential, order bookings are growing sharply. To create the scope for further growth in Imaging IT Solutions, we are also focusing on establishing a presence in two new countries. However, we do not expect to see the results of this work until a few years from now.

Sustainability

Along with product safety, quality is one of the most important aspects of our sustainability efforts. Our products and services can mean the difference between life and death for individuals and large groups of people. Carrying out structured quality control and acting responsibly as a company are a natural extension of our vision of contributing to a healthier and safer society. Since our employees are one of our most powerful competitive tools,
the process of recruiting, developing, training and retaining employees and securing a healthy work environment
are important aspects of our sustainability work. In order to meet customers’ supplier sustainability requirements, we developed a new environmental management plan during the year, including environmental goals and systems for managing processes that could potentially impact the environment.

Effects of unexpected news

The past year has been eventful from a political perspective. First the Brexit referendum, where the UK voted to leave the EU, followed by the US presidential election. As was the case for many companies with a high level of international sales denominated in GBP and USD, Sectra’s financial results for the year were impacted by major
currency fluctuations. The performance of the GBP will also impact our future revenues, since the UK is where our customer financing operations generate their largest revenues, which are derived from multiyear managed-services agreement. While Sectra has a relatively large exposure to currency exchange risks, we have chosen not to employ currency hedging given that our finances are otherwise strong. Currency fluctuations therefore have
a relatively quick impact on Sectra’s financial figures.

Will Brexit and Trump continue to affect our operations? As things stand, it is impossible to answer this question,
but there is, for example, a risk that the UK market could slow down as it adjusts to new conditions.

Outlook

In the growing markets for healthcare IT and cybersecurity, we are well positioned in segments where a strong brand, such as the Sectra brand, is an important and decisive factor. Given the increase in cyberattacks, our corporate culture – where the needs of the customer are always our top priority – and our combination of niche areas are clear strengths. Our prospects for success are good, thanks to our customer satisfaction, innovative offerings and financial position, which is enabling investments in new markets, product development and future-oriented projects. I therefore have high hopes when it comes to our ability to continue this positive trend over the years ahead.

 

Year-end report 2016/2017. Torbjörn Kronander, CEO and President Sectra AB, comments:

I am proud to announce that the past year was characterized by a continued high level of customer satisfaction, improved profitability, increased cash flow, strong market positions and innovative products in our niches of medical IT and cybersecurity. These areas represent changing, growing markets where agile, focused companies such as Sectra have the right conditions to succeed. Our results for the year show that we are on the right path. 

As I look back on the 2016/2017 fiscal year, I am most pleased with the positive feedback we continue to receive from users around the world. After all, operating a business is all about keeping your customers and users happy – and being paid to do so. The market’s view of Sectra reflects the high quality of our deliveries, regardless of where in the world our customers are located or the solutions they use. This high customer satisfaction is the result of our targeted efforts to understand our customers’ environments and of our culture, with outstanding employees who truly care about and assume responsibility for our customers.

Our profit increased, despite earnings being charged with several long-term investments in future growth. As the markets mature, our hope is that a number of these activities will contribute significantly to our growth. In the short term, however, Sectra’s growth will mainly be dependent on our sales in our largest business area, Imaging IT Solutions, where our order bookings over the past year did not quite meet our expectations. This was partly due to the trend in the UK, where we faced a falling GBP rate and a shrinking market in local currency, as well as the fact that in certain countries we now have such a large market share in our main area of medical IT systems (PACS) for radiology that it is difficult to continue growing at the same rate as we have in the past. However, in the US, for example, where Sectra so far has a relatively small market share and thus significant potential, order bookings are growing sharply. To create the scope for further growth in Imaging IT Solutions, we are also focusing on establishing a presence in two new countries: France and Canada. However, we do not expect to see the results of this work until a few years from now, since we operate in a slowly evolving industry.

Strategic and business choices

For a medium-sized company such as Sectra, which competes with some of the largest companies in the world, it is important to have a clear profile and focus. In global terms, Sectra is still a relatively small player compared with its largest competitors. Since these large players Sectra’s year-end report 2016/2017 2 (23) have much more extensive resources, it would be difficult and costly for Sectra to attempt to grow through conventional marketing activities. However, many of the largest companies find it difficult to maintain a high level of customer satisfaction, which is something we excel at. Sectra has therefore decided to focus on customer satisfaction—the best marketing a company can have. Our success is a testament to the fact that our PACS for radiology has received a top ranking for customer satisfaction for several years, both in the US and globally. This has enabled us to continue expanding our customer base in countries such as the Netherlands, Germany and, not least, the US.

Recurring revenue currently accounts for more than 50% of our sales. With every new customer, our recurring revenue increases since our contracts normally comprise either multiyear managed-services agreements or multiyear service and upgrade agreements. The proportion of managed-services agreements is also growing as customers are increasingly purchasing IT solutions as a service. In the global market for medical imaging management, which is currently our predominant product area, the proportion of revenue derived from services is currently estimated at only 10%, but this figure is growing.

Outlook

Sectra’s customers operate in some of society’s most critical functions. Our job is to help our customers become more efficient and give them the tools to in turn make people’s lives healthier, safer and more secure. By following our vision, this is how we create value for our customers, our society and our shareholders. In light of recent global cyberattacks, our corporate culture, where the needs of the customer are always our top priority, and our combination of niche areas are clear strengths. Healthcare and cybersecurity are growing and rapidly changing markets, where numerous opportunities are being created for companies such as Sectra. We are well positioned in these markets and we operate in segments where a strong brand, such as the Sectra brand, is an important and decisive factor. I therefore have high hopes when it comes to our ability to continue this positive trend over the years ahead.

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