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It is darkest before the dawn

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I was too busy last weekend to write down my thoughts about the Q3 report from C-rad, and to be honest it has taken some time to digest the information. The reaction from the market was loud and clear, a big disapointment! Down 10% on the Friday and another 5% on Monday takes us down to square one again...

So what was the big surprise? The loss of 7m for Q3 and 14,3m for 9months, combined with the information about the need for additional funding. That was enough for the market to give up on the C-rad case for this time... more about this later but first the important part of the report!

Focus on the main thing!

The most important number for C-rad is the order intake. 23m was at the low end of the range, the market was expecting +50% so we should be around 25/26m, but have in mind q3 2014 was strong and most likely the Skandion order was sold at a discount. Skandion is important from a strategic perspective so that can explain the missing 2m and also explain the low gross margin, 53% for 9 months is not what we are used to. Anyway this was the second best quater in C-rads history and 2-3m represents one project that was pushed into Q4, so not the end of the world... its impressive to see the DACH region (Deutschland, Austria and Switzerland) marching on, the ROE (Italy) is growing, the US is on track and thanks to the Skandion order the Nordic region shows a strong development. The weak areas are clearly Asia, OEM and Cyrpa.

Asia, it’s obvious that we need the approval to sell Catalyst in China. It’s the flagship product and the main orderdriver. Got the impression that Tim was in China to push this process, and when we get the approval we will see orders. It can take another year but hopefully we will get it 1h 2016.

OEM, this is where the GE deal will be our saving grace. We shouldn´t get carried away and I put in 15-20m in orders from the OEM business next year. It will take a while to get things going with GE but it will be a steady stream of revenues. GE is a difficoult beast to do business with and C-rad needs to push products to clients, it will not market itself and I dont think it will be on top of GE mind to sell the Sentinel product. If the client wants it they will offer it. If we get this right the potential is very attractive.

Cyrpa, gives me mixed feelings. C-rad keeps saying the Cyrpa offers state of the art HIT-lasers with red and green light etc. but we got it at a very low price, So why would the founders sell it to C-rad for almost nothing? Two scenarios, clearly Cyrpa haven´t managed to grow the volumes and to reach critical mass on their own, so the former owners sold the company cause they didnt see the commercial potential. Its difficult to estimate the size of the market for HIT-lasers and I am not an expert in this field, but maybe its too much of a nisch product to make it on its own. The other scenario is a liquidity squeese. The former owners couldn´t or didn´t want to put up sufficient funding and therefore sold it to make an exit. So what should we do with Cyrpa now when we got it? I think it´s an add on product, just look at the GE deal. The main product is Sentinel but we can add the Cyrpa lasers and earn some extra money. So for me it’s a bonus, it will never be our core product but it can add some on top of Catalyst and Sentinel.

The brightest spot in the report was the Gemini update. We are now at the very end of the development phase and we are preparing for the commercial phase. The market didn´t pay any attetion to this and maybe C-rad should have put more focus on Gemini. As Tim puts it in the report “This takes us into a new phase, in which we are evaluating the physical parameters against existing standards and competitive products.” For me that sounds like they have done most of the testing and are confident enough to start the process of presenting what kind of product this is. Collecting all the data, putting the product in the correct category, what information should we give clients etc etc. This is great news! Have in mind there are no margin for errors or going back to the drawing board and redo things. This is showtime for Gemini and I think it is a game changer for C-rad. It will take time to get the product flying but so far, the market put 0 value on the Gemini. In the latest report from Erik Penser they dont expect Gemini to reach a commercial phase. But here we are and 2016 will be a ramp up year but 2017 could be the year when we will see impact on topline growth from Gemini. In the long perspective the question will be if C-rad has got enough capacity in their facility in Uppsala to keep up with the ordergrowth?

The cost of doing business!

As I mentioned in the beginning the market was surprised by the big loss in Q3. The safest way for C-rad to show profit is to stop investing in R&D, fire the sales force and just focus on executing the order backlog, but that would also be the end of it all! Tim and the board is convinced that we now have a golden opportunity to make a global footprint and gain marketshare. There are competition out there but with the response we have seen from the launch of Catalyst, now is the time to create a market position. You can’t face the future going backwards! I am glad that C-rad hires salespeople and put state of the art products in their hands to show clients. They will be busy contributing to the C-rad success story! This will cost money, and that brings us to the second reason why the C-rad stock took a 10% beat last Friday, the financial position. I think it was right for Tim to mention this in the report, but it shouldn´t be a surprise that C-rad needs additional funding. They are looking at several options. With the burn rate we have at the moment, and the increase in working capital, C-rad needs roughly 100m in revenues to reach break even. Its hard to say if that is enough for the operational cashflow to be positive. C-rad will almost reach 100m in order intake this year, the 12 month rolling is at 86m and we have the best quater ahead of us. So revenues 2016 should be around that level, hence 2016 will be the year when C-rad will cover its cost and no more funding is needed. How much more capital is needed to make it to that point? The cashposition end of Sept was 4,6m and there is an unused credit facility of 5m. The order backlog is 53m so the situation is not urgent! That tells me we are not looking at a classic rights issue. The board took the decision to grasp the opportunity of launching C-rad on a global scale, by building a sales organization. Lets say C-rad needs additional 20m, the guys on the board have that kind of money! The Hamberg family are billionaires so if they have been supportive so far, why stop now? Have in mind that C-rad is almost debt free.

All in all, the numbers in the report was disappointing but far from a show stopper! Buy more shares if the prices comes down to 15 level and let’s look forward to an exciting future for C-rad!


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