Surgical Science Sweden AB

STO:SUS

Q1-2025 Earnings Call

[Tom Englund, executive]

Welcome to this Quarter 1 Presentation for Surgical Science. My name is Tom Englund. I'm the CEO of Surgical Science. And with me today, I have Anna Ahlberg, our company's CFO. We will use our time together today to first present the report, and then we will take questions from the audience.

We can look back at an eventful and positive first quarter for Surgical Science and a good start of 2025. This was an eventful quarter for us with strong growth and good underlying profitability. Sales increased to SEK 251 million, up from SEK 188 million last year with a growth of 30% in local currencies. During the quarter, we also reached an all-time high for our important license revenue, which grew more than 30% as the robotic surgery market continues to expand.

I will now present the most important highlights and results of the business during the quarter. Starting with Intelligent Ultrasound. The company was welcomed into the Surgical Science family during the quarter. Intelligent Ultrasound is a prominent player within ultrasound simulation and the acquisition makes Surgical Science the world leader within this field, which is a market with big growth potential. The integration process has progressed well during the quarter, and it's gratifying to see that the synergies identified before the acquisitions are now actually becoming apparent in practice. We're working according to a plan to realize these synergies, which are primarily found in distribution channels, strengthened sales presence in direct markets, cross-selling of products and in long-term product development.

During the quarter, we also officially opened up our direct sales office in the U.K. The acquisition and integration resulted in some one-off costs related to transaction and restructuring that negatively impacted profit in quarter 1. These one-off costs were totally in line with our plan. We also see that the estimated and predicted cost reductions from ongoing operations will be realized in the coming quarters. Sales for Intelligent Ultrasound during the quarter was SEK 23 million, of which SEK 18 million were included in our sales, which was lower than we expected. Although the Americas and APAC regions developed well for us, the U.K. market was weak to a challenging budget situation within the NHS, which distributes the funding for our type of equipment within the U.K. health care system.

Moving over to Educational Products. The positive development of Educational Products continued, and we saw a good increase in sales compared to the weak quarter 1 of 2024 with 55% growth and 32% growth if excluding Intelligent Ultrasound. And this sales was at the same level as quarter 4 of 2024. We saw significant sales increases in the EMEA and Asia regions and good growth in the Americas region. At the same time, we have experienced continued pressure on purchasing budgets for customers in key markets such as the U.S., where our quotes in a more challenging climate face tougher competition from other purchases that our customers must make. Our new sales organization was also established during the quarter, and we have already started to see positive results from this in terms of sales, customer satisfaction and efficiency. During the beginning of the second quarter, we have experienced reduced demand from our customers in Educational Products in the U.S., partly due to the above and partly due to the tariffs imposed between the U.S. and other countries.

Moving over to Industry/OEM. Industry/OEM continued its strong development with a 17% increase in sales for the quarter. We expect continued positive development in the segment, driven by the important role and value of simulation for robotic surgery and med device companies. License revenues grew to an all-time high by 33% to SEK 84 million, and the market continued to develop at a very rapid pace. On January 15, it was announced in a letter -- that a letter of intent has been signed between the company's largest customer, Intuitive and us. This means that Surgical Science moves to a fully subscription-based revenue model with Intuitive and that all da Vinci 5 systems will be equipped with simulation software from Surgical Science. And now all da Vinci 5 systems are equipped and shipped with simulation from Surgical Science.

Simulator sales to med device companies, that is nonrobotics was SEK 31 million, with customer demand remaining quite high. We estimate that this segment will continue to develop positively, driven by the fact that simulation is becoming a strategically important tool for our customers when they demonstrate their products for sales and training purposes and that the rapid technical development within the segment benefits Surgical Science.

Focusing a little bit more on Robotics, just to give some more context. During the last 9 months, 9 robot companies have received sales approval for 13 different procedures. Intuitive received FDA approval for da Vinci 5 in the U.S. and South Korea. J&J received IDE approval in November for clinical trials on human patients within its Ottava platform. And then a number of companies such as Medtronic, CMR Surgical, Medicaroid, J&J and Intuitive are also in the process of obtaining further regulatory approvals in the coming quarters. All of this is driving [ simulation ] and will positively impact Surgical Science's sales and license revenues.

Another clear trend that we see is that medical device companies such as Medtronic and J&J are now being challenged by robot companies such as Intuitive in their highly profitable instrument business. It will, therefore, be strategically important for these major players to quickly grow their installed base of robots in order to not lose further market share in their instrument business. And the key factor in a successful rapid rollout will be simulation and training, which will have a positive impact on Surgical Science. Operating profit during the quarter was SEK 24 million or 10% that was burdened by the above-mentioned one-off costs associated with the acquisition of Intelligent Ultrasound of SEK 26 million. Adjusted for the one-off costs, the operating profit was SEK 50 million or 20%.

During the quarter, a strategic review was initiated, which will result in a further developed strategy by fall 2025. The main reason for the strategic review is due to that the company now sees many more growth opportunities than previously, and we want to have a solid strategy for how to capitalize on these growth opportunities in the best way.

So that's a little bit about the quarter 1 highlights. I would like to now speak about our updated financial goals and first provide some background. At the end of 2021, following the acquisition of Simbionix, Surgical Science built our strategic plan for the next 5-year period up to and including 2026. We set our target for Surgical Science to generate sales of SEK 1.5 billion by 2026. And we also said that at the end of the period, adjusted EBIT should amount to 40%. And now we are almost halfway into 2025 and more than 3 years have passed since the formulation of the financial goals. And there have, of course, been some key developments that have had an impact on the financial performance versus the plan for the past 3 years and that act as a rationale to why we now revised the targets.

I will just go through them very quickly here. First, Educational Products. Educational Products had a good average growth of 22% in '21 to '23. The end of 2023 and 2024 were negatively impacted by high inflation, which put pressure on the hospital market and the budgets used for the purchase of Surgical Science's products. And this has led to a sales decrease by 15% in 2024 and lower average annual growth of 8%. We continue to have a positive view of Educational Products as a whole, although there is still inertia in certain market, and we believe that average growth target of 10% to 15% per year in the period up to 2026 will be achieved.

Regarding Robotics, in Industry/OEM, the development has been positive in many ways during the period. Surgical Science has secured several new customer -- customers and is today the dominant provider of medical simulation in this market. However, for some larger robotic companies, regulatory approvals have taken longer than expected or initial development has progressed more slowly than estimated when the financial targets were developed. This affects Surgical Science's expected license revenues in the short term. But in the longer term, the company maintains our positive view of the development of the Robotics market and the company's position within it. The effect of what is described above means that the license revenues are pushed forward in time. And thirdly, Surgical Science acquired Intelligent Ultrasound in the beginning of 2025. And the addition of Intelligent Ultrasound, which had revenues of just over SEK 100 million in 2024, will contribute positively to Surgical Science's revenue, but in the short term will affect the total margin negatively.

So if you look at these factors together, Surgical Science remains very positive about the company's growth opportunities with good profitability going forward, but at the same time, feel it necessary to revise the financial target. The sales target then. As a result of the development primarily in the Robotics segment, together with the current global trade uncertainties where direct and indirect effects are very difficult to forecast, we have, together with the Board of Directors, revised our sales target from previously SEK 1.5 billion down to SEK 1.4 billion for end of 2026.

And looking at the margins, the result of primarily lower license revenues in relation to total revenues and increased investments in areas that also include hardware means that the target for adjusted EBIT for 2026 has been revised to between 25% and 30%, down from previously stated 40%. As I mentioned previously, Surgical Science is now conducting a strategic review to capture and realize all the growth opportunities that we now see in the market going forward. And we also plan to return in late autumn with the new strategy and with new financial targets for the period after 2026.

That concludes my presentation, and I would like to hand over to Anna.

[Anna Ahlberg, executive]

Thank you, Tom. So the headline for the report is strong growth despite macroeconomic uncertainties. And for the quarter, we had sales of SEK 251 million, up 33%, whereas Tom mentioned, SEK 18 million came from Intelligent Ultrasound after the acquisition date on February 18. For the quarter as a whole, IU sales was SEK 23 million. All sales are in Educational Products business area and the ultrasound product group. In local currencies, sales was up 30%. We have approximately 80% of our revenues in U.S. dollars. And even though the SEK appreciated a lot during the quarter, it is still the case that the average rate was higher than in Q1 2024. It was [ 10.7% versus 10.4% ].

However, as we will see in the cash flow and on the balance sheet, the U.S. dollar at balance sheet date was a whole crown lower than on December 31, [ 10 versus 11 ], which caused very large revaluation effects. Starting this quarter, we have a new table in the report, Note 2, showing sales also divided by product group regardless of from which business area they originate. And there, you can see, for example, that our ultrasound sales was up from SEK 24 million to SEK 38 million for the quarter, making up then 15% of our total revenues. And for 2024 as a whole, ultrasound more than doubled with the acquisition of IU to a bit over SEK 200 million or 20% of sales. Again, IU was only in our revenues for part of the quarter -- part of Q1 after February 18, but it is still so. And as Tom also mentioned, that sales was slow for the first quarter, primarily attributable to the U.K. market and NHS.

The split between the business areas was 49% for Edu and 51% for [ Indo ]. Edu was up then 55% or 32%, excluding IU. Q1 last year was weak, and so we saw growth in all regions, but specifically in Europe, where many countries did well. The outlook then for the U.S. market going forward is a bit uncertain with a lot of leads and discussions taking place, but it remains to be seen at what pace these deals will be closed. Indo was up 17%. And as Tom talked about, we saw all-time high regarding license revenues. And if we then move over to our revenue streams, license revenues was 33% of total revenues. As mentioned many times before, this is lumpy for new entrants where many of our customers are still in early phase. But also as we heard Tom talk about, there are a lot of exciting things now happening on the market, new approvals, et cetera.

Simulator sales as a whole was up 47% compared to Q1 last year. This is then all due to Edu. Indo was down a bit, but we continue to view this segment very positively. And development revenues up a bit, while service revenue at a stable level. For the quarter, there is no revenue from the order that we got in February to supply TraumaVR products and services to a Ministry of Defense in Southeast Asia. This project is for 18 months and SEK 52 million. And we estimate approximately USD 0.7 million to be recognized on this order in Q2.

Moving from revenues to costs and EBIT margin for the quarter. Our gross margin was 69% versus 66% in Q1 2024. License revenues were slightly lower as a share of total sales. However, as we know, sales for, in particular, simulator was very weak in Q1 last year. And so it was still a good share for all of 2024. It was 31%. We also saw that we had good average sales prices in comparison to last year this quarter, while the consolidation of IU had a negative effect on the gross margin by just below 2 percentage points. Sales costs, 21% of sales that included most of the restructuring costs for IU. They were in total SEK 3.9 million and SEK 3.8 million were in sales costs, and that's then primarily attributable to redundancies of sales personnel. Also, Q1 is always very busy. Our largest Congress of the year, IMSH, is taking place in the U.S. in January each year. And we also always host our distributor meeting in this quarter.

When we acquired IU, we said that we estimated rationalizations and savings of between GBP 1.5 million and GBP 2 million. We have now, on an annual basis, reached approximately GBP 1.5 million. These savings did not have an effect on Q1, but we estimate that they will to a quite large extent, come into effect in Q2. Administration costs, they were high due to the fact that we had all the acquisition costs in Surgical Science during this quarter. That was approximately SEK 23 million, quite a lot. And a large part of it was for legal advice related to the process of acquiring a listed company in the U.K. through a court process, which was the procedure used. And this amount was also something we have already announced in the Q4 report.

Excluding these costs, we were at 8% of sales. And R&D was at 22% of sales, and we activated SEK 10 million. Other items, they include our options programs and FX effects. For this quarter, they also include income and costs in IU regarding a replacement program of older products. And so all in all, our EBIT margin was at 20% if we exclude acquisition and restructuring costs. For IU, less costs than revenues were consolidated if we take them as a portion of the respective item for the whole quarter. Excluding their acquisition costs, which were approximately SEK 16 million and the restructuring cost I talked about earlier, they had a quarterly loss of SEK 12 million, and we consolidated a loss of SEK 3 million in Q1.

And before leaving this slide, I just want to comment on the impact of U.S. tariffs as well. For 2024, our sales of simulators to the U.S., if we include IU sale of simulators, they were approximately SEK 250 million. And with a 10% tariff as it is today, we estimate the extra cost being around SEK 10 million per year. The ambition is to reflect this in the price of the products as much as possible, and we do consider the possibility of doing so to be good. For the remaining part of the business, there are indirect effects that are currently difficult to predict. Organization, number of employees at the end of the period was 336 people. And with the IU acquisition, we added 48 people in the U.K. and in the U.S. And then we have had redundancies of 6 people. We continue to employ above all software developers. And you can see the split between our sites down to the right.

Adjusted EBIT, the key ratio that we think best shows how the business is doing. That was 23% for the quarter, then excluding acquisition and restructuring costs. We measure this as EBIT exclusive of amortizations on surplus values related to acquisitions. And as you heard Tom talk about earlier, we now said that we estimate this to be 25% to 30% for 2026. Finance net and taxes. Finance net was SEK 22 million for the quarter. We had, of course, interest income on our bank balances. We also had a positive effect from our GBP hedge. And for this quarter, we also had interest costs related to the short-term loan of GBP 17 million that we took out in conjunction with the IU acquisition. This loan has been repaid during Q1.

Tax expense was SEK 13 million and net result, SEK 33 million. Cash flow. Cash flow from operating activities was minus SEK 5 million for the quarter. We paid the majority of the acquisition costs during the quarter, and we also had large tax payments that were made in both Sweden and Israel. And then we had a negative of SEK 34 million from changes in working capital, where both inventories and accounts receivable have increased during the quarter, while other current liabilities have decreased. These items are heavily influenced by changes in exchange rates and then above all, the U.S. dollar as discussed before, mainly due to the revaluation of internal receivables and liabilities.

If we look at unchanged currencies, both accounts receivable and inventory have increased only very marginally. And when we look at accounts receivable as a percentage of rolling 12-month sales, which is the gray line in the graph, we see that this continues to be at a good level. Cash flow from investing activities, that we mainly have the effect of the IU acquisition during the quarter and cash flow from financing activities, that we mainly have the effect from this repayment of the short-term loan that I mentioned before, GBP 17 million. And cash at the end of the quarter, March 31 was SEK 613 million.

And with that, we conclude our presentation and open up for questions.

[Operator]

[Operator Instructions] The next question comes from Ulrik Trattner from Carnegie.

[Ulrik Trattner, analyst]

I will try to keep it at 2 questions to begin with. And we start with Educational Products. Tom, you sounded a bit cautious on the short-term momentum stating that sort of the early parts of Q2 have not shown the same type of strong momentum as Q1. And just wanting to sort of dig a little bit deeper into this and how does your sort of visibility on the procurement and tender activity look like as well as are you still sort of confident in that activity and just believe that it's a matter of turning procurements into actual orders and revenue and installment? Or how should we view the statement?

[Tom Englund, executive]

So it's -- thank you for the question. It's quite a mixed picture when we look at Educational Products geographically. I mean we mentioned the strong demand that we see in EMEA and in Asia for Educational Products. And obviously, the Americas result is a great step forward if you look at the comparison quarter. So in that sense, it's positive, right? We also, in Americas specifically, where that we point out to be kind of the weak market, we feel that there is a very strong underlying demand from the customers. There's a lot of customers engaging with us in quotes and wanting to have demos and so on. And we also have a lot of proposals outstanding.

The metric that is difficult to predict and where we feel that it's somewhat slower than what it has previously been is in the close rate of these contracts and the availability for budget and this competition that I mentioned between other purchases that the hospitals need to do. And that's a little bit difficult to estimate. And it's also obviously affected every day by new things that are happening on how the funds are being allocated to these institutions and hospitals. And that's, hence, the cautionary remark. So it's a buffer or it's a negative in that sense. But we -- in general, we don't see any major change in the underlying long-term demand for Educational Products within the U.S. but rather short-term effects. Hope this answers your question.

[Ulrik Trattner, analyst]

Great. Yes, absolutely. And if I can just have a follow-up question on that as well before turning into my second question. We've been seeing some comments on funding coming and stimulus packages coming into China. Are you also seeing these effects on your end, given that China is a relatively big market on your end?

[Tom Englund, executive]

Yes. We are optimistic about the development in China and the sales trend in China is quite positive. The market is opening up slowly, and we also feel that we can do a lot internally to drive sales results even in a tougher market climate. So I would say positive outlook for China and a combination of slowly more positive macro together with very strong and positive sales efforts by the Surgical Science sales team.

[Ulrik Trattner, analyst]

Great. And then my second question relating to the Industry/OEM segment [ in terms of the ] Intuitive Dv5. And just wanted to get a sense here if you have seen any positive impact on the current placements of Dv5 systems as well as how you're expecting this to be developing here in the coming at least second half of the year once the Intuitive suite is actually available on the Dv5 machines, which should be after the summer according to their latest comments?

[Tom Englund, executive]

Well, it's very positive that the Dv5 is now being shipped with simulation. That per their previous comment has already started. They've also mentioned this in this transcript in the quarterly earnings call of Intuitive. So that's happening. And it's very positive that they mentioned that simulation is part of this digital package. And it's, of course, very positive that Intuitive is successful with their Dv5 platform, which will, in turn, drive the need for simulation. So we see this as a very positive sign and a good step in the right direction.

And then regarding kind of the success of the Dv5, I think it's a very, very good reading to read up on what analysts say about that. But so far, there is a very high demand for the product, and they are revising up both their sales as well as their procedural growth targets upwards here in their latest quarterly report.

[Anna Ahlberg, executive]

And just to follow up, we have a written question around that as well, if it's also including the previous sold ones. And there, we have said that, yes, they will be retrofitted, but that will be over the year and possibly a bit into next year. So that will also happen going forward. Yes. Sorry, go ahead, Ulrik.

[Ulrik Trattner, analyst]

Yes. Great. That would have been my -- no, no, Anna that was great. That was actually going to be my follow-up question. So that's great. But potentially, I could just squeeze a follow-up on top of that, and that would be like in your communication with Intuitive and in terms of the retrofitting of the Dv5 with the simulation packages, do you believe that, that like you say will transition into '26? Do you believe that there will be always be a backlog of you installing the simulation? Or will the base sort of up and running at a normal pace where all equipment already sort of installed base as well as new sales equipped by sort of mid-'26?

[Tom Englund, executive]

Yes. I think that that's the second alternative is what's going to happen. There's a strong interest from Intuitive to make sure that their customers get the absolutely latest and greatest and full product experience. So it's in their interest to do this retrofit as quick as they can. But it's, of course, also some practicalities around this, which makes it to Anna's point and that is going to take throughout this year to happen. But they intend to handle this backlog as soon as -- as quickly as they possibly can.

[Ulrik Trattner, analyst]

And just one follow-up, just to make sure that I have sort of all the right information. Equipping Dv5 with simulation is just putting a hard drive essentially on it. It's that much of...

[Tom Englund, executive]

That's -- yes. This is technicalities then, but for a certain volume of the already shipped Dv5 fleet, it's just a matter of a software upgrade, but it needs to be done by a technician. It cannot be done remote. So it's not a push of a button. And for certain parts of the shipped volume, it requires a hardware upgrade with new processing power onto the platform. So obviously, there is certain parts of the shipped volume that is going to be easier to retrofit and certain parts is going to take longer depending on whether it's a software-only upgrade or a combination of software and hardware.

[Operator]

The next question comes from Viktor Hogberg from Danske Bank.

[Viktor Högberg, analyst]

All right. So first question is on the targets. Just could you help us with -- does the new targets include potential M&A as the previous ones? Or are they with the current structure? And also, could you walk us through the margin range? What is needed for the low end and what is needed for high end? And then I have another question as well.

[Tom Englund, executive]

So first question regarding the -- whether we need an acquisitions or inorganic growth, the answer is no. We believe that these targets can be met organically. And then regarding the margin range, there is, I would say, 2 major factors playing into this. One factor is how quickly the robotics surgery market will develop and how many robots will be placed in the market that carry simulation with Surgical Science. It is a little bit difficult to predict. We have plans and we have external information, and we have then also ambitions and wants from our customers. But then we also have the regulatory machinery that is also a little bit of an unknown variable, how long these regulatory processes take. And that will affect then the volume of the installed base at the end of the financial -- the end of the 2026 and that will, in turn, affect the kind of total sales of licenses. So that is one factor.

And then the other factor is about how our gross margin development, primarily on simulators will look like for the next 18 months and our efforts to improve the gross margin on that part of the business. So that's the second variable that kind of dictated the range of 25% to 30%.

[Viktor Högberg, analyst]

Okay. And the next question is the med device simulators, the decline year-over-year in Q1, had a very strong run in 2024. You seem very confident still. How do you explain this implied blip then in Q1? Is it just timing or anything else, just the basis for your confidence in the continued growth here?

[Tom Englund, executive]

But I think that we are confident because we can see kind of the end customer demand, and we see the value that our products bring to our customers. And that -- and then, of course, the TAM is very big in this market. It is -- the sales can be lumpy of nature. We can have large projects one quarter and that are not realized in the next, and that goes both for development revenues as well as simulators. And thirdly, I mean, now the comparables are a little bit more difficult since the comparables and the very high triple-digit growth that we had was from relatively low numbers. Then you also -- a third aspect, and that is something that I've discussed in previous calls is that it also is a matter of how quickly we can ramp up our delivery capacity towards these players because many of them require bespoke products that require bespoke or specific teams internally. And that's why I've said that our kind of ability to scale our R&D and deliver multiple projects in parallel is going to dictate how quickly we can grow. So there's also an internal component here that we have to improve and we are working on.

[Operator]

The next question comes from Christian, Pareto Securities.

[Christian Lee, analyst]

My first one, it would be interesting to get your view on how many years the license revenue development has been pushed forward due to the regulatory delays compared with the trajectory you saw in 2022.

[Tom Englund, executive]

Yes. It's very -- it's a little bit difficult to answer a little bit like one number here. And I think it depends on player to player. It's dictated by the new players primarily coming into the market. And there, you have a plethora of different players. Some people say that it's 100 robotic surgery companies and some analysts say 50 or 60. And the right answer is probably somewhere in between. Building a robotic surgery platform is quite complex. And not only should you build it and get it through the regulatory process, but you also need to train surgeons for how to use it efficiently. And there have been kind of breaks on these very enthusiastic goals that many of the new players have had.

At the same time, these players, if you take, for example, J&J and Medtronic, they consider their robotic platform -- surgery platform developments to be extremely strategic. So they're putting a lot of efforts internally to make sure that these products can come out on time. So it has been delayed perhaps a year, perhaps 2 compared to the earlier estimates, but it doesn't kind of change the underlying super strong traction that these companies have and the importance that they put on these very strategic product launches.

[Christian Lee, analyst]

That's very clear. My second question is given that you have more than SEK 600 million in cash and no debt, I suppose you could step up your M&A strategy to reach your previous sales target of SEK 1.5 billion. Is that still an option to make acquisitions? Or do you see limited number of prospects out there?

[Tom Englund, executive]

Yes, it's a great question, Christian, and thank you. And it sort of is one of the reasons to why we speak so openly about the fact that we are now conducting a strategic review, because when we had the financial goals and when we articulated them back 3.5 years ago, the market looked quite different now compared to what it does today. The market has developed, and we see many more growth opportunities in many more areas than we have done previously, where it was more like a smaller Educational Products footprint and a smaller robotic license revenue. So what we're doing now is that we are in a strategic review process to make sure that we can capture all these growth opportunities and that the new market environment presents to us.

And including -- included in that new business plan and strategy that we will formulate for Surgical Science, obviously, there will also be the opportunity for us to grow inorganically with the new strategy as a backbone. So it all boils down to our strategic direction that we will formulate here in the next coming months and that we intend to also communicate here towards the fall together with our revised financial targets. And then that will also dictate how we'll allocate our capital and what type of acquisition targets we want to pursue as a company.

[Operator]

Question comes from Viktor Hogberg from Danske Bank.

[Viktor Högberg, analyst]

Yes. So on Intelligent Ultrasound, has historically grown 14% CAGR, but it was down year-over-year in Q1. Just given the ambitions for the full Educational segment, do you expect Intelligent Ultrasound to return to growth for the full year this year? Or are the comps tough? Or is the market adverse? Just some help on what you expect for Intelligent Ultrasound on the revenue side? And then maybe a follow-up on the cost side.

[Tom Englund, executive]

We definitely want to return to growth for the full year for Intelligent Ultrasound. So our quarter 1 result for Intelligent Ultrasound was, as we said, lower than expected. So this is definitely a focus area for us. It is a little bit -- or is quite a bit, I would say, affected by the NHS situation, the U.K. funding situation and Intelligent Ultrasound is particularly strong there. We believe that we can grow with the existing product portfolio just these activities and a stronger distributor network. Can you please mute your mic, please?

We believe that we will be able to grow the ultrasound business due to those factors. But we also believe we will be able to come into new parts of new market segments, new product segments, I should say. We also see there's an OEM opportunity. So we think that we can grow in the short term and we can grow even more in the medium to long term. So we remain very positive about ultrasound despite the kind of weak start of quarter 1.

[Viktor Högberg, analyst]

Okay. And on the cost side, in addition to already announced cost savings, GBP 1.5 million or up to GBP 2 million, as you previously said, I would assume it's reasonable to expect you would be looking at further operational cost synergies? Or are you done with the cost structure once you've reached this GBP 1.5 million or up to GBP 2 million, which were previously communicated?

[Tom Englund, executive]

No, we are not done. We believe that we have an opportunity here to take advantage of our scale when it comes to R&D, when it comes to manufacturing, when it comes to sourcing. Some of these synergies will take longer to realize. Some of these synergies actually also affect not only the Intelligent Ultrasound product line, but also the product line within Surgical Science or previous Surgical Science without Intelligent Ultrasound. So that's a strong focus for us to kind of improve our gross margin in the simulators business as I said previously. So it's not over yet.

[Anna Ahlberg, executive]

And remember, we also talked about -- [ Viktor ] you can mute, because it's very high, the noise. We also talked about the avoidance of cost, which is also a factor, meaning that we would otherwise have to invest in, for example, a direct sales organization in the U.K. As Tom said, we just started with our direct office there. And so those are also things that are affecting, of course, the overall cost structure of the group.

[Operator]

Question comes from Viktor Hogberg from Danske Bank.

[Viktor Högberg, analyst]

Sorry, I didn't know. Maybe an error here, but maybe -- is it okay if I add another follow-up on this, on Industry/OEM?

[Anna Ahlberg, executive]

Sure. Go ahead, Viktor.

[Tom Englund, executive]

Go ahead.

[Viktor Högberg, analyst]

So license revenues, just want to make sure, given your comment, Anna, on the retroactive revenues for the 2024 deliveries, Q1 didn't include any of those, right? You still expect that towards the back half of the year, potentially into 2026. Just want to make sure that there were no one-off revenues connected to the new deal here with Intuitive in Q1 in terms of license revenues.

[Anna Ahlberg, executive]

Correct, meaning it's the first part of your -- it did not include any retrofits.

[Viktor Högberg, analyst]

And no, I don't know, upfronts for something else, something included given that the deal was effective from 1st of January. So this is the run rate, so to say, to expect -- or not to expect maybe, but to calculate from.

[Anna Ahlberg, executive]

And also remember that we -- yes, we have license revenues from more customers. And as we said, always mentioned, they are a bit lumpy. So we don't -- we do not speak about the run rate in terms of absolute numbers for the license revenues, but it's correct that there were no retrofits or nothing out of the ordinary regarding that agreement.

[Viktor Högberg, analyst]

Would it be fair to assume, given the large step-up that there were some lumpiness from other customers affecting Q1 positively?

[Anna Ahlberg, executive]

We never comment on specific customers or the absolute amount for them. So it's that general comment that we always have. And we -- as I said, we do have revenues from more customers definitely.

[Operator]

The next question comes from Christian Binder from Redeye.

[Christian Binder, analyst]

I just have one follow-up regarding M&A. I'm sure that there are quite a number of companies that could potentially be attractive for you to buy. But what we've heard for quite a long time is that at least private market valuations have kind of remained stubbornly high. And I guess Intelligent Ultrasound was kind of a little bit of a special situation because it was listed. In general, do you think that there are enough M&A targets available at attractive valuations that kind of makes financial sense for you, if you understand what I mean?

[Tom Englund, executive]

Yes. Thank you for your question. I believe that the most important part when looking at whether we add companies to Surgical Science is whether it makes strategic sense to do so and whether we can find synergies. The 1 plus 1 equals 3 between the acquired company and Surgical Science. And we feel that we have done so with Intelligent Ultrasound, for example. We feel that their ultrasound offering is highly synergistic with ours. And we also feel that we can develop this combined entity in a much better way together than what we could have done separately. So it's clearly synergistic, and we're very happy about that.

We are less interested in the valuation aspect. It is important, but it's not kind of the determining factor to why we decide or not decide to do an acquisition. So once again, then it's extremely important that you, as a company, have a very clear strategy of what growth you want to pursue and what segments you want to develop. And based on that, you build your growth strategy that can be both organic as well as inorganic. So that is what we're looking at. And then valuations can be interesting to look at and can perhaps sometimes affect timing, but it cannot be the kind of underlying cost to why you do acquisitions. So that's how we think and reason about inorganic growth.

[Operator]

There are no more questions at this time. So I hand the conference back to the speakers for written questions and closing comments.

[Anna Ahlberg, executive]

We -- I think we answered the questions. We have one more written, if the targets reflect a run rate at the end of 2026 or full year 2026 targets, and they are for the full year 2026. Other than that, we do not have any more written questions that we have not answered.

[Tom Englund, executive]

Unless there is any more questions, we would like to end the call. Thank you for listening, and have a great day.

[Anna Ahlberg, executive]

Thank you. Bye-bye.

[Tom Englund, executive]

Thank you. Bye-bye.