Sectra: Cloud Economics

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What's the biggest incentive for customers to move to the cloud? Is it because Sectra isn't supporting on-premises anymore?

I would say it's a combination. It's not that Sectra won't support on-premises, but they mainly market and invest in their cloud solutions. Customers see this as the most attractive option. From a customer perspective, you don't need to maintain hardware in your basement, and you mitigate risks like server downtime. You transfer that responsibility and risk to the supplier, Sectra, which is quite attractive. It's similar to having Microsoft Office on the cloud instead of purchasing it from a store. You want it to run all the time with the latest updates.

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In terms of modeling. The way I'm thinking about it is you have the recurring revenue piece, which is the cloud, and then the rest, which is predominantly maintenance subscriptions. I'm assuming a certain percentage moves across over the next five years. By reducing the recurring revenue by the maintenance piece and applying a two times multiplier, you get the cloud revenues in the recurring piece. Am I thinking about that correctly for the recurring piece?

As it stands now, they are reporting recurring revenue, of which a portion is cloud-based. The more customers that transition to the cloud, the recurring revenues that are currently not cloud-based will become cloud-based. The recurring revenue that is not cloud-based is mainly on-premises maintenance and support revenues. These will transition to cloud, and you will also gain the hosting and license portions as cloud revenue. So, it might be roughly double. At least something more than what is in the recurring today will be transferred into the cloud recurring.

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Regarding the imaging business, how should I think about non-recurring revenues? Some of that is installation, which will still be a part of the cloud. How should I model that over time? Do you think it decreases as we shift to the cloud?

Yes, I would assume so. If you look at the non-recurring revenues for the medical imaging part, you have contracts where a customer wants an on-premises solution and prefers a single supplier. This means they might also want to purchase hardware from Sectra. Sectra sells the servers, which is a significant amount.

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