Q1 2023 review

The sales for Q1 came in at EUR3.5m (EUR3.2m), 3% above our sales estimate of EUR3.4m. This corresponds to a YoY increase of 8.2%, where we learned from the report that the software segment continues to perform well. Moreover, the gross margin for the quarter was 71% (67%), which was higher than our estimate of 67%. Operating expenses amounted to EUR-3.0m (EUR-3.1m) compared to our OPEX estimate of EUR-2.5m, and EBIT came in at EUR-1.0m (EUR-1.5m), lower than our EBIT estimate of EUR-0.8m. The difference between our estimates and the report is mainly the gross margin as well as we included other operating income of EUR0.2m (no other operating income was reported).

The cash flow from operating activities was EUR-0.4m (EUR-0.7m), and by the end of the quarter, the cash and cash equivalents amounted to EUR7.2m. In our view, the current cash position will be sufficient to cover future business activities and we, therefore, no not see a current capital need.

During the last quarter, the devices segment revenue decreased by 16.5% YoY to EUR0.9m (EUR1.1m). We learn from the report that the US and distribution channels have performed well; however, OEM and Chinease sales continue to remain low. The gross margin in the segment came in at 63% (60%), where the increase mainly corresponds to a higher degree of direct sales, which also resulted in a slighly better EBITDA of EUR-0.4m compared to the same period last year of EUR-0.5m.

The software segment has performed well during the first quarter with quarterly sales of EUR2.6m (EUR2.2m), an 20.5% increase YoY. The growth mainly is a reason of the strong performance in the healtcare solution segment, which also was a main reason to the segment's increased profitability with a gross margin of 74% (72%) and EBITDA of EUR0,8m (EUR0.4m)

Overall, the report aligned with our expectations. However, we note from the report that the additional data has not yet been sent in to the FDA due to a slight delay at the beginning of the process. We learn that the process is now up and running and expect the data to be sent in during the next couple of months. We previously estimated a potential FDA approval during Q2 2023; however, with the new information, we expect a decision during Q3 instead.

The report was in line with our expectations; however, due to the delay of the FDA approval, we have chosen to make minor changes to our sales estimate for 2023e. We previously estimated sales of EUR16.8m for the FY 2023. We make minor decreases in all the coming quarters and expect full-year sales of EUR16.3m, where we expect a stronger second half of the year where US subscription sales are included. Moreover, we make a 1% increase in the gross margin for all the following quarters of 2023.

The most significant event during the year is the potential FDA approval of the Aurora AEYE, where we expect a decision during Q3 2023. We argue there is a high possibility of approval, and we expect the US strategy and launch will start directly after the potential approval. The FDA approval is highly important for the company and our investment case as there is a clear need for the AI camera in the US, in our view. Moreover, the US strategy will create recurring sales to a much higher degree than currently, which we believe reduces the risk in the case. Optomed's share price has significantly declined during the last couple of years. We argue the valuation is currently low and believe a potential FDA approval will majorly impact the share price positively.

We continue to expect a larger sales growth during the second half of 2023, where we include risk-adjusted US sales. We estimate FY'23 sales of EUR16.3m and believe the company will have a EBITDA positive quarter at the end of the year. Moreover, we expect Optomed to become EBIT positive during 2024e with sales of EUR20.7m and sales of EUR33.5m in 2025e, where we expect US sales to gradually impact more and more as we move forward. As we only have made minor estimate changes, our fair value range remains the same with a base case of EUR8.

Our valuation of Optomed is based on a discounted cash flow model. Our analysis suggests a base case of EUR8, representing a significant upside from the current share price levels.

At Redeye, we use three different scenarios to value a company's stock. These provide a more dynamic view of the case.

• Base case: EUR8 per share
• Bull case: EUR17 per share
• Bear case: EUR1.5 per share

In our base case of EUR8, we assume a European market value in the device segment of approximately EUR21m. We estimate Optomed will have 16% market penetration in 2023e and that the market will grow by 7% across the entire forecast period. Moreover, we assume Optomed's market penetration will increase during the forecast period, arriving at 20% penetration by 2030e. Optomed's European software segment has been strong in the past, and we expect ongoing 10% annual growth. The Chinese market has been turbulent, and in our base case, we expect this to continue, resulting in low expectations. As Optomed is developing its business in other parts of the world, we believe its RoW sales may increase significantly in the future. However, as we do not expect this in the coming years and because of the uncertainty, we exclude a potential expansion and only apply low sales numbers to this segment for our forecast period (EUR0.2m for FY'23e, with 8% annual growth).

Moreover, we believe the US business model is exciting and vital for the case. In our base case scenario, we assume a 90% LoA by the FDA and estimate that Optomed will have 7,000 subscribers in the US by 2030e. Although we expect the number of subscribers can grow far larger, we would like to get a picture of the interest and demand before assuming higher numbers. We expect to get a better picture during late 2023 as the first subscribers have tried and evaluated the offering.

In our bull case scenario of EUR17, we assume a faster ramp-up in sales in all segments. Our assumptions are summarized in the list below:

In this scenario of EUR1.5, we assume a slower sales ramp-up in all segments. Our assumptions are summarized in the list below:

In addition to our DCF valuation, we offer a peer group analysis that compares Optomed with other medtech companies in the Nordic region. These ten companies have a similar enterprise value to Optomed. We argue the best measurement is EV/Sales, as Optomed is not currently profitable.

We argue it is challenging to find similar peers to Optomed, and we observe the company's EV/Sales multiples are 4.5x and 4.1x for 2022 and 2023e, respectively. However, the most similar company to Optomed is Revenio Group, which operates in the same area. Even if Revenio is larger than Optomed and is in a later stage, its EV/Sales multiples are around 7x-10x for 2022-2024e sales. We believe such a difference is too massive and argue that the Optomed share is currently trading at low levels, especially due to the high potential in the US.