CEO comments

High level of customer satisfaction

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.

Torbjörn Kronander, CEO and President Sectra AB
Year-end Report, May 2017

Sectra five years from now

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 a company that has grown and advanced its 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 pathology have improved diagnostics and helped to provide more people with high-quality care. Within Secure Communications, we have created opportunities for increased growth by broadening our product portfolio and expanding our customer base. We have continued to initiate innovative projects with good profitability potential and divested less successful initiatives where necessary. Our customers continue to be satisfied and our employees enjoy their jobs. These are important factors when it comes to achieving long-term value growth and ultimately generating a return for our owners.

Torbjörn Kronander, CEO and President Sectra AB
Annual Report 2016/2017, June 2017

September 12, 2017: Growth and increased operating profit

Three-month interim report. 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.

June 28, 2017: Rapidly changing markets creating new opportunities

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 futureoriented projects. I therefore have high hopes when it comes to our ability to continue this positive trend over the years ahead.

May 30, 2017: High quality and customer satisfaction increase profitability

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.

March 6, 2017: Sectra earns top ranking in customer satisfaction and performance shows that quality is profitable

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

Sectra’s financial performance during the third quarter reflected positive trends with respect to the Group’s sales, operating profit and cash flow. While order bookings in Scandinavia were lower than in the comparative quarter, we doubled out order bookings in the Netherlands, the UK and the US. However, we must ensure a higher growth rate for the Group’s total order bookings if we are to achieve Sectra’s financial goals in the long term.

The US is one of the markets where our largest business area, Imaging IT Solutions, is growing and capturing market shares with its medical IT systems. Over the past three years, the US operations have reported average sales growth in excess of 20% per year. I recently returned from the US, where we once again received the prestigious award of “Best in KLAS” for our top ranking in customer satisfaction. This is the fourth consecutive year that Sectra’s system for managing medical images has received this award in the US, and the third year globally. In my opinion, the fact that we have won this award for so many years in a row is directly attributable to our close cooperation with customers, our strong corporate culture and our outstanding employees.

Within the Secure Communications business area, we have turned a loss into a profit. With new security approvals from NATO and the Netherlands, the business area has begun delivering the latest generation of Sectra’s Tiger products – products that protect phone calls and data communications from eavesdropping. While the business area’s focus on the growth of the new critical infrastructure product area will hamper its earnings trend in the short term, it will ultimately contribute to continued expansion.

Strategic choices

Sectra is well positioned in a number of niches, with strong global potential and favorable underlying market growth. We compete on the basis of high-tech products, highly motivated and talented employees and, above all, superior quality resulting in outstanding customer satisfaction. Both internal and external customer satisfaction surveys confirm that our customers appreciate our efforts. The positive feedback we receive from our users across the globe is a testament to our outstanding employees and the fact that we offer high-quality solutions, regardless of where in the world or in what areas our customers operate. 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. Just as we began operating in France last year, we plan to open offices in one or two additional countries during the coming year.

Outlook

With a vision of contributing to a healthier and safer society, Sectra delivers stable solutions with a high level of availability for some of society’s most critical functions. This high level of customer satisfaction and long-term future focus is helping to strengthen our position in Sectra’s niche areas. Given our high level of quality and customer satisfaction, long-term customer relationships, dedicated employees, innovative products and strong financial position, I believe we have the right prerequisites to continue performing well going forward.

December 12, 2016: Increased earnings, strong cash flow and expanded future focus

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

With a vision of contributing to a healthier and safer society, Sectra delivers stable solutions with a high level of availability for some of society’s most critical functions. Both internal and external customer satisfaction surveys confirm that our customers appreciate our efforts. In a recent survey of decision-makers in the North American healthcare market, Sectra once again outranked its competitors. This high level of customer satisfaction and long-term future focus is helping to strengthen our position in Sectra’s niche areas.

Quality is profitable. We delivered a strong financial performance in the second quarter, with continued positive trends with respect to the Group’s sales, operating profit and cash flow – despite the fact that our results were adversely impacted by currency effects, particularly in the UK, and that earnings for the second quarter were charged with long-term investments in future growth areas such as digital pathology and IT security for critical infrastructure. Our investments in these areas are growing as the markets mature, which will have a dampening
effect on our earnings trend for the current fiscal year.

Although order bookings for the quarter showed an adequate improvement, we will not be entirely satisfied until our annual growth rate increases further. We are seeing light at the end of the tunnel for the Secure Communications business area, both in terms of the existing crypto business and in the new area of critical infrastructure, where we are experiencing strong market interest.

During the quarter, we carried out a negative correction in our order stock in an amount of SEK 78.9 million as a result of the renegotiation of a major long-term contract. This renegotiation resulted in hardware being excluded from the contract, a decision that both we and the customer were pleased with since Sectra’s margin on hardware is low and eliminating hardware from the contract would reduce the level of business risk. The renegotiation will only have a marginal impact on our future earnings since it concerns low-margin hardware products and the effect will be spread over a number of years. Our strategy is to continue streamlining our business toward software-based operations wherever possible, but sometimes customers require hardware to be included in the contract.

Outlook

Sectra has received a top ranking in numerous customer satisfaction surveys conducted by various survey institutions. Satisfied customers drive demand and create customer loyalty. Most of the surveys focused on the US and, combined with our low market share in the country, suggest that there is room for our medical IT offering to grow. Taking into consideration Sectra’s high-quality solutions and customer satisfaction, longstanding customer relationships, dedicated employees, innovative products and strong financial position, I believe we have the right prerequisites to continue performing well going forward.

Torbjörn Kronander. CEO and President Sectra AB

September 5, 2016: Multiyear managed-services agreements contribute to Sectra’s positive performance

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

We reported a stable first quarter and the key figures for our financial goals remain above our target levels. Order bookings exceeded net sales on an annual basis, but were below the level recorded in the comparative quarter. Order volumes vary considerably between quarters, since individual multiyear customer contracts can be significant in size. Nevertheless, we must keep an eye on this trend. The Group’s sales, operating profit and cash flow increased during the quarter, despite unfavorable currency fluctuations.

We reported a stable first quarter and the key figures for our financial goals remain above our target levels. Order bookings exceeded net sales on an annual basis, but were below the level recorded in the comparative quarter. Order volumes vary considerably between quarters, since individual multiyear customer contracts can be significant in size. Nevertheless, we must keep an eye on this trend. The Group’s sales, operating profit and cash flow increased during the quarter, despite unfavorable currency fluctuations.

Within our largest business area – Imaging IT Solutions – sales and operating profit were lower than in the comparative period. During the early quarters of 2015/2016 and the preceding year, the business area experienced positive effects of an unusually high number of installations and deployments of medical IT solutions in the UK, where healthcare providers procured new systems as their previous contracts expired during this period. Consequently, the effect was of a nonrecurring nature. The increase in sales in the UK has resulted in a relatively large exposure to the British pound (GBP) for Sectra. The outcome of the UK Brexit referendum in June caused the GBP to fall, which had a negative impact on our earnings for the quarter.

The Business Innovation and Sectra Customer Financing business segments, the latter of which handles customer financing for managed-services agreements, reported sales growth. Our Secure Communications business area posted an operating profit for the quarter. To improve the business area’s performance, we are making long-term investments in international expansion and our new product area within IT security for critical infrastructure.

Strategic choices

We continued to grow in Sectra’s major geographic markets, in line with our focus on controlled expansion, and on being a leader in the areas and regions where our company operates. We are also supplementing this strategy with growth initiatives in a few carefully selected markets and product areas. For example, approximately five years ago, we increased our focus on expanding our presence in the UK healthcare market. This initiative had a significant impact and is now a contributing factor behind our positive performance.

During the first quarter, we opened an office for direct sales of medical IT systems in France, one of the largest countries in Europe where our market share to date has been modest. We believe that Sectra has the necessary prerequisites to help French healthcare providers achieve more efficient medical imaging management, and we have extensive experience and numerous customers in countries where similar changes have taken place, such as the UK and Scandinavia.

Outlook

We operate in niche markets where there is a growing need for the products and solutions offered by Sectra. Our order bookings are significantly higher than our net sales, and we have a growing number of customers with multiyear managed-services agreements, which provide long-term stability. The Group’s financial position is favorable, and we have several exciting initiatives in the pipeline that we hope will contribute to future growth. Thanks to our high customer satisfaction, our long-term customer relationships, our dedicated employees, our high-quality and innovative products, and our strong financial position, we have the necessary prerequisites to continue delivering solutions that contribute to a healthier and safer society. This is how we create customer value, which in turn can lead to a favorable, long-term return for our shareholders.

 

ARCHIVE

June 30, 2016: On course to realizing our vision – with satisfied customers, innovative offerings and achieved financial goals

Annual report. Torbjörn Kronander, CEO and President Sectra AB, comments:

Sectra has a clear vision when it comes to making the community we live in a better place. We want to help customers operating in some of the most critical societal functions in order to make people’s lives safer, healthier and more secure. This is why our vision is to contribute to a healthier and safer society. In the niches where we operate, there is an acute and growing need for Sectra’s solutions and services.

I would summarize 2015/2016 as follows: satisfied customers, achieved financial goals and the launch of new product ranges with the ability to contribute added customer value, thus creating considerable future potential. I am particularly proud of the results of our customer satisfaction surveys, all of which confirm one thing – we have satisfied customers thanks to our fantastic employees and the high quality of our products. The work of our employees is a major reason that we are able to generate value for our customers and thus deliver a favorable earnings trend ourselves. This is strategically important for Sectra’s long-term success.

Potential billion-krona markets

The Group’s sales have surpassed SEK 1 billion for the first time and several of our major markets are displaying strong growth. Our largest operation by far is the Imaging IT Solutions business area, where we have both grown organically and acquired a number of small companies and products that have contributed to our growth in recent years. Sectra Customer Financing, our unit for financing major managed-services agreements, has surpassed our Secure Communications business area to become our second-largest segment in terms of revenue. In addition to our main business units, we also have Business Innovation, our incubator for attractive future projects and home to our research department.

When we start a new business, it must have the potential achieve SEK 100 million in sales within the foreseeable future, and ultimately to surpass SEK 1 billion in sales. Our most recent initiative focuses on services in the area of IT security for critical infrastructure, which has the potential to generate significant synergy gains with our Secure Communications operations.

New services to reverse negative trend in Secure Communications

Sectra has a strong brand in both medical IT and the highly advanced IT security segment. When it comes to Secure Communications, the company has not performed as well as expected. In April 2016, Simo Pykälistö, CFO and Executive Vice President of Sectra AB, took over as President of Secure Communications. Under his leadership, we are now aiming to restore our growth and profitability in this area through the launch of analysis and monitoring services for customers in the energy sector, the largest sub segment within critical infrastructure. The players in this area have significant value that must be protected from unauthorized data access. Strengthening IT security in the energy sector is fully in line with our vision of contributing to a healthier and safer society.

Growing in countries where Sectra commands strong market position

As planned, we are primarily growing in markets where Sectra commands a strong market position as well as in the US. In Sweden, the UK and the US, our sales increased more than 10% during the fiscal year. A key factor in our global success is our top ranking in the recent customer satisfaction surveys conducted by the analyst company KLAS.

The market for medical IT systems is driven by a customer need to coordinate their care resources in order to improve their cost efficiency. The global healthcare sector is facing significant savings requirements, resulting in a major wave of consolidation, not least in the US. The market trend in the US is currently uncertain, as the upcoming election and potential shift in power could temporarily hamper growth if they result in major changes. Knowing that their circumstances could change, many businesses are waiting to make investment decisions until the situation becomes clearer. The healthcare market in southern Europe has been essentially stagnant for several years and the market has also slowed recently in countries that are dependent on revenues from oil exports, such as Saudi Arabia and Russia.

However, we will not allow this to impact our strategy going forward. Society has a fundamental need for more efficient healthcare and increased IT security – precisely the areas where Sectra can offer its expertise. Our focus is on controlled growth and on being a leader in the areas and regions where our company operates. This strategy is supported by investments in a few carefully selected markets and product areas. Digital pathology and IT security for critical infrastructure are new segments in our business areas. IT support for orthopaedics and systems for medical education are examples within Business Innovation.

Initiating direct sales in France and Finland

Imaging IT Solutions has been active in France through partners since 2006. We are now scaling up our operations through the launch of an office for direct sales of medical IT systems. The French government’s recent directive to offer more efficient care through regional cooperation in the healthcare sector is imposing requirements with respect to the consolidation of hospitals’ IT systems. We have extensive experience from similar changes in areas such as Scandinavia and the UK, and thus have the right prerequisites to help French healthcare providers in the challenges they are now facing.

In Finland, we have acquired the IT security consultancy company EXP Analytics Oy. The company is part of Secure Communications’ newly formed Finnish subsidiary, which conducts direct sales of secure communication systems in the Finnish and Baltic markets.

All financial goals achieved

I am pleased to announce that we have fulfilled all of the Group’s financial goals, despite the fact that not all areas performed as well as expected. A more precise definition has been established for Sectra’s growth goal for 2016/2017, since the previous target was open to interpretation.

Multiyear managed-services agreements contribute to stable development

It is becoming increasingly common to deliver medical IT systems as a service since this approach generates cost and operating advantages for both customers and suppliers. Within Secure Communications, we offer equivalent comprehensive infrastructure for secure communication as a service. Resource requirements and costs during the installation phase are offset by the higher rate of recurring revenue since the contracts are usually long-term, which contributes to a more stable development for Sectra over a number of years.

Several of the acquisitions we have carried out in recent years to strengthen Sectra’s organic growth were companies that deliver services. One such example is the Swedish company RxEye (integrated into Imaging IT Solutions), which sells IT services for efficient and secure remote viewing of medical images.

The future Focus on cancer diagnostics

Age-related diseases, such as cancer, place significant strain on the healthcare sector. Although the number of cancer cases continues to increase, advances in cancer care are allowing more patients to survive the disease. In many cases, these patients require regular examinations for the rest of their lives, which is contributing to an increased need for diagnostic imaging. Advances in cancer care are also creating more opportunities for customized treatment and quick follow-up of results, so that alternative methods can be used when needed. An important success factor is integrated diagnostics, whereby a team of medical specialists in various fields make a diagnosis based on several types of examinations. Sectra currently commands a strong position in general diagnostic imaging and through the launch of a system for digital pathology, we can now offer a unique solution for integrated diagnostic imaging. We will gradually add additional features for advanced cancer diagnostics and treatment monitoring.

Higher degree of customization in future healthcare

By monitoring technological advances in our operating environment and new medical methods, we can meet the future needs of our customers, future-proof our offering and identify new business opportunities. One area that could have a major impact on the future of healthcare is big data. Big data refers to the process of retrieving information from the large data sets generated in all digital processes, as well as methods for utilizing this data through machine learning. At Sectra, we are investigating how we can leverage the opportunities created by machine learning in order to help our customers achieve their vision of better, more customized care with shorter lead times. I am convinced that new, more efficient decision support systems for care personnel will play an important role in the future of healthcare.

Cyber security

The market for cyber security is growing. One factor driving this trend is the rapid increase in the number of systems and units connected to the Internet. Critical infrastructure is a sector where computerized supervisory control and data (SCADA) systems are used to monitor and control industrial processes. Connecting these systems to the Internet offers major advantages, but also entails increased vulnerability and greater risk. The current demand for services and products that offer increased security matches our expertise and capacity within Secure Communications and we can benefit from Sectra’s strong brands in security and encryption. Moreover, our new IT security services for customers in critical infrastructure are not limited by the export restrictions that apply to the business area’s security approved crypto products.

Outlook

Our efforts to develop our operations and relationships are long-term in nature. By managing Sectra’s assets responsibly, we can continue to generate value and success for our customers for a long time to come. This is also a prerequisite for generating a favorable long-term performance and return for our owners.

Our order bookings are significantly higher than our net sales and a higher number of customers with managed services agreements will generate stable revenues over a number of years, which bodes well for the future. The Group’s financial position is enabling investments in new markets, product development and future-oriented projects. Thanks to our long-term customer relationships, our focus on high customer satisfaction, our outstanding employees, our high-quality and innovative products as well as our strong financial position, we have the necessary prerequisites to continue delivering solutions that contribute to a healthier and safer society.

May 31, 2016: Financial goals fulfilled and increased order bookings during the quarter

Sectra's year-end report May 31, 2016. Torbjörn Kronander, CEO and President Sectra AB, comments:

Several of our major markets are displaying strong growth and Sectra’s sales have now surpassed SEK 1 billion. Our sales in the US, the UK and Sweden increased more than 10% during the fiscal year. Our top ranking in the last three annual customer satisfaction surveys carried out by the analyst company KLAS have had a positive impact on our performance both in the US and globally. We know that what customers appreciate most are Sectra’s employees and our stable and userfriendly products. I am proud of the efforts of our employees, which contributed significantly to our ability to deliver customer value, thereby enabling us to report a favorable earnings trend.

Our Group-financed managed-services agreements for medical IT systems had the greatest impact on the Group’s positive performance in terms of sales, operating profit and cash flow. Several customers with extensive agreements deployed Sectra’s systems in late 2014/2015 and early 2015/2016. This had a positive effect on the performance of the Imaging IT Solutions business area. Managed-services agreements are handled by our financing unit, Sectra Customer Financing, which has grown more than 60% and is now the Group’s second-largest operation.

I am delighted to announce that we have fulfilled all of the Group’s financial goals, despite the fact that not all areas performed as expected. Please note that a more precise definition has been established for Sectra’s growth goal, since the previous target could be interpreted in different ways (refer to page 6). However, both definitions of the growth goal – which is based on operating profit per share – were fulfilled. Taking into consideration the company’s favorable performance and strong financial position, the Board has decided to propose to the Annual General Meeting (AGM) that SEK 4.50 per share be distributed to the shareholders through a share redemption program.

Strategic choices

We remain focused on controlled growth and on being a leader in the areas and regions where the company operates. This strategy is supported by new ventures in a few carefully selected markets and product areas that we believe offer significant growth potential for Sectra. Digital pathology and IT security for critical infrastructure are examples of such new product areas.

Sectra has a strong brand – not only in medical IT, but also in the highly advanced IT security segment. While the Imaging IT Solutions business area performed well, the Secure Communications business area has failed to meet our expectations for several years. We are now aiming to establish a broader market in this area through the launch of analysis and monitoring services for customers in the energy sector, the largest subsegment within critical infrastructure. Players in this area have significant value that must be protected. Unauthorized data access could result in the loss of human lives, serious injuries, major financial losses or jeopardize the safety of the entire country. Helping customers in the energy sector to protect their control systems is fully in line with our vision of contributing to a healthier and safer society. This new venture is an important part of our ongoing efforts
to restore profitable growth in the Secure Communications business area.

Outlook

Our order bookings are significantly higher than our net sales and a higher number of customers with managed-services agreements will generate stable revenues over a number of years, which bodes well for the future. The Group’s financial position is enabling us to invest in new markets, product development and future-oriented projects. Thanks to our long-term customer relationships, our focus on high customer satisfaction, our outstanding employees, our high-quality and innovative products, and our strong financial position, we have the necessary prerequisites to continue delivering solutions that contribute to a healthier and safer society. This is how we create customer value, which in turn can lead to a favorable, long-term return for our shareholders.

March 9, 2016: Sectra CEO in light of cybersecurity news

Press release March 9, 2016. Torbjörn Kronander, CEO and President Sectra AB, comments:

To reap the full benefits of the IoT, there’s an obvious need for intelligent security assessments.

During the past few quarters, including yesterday’s presentation of the nine-month interim report, Sectra has mentioned its intentions to broaden the operations of the business area for secure communication to include new customer segments where Sectra, as a specialist in data security, can contribute. In this interview, Torbjörn Kronander, Sectra's President and CEO, elaborates on the background to these plans.

Can you explain why you see an opportunity for Sectra to make a contribution in new areas of society?

Connecting more and more devices to each other and to various sources of information is making the day-to-day life of both businesses and individuals more efficient, richer and simplified. However, this Internet of Things (IoT) is also creating a vulnerability to human and technical errors, data breaches and cyberattacks. At Sectra, we have a longstanding experience of providing security and threat analyses for our encryption systems for defense and government authorities. We now see an increasing need for the same type of analyses in other parts of society.

Let me mention a few examples to clarify:

So, how can Sectra contribute?

We have 30 years’ experience of making threat analyses and security assessments for the most demanding industry – the defense and government sector, where national security is actually at stake. This has given us deep knowledge and understanding of data security and well-proven processes on how to assess a situation, evaluate various threat scenarios and improve security without jeopardizing efficiency and the need to communicate. We understand the value of balancing security against asset value and can support organizations in adequately mitigating risk without overinvesting. Making decisions in this area requires a keen understanding of the way information and data flow in and between systems and where they create value for the organization. Our security experts have this understanding.

In which segments of society do you feel Sectra can contribute?

Like the examples mentioned earlier show, the need exists in several different businesses and Sectra has been evaluating its concepts in some of these over the past year. We have, for example, participated in a research project with the automotive industry, which provided a systematic approach of security requirements for the automotive industry.

For us, this research project was a way to validate our processes and knowledge, proving that it is applicable and valuable to industries outside of our normal realm. I see it as an example of how the Internet of Things is creating a much bigger need for security awareness on a level that has not previously been seen.

Other areas where we have evaluated our concepts include the energy sector. As the efficiency of critical systems in this sector is enhanced by adding connectivity and controllability, the resulting need for increased data flows between control systems, remote systems and business systems elevates complexity and the exposure to cyber threats. The effects can be severe, as shown in the example above.

All in all, we see many new ways for Sectra to contribute to the stability of society.

March 8, 2016: Sectra displays positive earnings trend and top global ranking in customer satisfaction

Nine-month interim report March 8, 2016. Torbjörn Kronander, CEO and President Sectra AB, comments:

For the third consecutive year, Sectra topped its segment in the industry’s most important customer satisfaction survey for IT systems in healthcare. The survey was performed by the analyst company KLAS, and our system for managing medical images, Sectra PACS, was ranked highest in Europe, the US and globally. Sectra was awarded top ratings for the stability and ease-of-use of its system, as well as for its employees, proactive service, high-quality implementation and training. This ranking in the KLAS survey shows that customers have a high level of confidence in Sectra and our ability to help them deliver efficient healthcare of the highest quality.

Strategic choices

It is becoming increasingly common to deliver IT systems as a service since this approach generates cost and operating advantages for both customers and suppliers. In certain cases, this means that Sectra assumes overall responsibility for technology, operation and service; in others, it simply entails a payment plan for software over a longer period of time. Orders in Scandinavia from the Norrbotten Region County Council and the private healthcare provider Unilabs during the third quarter are examples of such multiyear service agreements. Within the Secure Communications business area, we offer equivalent comprehensive infrastructure for secure voice communication as a service. Several of the acquisitions we have carried out in recent years to strengthen Sectra’s organic growth were companies that deliver services. Our most recent acquisition, which took place at year-end, was the Swedish company RxEye, which sells IT services for efficient and secure remote viewing of medical images.

By their nature, service sales normally utilize resources and generate costs during the installation phase and initially have a negative impact on our operating profit and cash flow. However, this is offset by the fact that these transactions go on to generate stable invoicing for many years. Several of the service orders that Sectra received for medical IT systems in the preceding fiscal year have reached the operational phase in recent quarters. This means that we have now started invoicing these customers, which is having a positive impact on the Group’s net sales, operating profit and cash flow.

Outlook

Order bookings are significantly higher than our net sales, which bodes well for the future since many orders are spread over a long period, and we are growing in all areas. Our earnings, calculated as operating profit per share, have climbed more than 60% over the past five years, which is above our target level.

Although we are making progress in all areas, I must emphasize that it is unsatisfactory that we have not succeeded in reversing the earnings trend in Secure Communications. Our ongoing efforts to boost our international sales and broaden the business area’s offering to include new customer segments had a negative impact on profit for the period and were not sufficient to entirely compensate for our declining sales to our principal customer in Sweden. In the long term, these efforts are expected to restore our margins and growth to our target level.

The Group’s financial position is enabling us to invest in new markets, product development and future-oriented projects. Thanks to our close, long-term customer relationships, our focus on high customer satisfaction, our outstanding employees, our high-quality and innovative products, and our strong financial position, we have the necessary prerequisites to continue delivering solutions that can improve people’s quality of life, reduce society’s healthcare costs and contribute to a safer society. This is how we create customer value, which in turn can lead to a favorable, long-term return for our shareholders.

December 8, 2015: Growth and strong cash flow

Six-month interim report, December 8, 2015. Torbjörn Kronander, CEO and President Sectra AB, comments:

We reported strong sales growth in all operating segments during the quarter, but our expenses also increased. This was mainly attributable to the resources and expenses incurred in connection with large, ongoing installation projects in Imaging IT Solutions - Group-financed projects that have not yet been recognized in earnings at the Group level. To a lesser extent, we are seeing the effects of our investments in future growth, particularly with respect to digital pathology. However, we believe that our profit level will improve again once these large installation projects reach the operational phase and thereby begin contributing to stable long-term development.

Strategic choices

Our strategies for growth primarily include organic growth, supported by smaller acquisitions, and new products in areas closely related to our current product areas. We are continuing to focus on controlled growth in order to become or remain a leader in the areas and regions where the company has its own offices, supplemented by operations in a few carefully selected markets that we believe offer significant growth potential for Sectra.

In our major business areas, we often perform better in markets where Sectra conducts its own sales than we do through partnerships. Accordingly, we plan to devote greater focus to establishing operations in markets that we believe have significant potential. One such area is the market for secure communication systems in Finland, where the Secure Communications business area acquired EXP Analytics Oy during the second quarter. EXP Analytics Oy sells consulting services in the field of information security.

Outlook

The Group’s order bookings for the most recent 12-month period amounted to SEK 1.4 billion. This far exceeded net sales and thus bodes well for the future, although large projects are now often spread out over longer periods. Following the most recent 12-month period, Sectra’s growth target, calculated as average profit growth per share, is 11.4%, which is above the target level. Thanks to our close, long-term customer relationships, our focus on high customer satisfaction, our high-quality and innovative products, and our strong financial position, we have the necessary prerequisites to continue driving the development of solutions that can improve people’s quality of life, reduce society’s healthcare costs and contribute to a safer society. This is how we create customer value, which in turn can lead to a favorable, long-term return for our shareholders.

September 7, 2015: Strong operational growth and earnings trend

Three-month interim report, September 7, 2015. Torbjörn Kronander, CEO and President Sectra AB, comments:

During the first quarter of the preceding year, Sectra reported a relatively large nonrecurring item pertaining to the sale of patent rights. If we compare our performance excluding this nonrecurring item, the Group’s operating profit increased 29.8% and sales rose 14.7%. This is a trend that we are proud of. This improvement during the quarter is partly attributable to the large number of long-term contracts we have signed in recent years, which are now helping to counterbalance seasonal variations in the Group’s net sales.

Both of our business areas – Imaging IT Solutions and Secure Communications – reported increased sales and earnings for the most recent 12-month period. Within Secure Communications, we achieved international sales success with our concept for a secure ecosystem for spoken communication, which integrates various phone models and several security classes into a single security solution.

The trend noted in Sectra’s largest business area – Imaging IT Solutions – is not simply the result of a growing market. We are also receiving more requests for tenders as healthcare providers across the world increasingly become aware of our stable products and high level of customer satisfaction. The positive news for the quarter is that both new and additional sales contributed to increased order bookings in several markets, including the US, where we are intensifying our growth initiatives and beginning to see the effects of our top rankings two years in a row in the market’s most important customer satisfaction survey. For example, we received an order during the quarter from the major US healthcare chain Carilion Clinic, which is a new customer for Sectra.

While order bookings remained favorable and well above our net sales, we experienced a decline compared with the year-earlier period. As anticipated, order bookings were not as high in the UK, the market in which Sectra’s order bookings increased most in the preceding fiscal year. While the variation in sales between quarters has declined somewhat as a result of long-term managed-services agreements, the variation in order bookings has increased. When we sign a five-year managed-services agreement, for example, the entire order amount is recognized when the agreement is signed, while sales are distributed over the duration of the agreement as the systems are put into operation at the customer’s facilities.

Strategic choices

Our product development activities have increased compared with the year-earlier period. Within Imaging IT Solutions, we are devoting special focus to the use of medical imaging management in cancer diagnosis, which is a key part of the business area’s strategy for the future. This initiative includes, for example, imaging management for mammography, radiology and the new area of digital pathology. So far, when it comes to digital pathology, only a small number of hospitals have begun using digital technology for primary diagnostics. One hospital which is in the process of digitizing its pathology department is University Hospital Utrecht in the Netherlands, which ordered Sectra’s system for digital pathology during the first quarter. One of Sectra’s unique advantages in this product area is that we offer hospitals an integrated IT solution for radiology and pathology, which reduces the number of IT systems and the hospital’s operating costs, while facilitating and improving clinical collaboration. 

Outlook

Sectra is growing and gained the trust of new and existing customers worldwide. After a period of strong order bookings in recent years, many major customer projects are now in the installation phase. Initially, these projects will have an adverse impact on Sectra’s cash flow, but when the projects move from the installation phase to the operational phase, they will contribute to a stable long-term trend for the Group.

Thanks to our close, long-term customer relationships, our focus on high customer satisfaction, our high-quality, innovative products and our strong financial position, we have the necessary prerequisites to drive the development of solutions that can improve people’s quality of life, reduce society’s healthcare costs and contribute to a safer society. This is how we create customer value, which ultimately results in a favorable return for our shareholders.

June 30, 2015: Increased customer value, satisfied customers and high returns

Annual report, June 30, 2015. Torbjörn Kronander, CEO and President Sectra AB, comments:

The 2014/2015 fiscal year was a favorable one for Sectra. There are several reasons for our positive performance, one of the most important of which is customer satisfaction. I am proud of and grateful for the efforts of our employees, which contributed significantly to our ability to deliver customer value, thereby enabling us to report a favorable earnings trend.

When I meet customers, both in the healthcare and security fields, I can see the strong confidence in Sectra that our employees have built up. It is highly gratifying to see that we have succeeded in creating such confidence and generating customer satisfaction for Sectra and our products. In this respect, we appear to have performed better than our competitors.

Highest customer satisfaction - again

The fact that Sectra has satisfied customers was confirmed by both external and internal surveys around the world. Among other surveys, our medical IT solution Sectra PACS received a top ranking in KLAS, the industry’s most important customer satisfaction survey (page 11) for IT systems in healthcare, for the second consecutive year. The surveys reveal that our high rating is attributable to the company’s employees, as well as the stability and easy-to-use nature of our systems.

Our quality work is heavily based on feedback from users and customers. Accordingly, I would like to specifically thank all users who have taken the time to give us valuable feedback in different surveys, thus enabling us to continuously strive to improve even more. We also appreciate the opinions and suggestions we receive from shareholders and investors. As a result of such feedback, we have now supplemented the Annual Report with an income statement classified by function and we held an open day at our Linköping office in connection with the most recent Annual General Meeting.

Long-term contracts contribute to stable performance

Customer confidence in Sectra is also reflected in order bookings, which are the highest in the company’s history. However, it will not result in a quick, short-term increase in sales. Many of the new agreements are service deliveries with terms of up to ten years, which means that they will gradually increase net sales and contribute to a stable performance over a long time to come.

The scope for growth in Sectra’s niche areas remains large, as confirmed by the higher order bookings in all business areas. The UK represented the largest increase, but the high order level in this market is only temporary since many hospitals had to purchase new systems or renew their agreements before summer 2015.

We are focused on controlled growth and primarily on being a leader in markets where the company already operates, as well as growing in a few carefully selected markets were we believe there is high growth potential. In line with this strategy, we strengthened our presence in Denmark during the year through the acquisition of our partner it-mark ApS, which offers online services for medical imaging management. We also established a new subsidiary of Sectra Communications in Finland, where we are working to boost our sales of security products and services, as well as another subsidiary in France linked to the activities being carried out in Business Innovation.

Sectra growing in major markets

Several of Sectra’s major markets are displaying strong growth. We increased our sales by more than 20% in the US, where we are beginning to see the effects of our top ranking in the two most recent KLAS surveys, and in the UK and Norway. We are making progress, but I must emphasize that there are also areas of concern. Sales in Sweden have declined as a result of the market for encryption systems being weak for several years. The favorable sales of medical systems were not sufficient to fully offset this downturn, which led to the lower sales in Sweden. However, the Secure Communications business area reported slightly improved earnings in recent quarters due to higher revenues from customers in Europe, and also as a result of our major customers in our domestic market of Sweden.

All financial goals achieved

Although not all of our business areas are performing as expected, we fulfilled all of the Group’s financial goals (page 12) for the first time since they were established two years ago. Our financial focus will now concentrate on increasing operating profit, while maintaining our operating margin. Growth will be achieved through the development of customer partnerships, increased sales of software and cloud services, and new products and services related to existing areas. Primarily, we will grow organically, although smaller acquisitions may also continue to be made to strengthen and supplement organic growth.

Service sales replace traditional delivery models

It is increasingly common in the IT systems market to deliver software as a service (SaaS), instead of selling software as a product with subsequent maintenance and service agreements. This trend also applies to Sectra, but is not as clear in all markets. The vast majority of large-scale IT systems for the healthcare sector in the UK are purchased as SaaS. We completed the first SaaS deal in Sweden only last year and such orders remain uncommon in the US.

Naturally, this affects Sectra to a great extent, particularly regarding short-term cash flow. This is, however, counterbalanced by long-term stability. An order is realized quickly for product deliveries, within about a year, while a SaaS order can be spread over up to ten years. But this is not necessarily always a disadvantage. It is difficult to get banks and other credit institutions to lease software, which is beneficial for a financially strong company such as Sectra that can manage this itself. New players in the market can seldom sustain this type of business transaction. For Sectra, it also results in greater long-term security and stability since more than 50% of our sales have now been secured before the start of a fiscal year.

Innovation and research

Using modern IT technology, we help customers work efficiently and more securely. One of many examples is Sectra’s new system for digital pathology that in addition to improving pathologists’ work can also have a positive effect on the entire cancer care sector. Pilot customers tested the system this year with positive results and we are ready to begin deliveries to the first customers. The system is based on technology developed jointly with researchers at Linköping University and representatives from many Swedish county councils. We are genuinely excited to help pathology departments make the move over to digital imaging management so that they, like radiologists, will also be able to, for example, share and distribute images and diagnoses with specialists at other hospitals. This is where Sectra has an advantage on its competitors since we have added pathology to the same underlying system used for our digital radiology. This means that hospitals can reuse their investments, reduce the number of IT systems and lower their costs.

For two consecutive years, we have increased investments in product development and future-oriented projects that have the potential to solve our customers’ problems. We have also sold and licensed some of our patents, which made a positive contribution to our financial results. As part of the agreement, Sectra can, if we so wish, use the patents in proprietary products in the future. Accordingly, not only can investments in product development and research lead to improved market positions, but money can also be made on protecting the innovations that we produce for the future.

Outlook

There can be no doubt that the world needs more efficient healthcare and more secure communication. Sectra is often one step ahead of its competitors, giving us unique opportunities to be involved in forming the future of the healthcare and security fields together with our customers. Thanks to our close, long-term customer relationships, our innovative, high-quality products and our strong financial position, we have the necessary prerequisites to drive the development of solutions that can improve people’s quality of life, reduce society’s healthcare costs and contribute to a safer society. This is how we create customer value, which, combined with high financial control, results in a favorable return for our shareholders.

June 3, 2015: Strong order bookings and favorable earnings

Sectra's year-end report, June 3, 2015. Torbjörn Kronander, CEO and President Sectra AB, comments:

Sectra’s successes are growing as a result of the close relationships we have with our customers. We always put our customers first and involve them in the ongoing development of our product offering. Therefore, there are few things more gratifying than the top rankings we received in customer satisfaction surveys this year, both in the US and globally. This level of customer confidence in Sectra was reflected in our order bookings, which continued to increase during the fourth quarter – partly as a result of an extensive agreement signed with the Karolinska University Hospital, one of Sectra’s long-standing customers. We know that what customers appreciate most – even more than our stable and user-friendly products – is Sectra’s employees. I am proud of the efforts of our employees, which contributed significantly to our ability to deliver customer value, thereby enabling us to report a favorable earnings trend.

Several of Sectra’s major markets are displaying strong growth. Our sales in the US, where we are beginning to see the effects of our top ranking in the two most recent KLAS surveys, and in the UK and Norway, increased more than 20% during the fiscal year. Sales in Sweden declined as a result of a weak market for encryption systems, and our favorable sales of medical systems were not sufficient to fully offset this downturn. The trend with respect to encryption systems in Sweden has major impact on the overall performance of the Secure Communications business area. However, the business area reporting somewhat stronger earnings in the past two quarters as a result of increased revenues from customers outside Sweden.

Although not all of our business areas are performing as expected, I am very pleased to announce that we have fulfilled all of the Group’s financial goals. Taking into consideration the company’s strong financial position and performance, the Board has decided to propose to the Annual General Meeting (AGM) that SEK 4.50 per share – the same amount as in the preceding year – be distributed to the shareholders through a share redemption program.

Strategic choices

We remain focused on controlled growth and on being a leader in the areas and regions where the company already operates, supplemented by operations in a few carefully selected markets that we believe offer significant growth potential for Sectra. In line with this strategy, we strengthened our presence in Denmark during the quarter through the acquisition of our partner it-mark ApS, which offers online services for medical imaging management. We also established a new subsidiary of Secure Communications in Finland, where we are working to boost our sales of security products and services, as well as another subsidiary in France linked to the activities being carried out in Business Innovation.

Outlook

The past year’s robust order bookings encompass several long-term agreements with major customers, which means that we have many customer projects in the installation phase. Initially, these projects will have an adverse impact on Sectra’s cash flow, but when the projects move into the maintenance and support phase, they will contribute to a stable longterm trend for the Group. I also want to point out that a large portion of the order increase 2014/2015 was attributable to the UK, where several hospitals were forced to acquire new systems or to renew their agreements before summer 2015. Accordingly, the level of orders we have recently seen in this market will not be repeated during the years ahead.

March 10, 2015: Increase in order bookings paves way for stable future

Sectra's nine-month report March 10, 2015. Torbjörn Kronander, CEO and President Sectra AB, comments:

I am truly delighted that for the second consecutive year Sectra has been rated top of the industry’s most important customer satisfaction survey for IT systems in healthcare. The survey was performed by KLAS and our system for managing medical images, Sectra PACS, was ranked highest, both internationally and in the US. From the comments made in the customer assessments, it is clear that our employees and also the stability and easy-to-use nature of our system are to thank for Sectra’s high ratings. The survey responses show that customers have great confidence in Sectra and that makes me very proud.

The fact that the customers trust Sectra is also reflected in our sales. Compared with the preceding year, we doubled our order bookings in the third quarter. However, order bookings can vary sharply from quarter to quarter due to a number of very large multiyear customer contracts. Sectra is showing growth in the US in particular, where we are beginning to note the effects of our high ranking in the preceding year’s (2013) KLAS survey, and in the UK, where we nearly tripled our order bookings during the nine-month period. However, the situation in the UK largely reflects a transient local effect deriving from the fact that many hospitals feel compelled to acquire new systems or to renew their agreements before summer 2015. Accordingly, the level of orders we have recently seen in this market will not be repeated during the years ahead.

The Secure Communications business area has been a concern for some time. However, the area showed somewhat better earnings for the third quarter as a result of higher revenue from customers outside Sweden. This makes me cautiously positive, but I remain worried about the weak performance of encryption systems in Sweden.

Strategic choices

We are focusing primarily on increasing sales of software and IT services to existing and new customers in markets where we have an established position. In the Imaging IT Solutions area, many of the new customer contracts in the UK are long-term managed-service agreements, whereby Sectra supplies IT systems as a service. In recent months, we have also secured orders from procurements with Stockholm County Council and the Karolinska University Hospital, which are the first Swedish examples of customers acquiring Sectra systems for processing and archiving medical images as a service. The transition from sales of systems to sales of services has had short-term negative effects on the Group’s growth, but adds favorable stability for the long term. For example, more than 50% of our sales currently comprises recurring revenue from long-term agreements.

Outlook

The past year’s robust order bookings encompass a large number of new long-term agreements with major customers, which means that we have many sizeable customer projects in the installation phase. Initially, these projects are having an adverse impact on Sectra’s cash flow and operating margin, but when the projects move into the maintenance and support phase, they will contribute to a stable trend for the Group. With the great confidence shown by customers, our dedicated employees and Sectra’s strong financial position, we will continue our work to build success for our customers, which is what will ultimately make the greatest contribution to increasing Sectra’s value.

December 9, 2014: Strong first half-year for Sectra

Sectra's six-months interim report, December 9, 2014. Torbjörn Kronander, CEO and President Sectra AB, comments:

We posted strong profitability and growth during the first six months of 2014/2015. For the first time since our three financial goals were established one and a half years ago, Sectra’s average growth in terms of operating profit per share over a five-year period exceeded 10%. This means that we have now achieved all of our financial goals with respect to stability, profitability and profit growth. There are several reasons for this positive development, the most of important of which is customer satisfaction. Internal and external evaluations conducted around the world have confirmed that our customers are satisfied with Sectra as a supplier, which is crucial for our long-term growth.

Although we are making progress in all business areas, I must emphasize that there are also areas of concern. The largest of which being our Secure Communications business area, which accounts for 8% of the Group’s sales. Efficiency in this business area has increased and we are continuously securing orders from new and existing customers in Europe. Unfortuna­tely, this has not been enough to restore the business area’s margins to the level we are striving to achieve. We are dependent on our major customers in our home market of Sweden, where we remain uncertain as to when our customers will make a decision regarding their product orders and what those decisions will be.

Strategic choices

Historically, the income generated by our largest business area, Imaging IT Solutions, has been derived from solutions for radiology and mammography clinics. Part of our growth strategy involves broadening our customer offering to include other image-intensive departments, such as pathology, cardiology and dermatology. This will enable us to help hospitals coordinate their management of medical images using a single solution, thereby helping our customers to achieve efficiency gains and cost savings. The order received from Norway’s Helse Vest healthcare region in the preceding quarter pertains to this type of consolidated solution.

Outlook

During the first half of the year, we reported successful sales performances in Scandinavia, the US and the UK, which are our largest markets. Our order bookings include several comprehensive, long-term customer contracts. These long-term contracts contribute to a stable trend for the Group, where recurring income currently accounts for more than half of net sales. However, these contracts will have little effect on the Group’s sales growth in the short term and may initially impact earnings for the next six to twelve months, even although the long-term business is positive. Thanks to its high level of customer satisfaction, its large proportion of long-term customer contracts and long-term investments in products and services, Sectra is well positioned to continue driving the development of efficient solutions that can improve people’s quality of life, reduce society’s healthcare costs and contribute to a more secure society.

September 8, 2014: Sectra reports increased profit and order bookings

Sectra's three-months interim report, September 8, 2014

The Sectra Group entered the 2014/2015 fiscal year with increased profit, sales and order bookings compared with the year-earlier period. Several long-term customer contracts with major healthcare suppliers in the US, UK and Scandinavia, for example, contributed to the increase in order bookings. Seasonally, this is usually a weak quarter for Sectra, but the variation between quarters declined slightly due to the increased proportion of long-term customer contracts. The first quarter was better than usual this year, due to high order bookings and a year-on-year increase in profit. However, the outcome includes a positive nonrecurring effect of SEK 16.3 million from the sale and licensing of patents.

Strategic choices

Sectra is focused on controlled growth and on being a leader in markets where the company already operates, as well as growing in a few carefully selected emerging markets through partners. There is still considerable scope for growth in Sectra’s niche areas, which was confirmed by the increase in order bookings reported by all business areas during the first quarter. However, not all operations or individual markets developed at the pace we desire. I am mainly referring to partner sales in some emerging markets and to the Secure Communications business area, which despite improved operational efficiency, still requires greater numbers of customers.

Outlook

Sectra has a high level of customer satisfaction and a considerable portion of long-term customer contracts. This provides the Group with stability and enables long-term investments in products and services which, in turn, creates additional value for customers. Based on these conditions, I believe that Sectra has the potential to continue driving the development of efficient solutions that can improve quality of life, reduce society’s healthcare costs and contribute to a more secure society.

Sectra’s profitability remains favorable. The target margin for the Group is 15%. Including the nonrecurring effect from the patent transaction, we reported an operating margin of 17.4% for the most recent rolling 12-month period. Excluding the nonrecurring effect from the patent transaction, the profitability ratio was 15.8%. This means that our financial focus will now concentrate on growing operating profit, while maintaining our operating margin. Growth will be achieved through the development of partnerships with existing customers, increased sales of software and cloud services, and new products and services in segments related to, or within, existing areas.

June 2014: Satisfied customers and dedicated employees generate high returns

Annual report, June 2014. Torbjörn Kronander, CEO and President Sectra AB, comments:

The 2013/14 fiscal year was positive for the entire Group. Customer satisfaction increased and we achieved our profitability goal – an operating margin of 15%. Obviously, it feels gratifying that our profitability is high and we can thus continue to generate high returns. But what really makes me proud is the confirmation that Sectra’s employees and products are appreciated by our customers. So highly appreciated, in fact, that our US customers rated Sectra the top provider of Picture Archiving Communication Systems (PACS).

I want to start by being honest with those of you who have chosen, or are considering, to invest in Sectra. Among the highest priorities for our day-to-day operations, our shareholders come third. In the long term, we believe this will benefit you most. Our highest priorities are:

  1. Satisfied customers
  2. Dedicated employees

This is the basis for our priorities in the extensive process to create solutions that contribute to improving quality of life through more efficient healthcare and a more secure society. This is also the reason why our shareholders have received high dividend yields over the past four years.

Will champagne lead to customer satisfaction?

Our goal to be ranked Number 1 in the medtech industry’s most important customer satisfaction survey, compiled by the US market research company KLAS, was established nearly ten years ago. At the time, a global company that sold our medical IT systems as part of its own offering had acquired one of our competitors. We both went our own separate ways and Sectra began to act in the US market under its own brand. Today, we have a good relationship with our former partner, which continues to maintain and deliver upgrades to hundreds of shared customers who have chosen to retain our systems. However, knowing that Sectra has the most satisfied customers is a wonderful feeling. The KLAS award boosts our marketing in the US, but also in other countries. When we achieved our goal, we opened two magnums of champagne together with employees at our offices in Shelton in the US and Linköping in Sweden. The bottles had been strategically displayed throughout the years to remind us of our goal on a daily basis.

Employees are our greatest competitive advantage

I wish that all of our shareholders could join us when we visit customers and hear about the efforts that Sectra’s employees make for our customers. But since this is not possible, we have chosen to include some of the comments from customers in various customer evaluations in this Annual Report. They testify that we have succeeded in creating a culture that promotes responsibility, expertise and knowledge sharing. However, the real key is to recruit the right employees, and this is an area in which I, personally, am very much involved.

Development and innovation

Sectra’s operations have been based on innovations since the company was founded in 1978. Since we want to maintain a high pace of innovation, we continuously invest in product development and, compared with previous years, activity in future-oriented projects has increased. One of our new and exciting innovations is an IT system for pathology – a highly significant area in cancer care. In this area, images are still managed manually using microscopy. In order to improve collaboration between hospitals and to benefit from computerized image analysis, digitization is required. This presents an ideal opportunity for us to contribute and Sectra is currently commercializing a prototype for digital pathology that has been developed in a major Swedish research project in which Sectra is participating.

Long-term managed-service agreements provide stability

Both Imaging IT Solutions, which is Sectra’s largest business area, and Business Innovation have grown – particularly in the UK, where Sectra has made acquisitions and invested in growth in recent years, and the Netherlands. Partner sales have also increased, mainly in the Middle East. The orders we receive from our healthcare customers are often extensive agreements for managed services or maintenance, and may continue for a period of up to ten years. The high proportion of long-term customer contracts provides stability and enables long-term investments in products and services that, in turn, create additional value for our customers.

The Secure Communications business area experienced a difficult year. The weak links are the operation’s dependence on a few large customers and the limited market (European authorities) that we have addressed to date. To create conditions for long-term growth in the security field, we have initiated a process to identify and establish Sectra in new customer segments within industry and infrastructure, in which there is both a need and growing demand for our security expertise.

Profit growth in focus

We have conducted a number of activities in recent years that have contributed to Sectra’s positive profit trend and the achievement of our profitability goal. The most significant activities are:

  • the structural transaction in 2011, in which Sectra divested the company’s low-dose mammography operation
  • focused expansion
  • lower proportion of hardware sales
  • product development that has reduced costs for installation and maintenance
  • internal efficiency enhancements and restructuring programs

The operational improvements have mainly affected the Imaging IT Solutions business area, led by Marie Ekström Trägårdh, who is the highly competent President of this area and an inspiring person to work with.

Now that we have achieved our profitability goal, we will focus on also achieving our growth goal with a sustained operating margin. The growth goal is that operating profit per share will grow at least 10% per year, on average, over a five-year period. This does not mean that our strategies will change. Growth will primarily be achieved through:

  • focused expansion, possibly supplemented by acquisitions that support our organic growth
  • developed partnerships with existing customers
  • continued internal efficiency enhancements, including increased sales in the form of cloud services
  • continued expansion of the product offering in segments adjacent to our current areas

The future

The global trend of ageing populations with a growing demand for care services is increasing pressure on healthcare. The development potential for companies that are able to participate in, and contribute to, a sustainable and economically viable healthcare system will continue in mature markets. Sectra’s products and services play a key role, since they enable greater efficiency and cost savings in the healthcare sector.

Cyber security is also a highly topical subject. Issues concerning inadequate security systems and products that are vulnerable to IT attacks are no longer reserved for defense departments and government agencies. They increasingly involve private sector players and society in general. If these threats are not taken seriously, they could have serious implications and also pose a threat to public safety. Sectra also has unique specialist expertise in this field and can provide solutions that reduce vulnerability.

There is still considerable room for growth in our niche areas and I look forward to the future with confidence, bolstered by praise from satisfied customers. Together with these customers and our wonderful employees, Sectra is well-positioned to continue driving the development of efficient solutions that can improve quality of life, reduce society’s healthcare costs and contribute to a more secure society.

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