SERSTECH AB: Year-end Report 1 January - 31 December 2019

Serstech AB

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STRONG FULL YEAR SALES INCREASE

Fourth quarter 2019                                                                               Full Year 2019        
• Net sales: KSEK 3 824 (5 093)                                                             • Net sales: KSEK  18 742 (10 588)      
• Profit for the quarter: KSEK -6 131 (-181)                                             • Profit for the period KSEK -15 682 (-12 331)
• Earnings per share SEK -0,09 (0,00)                                                     • Earnings per share: SEK -0,23 (-0,20)
• Earnings per average number of shares: SEK -0,09 (0,00)                      • Earnings per average number of shares: SEK -0,24 (-0,23)

The first three quarters of 2019 had strong growth – well above 100% every quarter – and when we closed the books, we had achieved a full-year growth of almost 80%. The last quarter of the year had lower than expected sales, since the time between tender closure and awarding a winner was longer than expected in several cases. Our partners did not lose many tenders in 2019, but we saw several postponed decisions by the end-customers during the latter part of the year. We expect that we will continue to see large fluctuations from month to month and from quarter to quarter, since practically all our sales are through public tenders. Some quarters there will be many tender closures and some there will be fewer, but we are convinced that we will continue to see a positive long-term trend.
We are now more than 18 months into Serstech’s commercial phase. During the time since we actively started to sell and market our products in 2018, we have learned a lot about the industry and the behavior of the end-customers. In general, things take longer than we initially hoped for, as we have seen in the case of the postponed and delayed tender closings in 2019. The first months of 2020 have however showed a significant increase in the number of tenders in which our products are offered. As a result, the opportunity pipeline is currently much stronger than at any other time in the history of the company.

Sales process and positioning
There are two main categories of customers; the first one already has a Raman system in place. The update cycle is between five and eight years, and the goal of our partners is to establish Serstech as the best replacement option before the next cycle starts. The second case is when the end-customer does not have a Raman system already, which we have seen to be the case in some developing countries. In this case, our partners need to convince the customer about Raman and Serstech and then the customer needs to secure a procurement budget and eventu­ally plan for a public tender. The process is between 18 and 36 months, and typically, the larger the procurement tender, the longer the lead-time before an order is placed. In both cus­tomer categories, the sales investment is significant, and the goal is to influence the tender specification to include features that the competition does not have. The above means that the sales opportunities in a given geographical region can vary wildly between years – some years, there will be several tenders and some none at all.
For the first time ever, two of our partners in December won small tenders, for which they had gone through all the steps and influenced the tender specifications in a way that locked out parts of the competition. In 2018 and 2019, we have had a very limited set of these important "lock-out” features, besides size, weight and price. Most of our development work the last two years has been focused on getting the fundamentals in place and to try to catch up with the more experienced main com­petitors. Our next product update, planned for this summer, will introduce several new features that both reduce the risk of us being locked out and improve our chances to lock out the competition.

Stronger value proposition and team
The rights issue, that was completed in December, was over­subscribed by more than 30% and we now have sufficient funds to accelerate our product development and sales efforts. We have an ambitious product roadmap and with the new financing in place, we are moving forward at a high pace. This summer, we will launch a new Raman spectrometer that will allow us to move past being mainly the low-cost alternative. The new prod­uct includes our implementation of the recently patented auto-focus functionality. The feature will provide an industry-first focusing mechanism, that will dramatically improve the quality of the measured substance spectra. Other features include next-generation substance matching algorithms, an industry-best user interface, a new, more slim shape and lower weight, a better display and several other upgrades.
In 2020, we plan to almost double our R&D team and more than double our sales team – all-in-all, we plan to hire 15 people to our teams in Sweden and Romania this year. The sales team will grow from two people to five and we will hire our first marketing person, to improve our partner communication, our brand building efforts and the marketing support for our partners. In 2018 and 2019, we built a small, but strong team and estab­lished the basic functions in the company, such as sales, product management, project management and quality assurance, and it is now time to take the next steps. Our much stronger sales team, will be able to meet our partners more often and push, follow up and help them build the knowledge, mind-set and focus they need to succeed. Our new technical sales team will be able to train, either remotely or on-site, both partners and end-customers to make them understand the benefits of Raman spectroscopy and Serstech’s unique solution.
The important narcotics library is one of our top sellers and in December, we launched a significantly improved version, expanding its content from 205 to 380 spectra, which now makes it similar in size to what the competition offers. The work to expand it further continues and we expect to have the most relevant and highest quality narcotics library in the industry by summer 2020. Every week, there is at least one new narcotic substance discovered by police and border control agents, which makes updated libraries imperative for our customers. We plan to introduce a subscription model for these updates within a year, to better capitalize on the high value we continuously provide.

Improving performance in sales channel
Our partner network continues to evolve, and we replaced or cancelled 15 partnerships during 2019, with the majority in the last quarter. By the end of the year, we had 70 active sales part­nerships and we expect this number to show a net increase during 2020. We put a lot of requirements on our partners and we continuously evaluate their performance, reporting quality, number of customer meetings and many other parameters. Since the sales cycles are long and we are in the beginning of our relationship with our partners, we cannot measure on sales numbers alone. Our recently introduced Partner Program awards also customer visits, marketing activities and proven expertise through our online training and certification system.
As our relationships with partners are strengthened and we build mutual trust, we gain more and more insights into the local markets, the end-customers, product update cycles and coming tenders. Our rapidly improving understanding allows us to adapt our offering, bring our sales resources to bear where they are most needed and provide better partner support in public tenders. For the first time, we now know in which tenders our products are offered and as we gain more data, we will be able to better predict our sales and adjust our plans accordingly.
We have started 2020 in a strong way and we can see the same positive trend as we did in 2019. The largest difference between now and only six months ago is that we now have a fast-growing sales pipeline of known opportunities and every week, our partners report new tenders they are participating in. The im­portance and value of this cannot be emphasized enough and it is a clear proof that our strategy is working. Building a working global sales network from scratch obviously takes time and we are now starting to see the results – high-value opportunities being added every week.
The high inflow of opportunities is due to several factors, the most important of which is the maturity of our sales channel. Our internal sales team has an average employment time of a bit more than one year and our partners have an average time with us of around eleven months. Our sales team has spent most of 2019 on the road, meeting with partners, building trust, doing training and joining end-customer meetings for demos. The results from this are more skilled and confident partners, a growing trust between Serstech and the partners and signifi­cantly higher awareness among end-customers. Building a brand and trust in a conservative industry takes time and it is now clear that both the end-customer communities and our competitors are starting to take notice of Serstech, as the new player in the field. With three new people in sales starting in March and one in marketing before the summer, we expect to accelerate this process further in 2020.
The new product launch this summer will be another important suc­cess factor. The traditional competitors, mainly five US and one European company, have aging products and display limited innovation. Several of our competitors have large portfolios and consider their relatively low-priced hand-held Raman products as second priority, since they are only a small part of their rev­enue. They spend limited resources in both R&D and sales and there are very limited new features or products reaching the market. For nearly two years, we spent our R&D resources on getting the technical fundamentals in place and that phase has now been completed. Since a few months, we focus our resources on projects that will elevate our products to a best-in-breed status and we are well on our way to this goal.
The combination of factors – our pace in R&D, our growing sales team, our rapidly improving sales channel and the relatively slower competitors – makes me highly optimistic about the future. Our sales strategy is working, our sales continue to in­crease rapidly, our expanded product portfolio will open new opportunities and our chances to win tenders are improving fast. Our partners are becoming ever more active and their stronger trust in us allow us to participate in the work with important end-customers and tenders. In 2020, we will beat the 50% growth goal with a wide margin.

Stefan Sandor, CEO

For further information, please contact:

Stefan Sandor,
CEO, Serstech AB
tel: +46 739 606067
email: ss@serstech.com

Thomas Pileby,
Chairman of the Board, Serstech AB
tel: +46 702 072643
email: tp@serstech.com 

Company website: www.serstech.com

This is information that Serstech AB (publ.) is obliged to make public pursuant to the EU Market Abuse Regulation and the Securities Markets Act. The information was submitted for publication, through the agency of the contact person set out above at 08.45 CET on February 27, 2020.

Certified advisor to Serstech is Västra Hamnen Corporate Finance AB, phone: 040-20 02 50, e-mail: ca@vhcorp.se.

About Serstech
Serstech delivers solutions for chemical identifications and has customers across the world, mainly in the safety and security industry. Typical customers are customs, police authorities, security organizations and first responders. The solutions and technology are however not limited to security applications and potentially any industry using chemicals of some kind could be addressed by Serstech’s solution. Serstech is traded at Nasdaq First North and more information about the company can be found at www.serstech.com

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• Serstech_year_end_report_2019