[Edaily Reporter Kim Seung-kwon ] Lunit Inc.(328130), a leading medical artificial intelligence (AI) company, is facing a critical test of its profitability.

This comes as the company is set to announce its third-quarter earnings, which will gauge the feasibility of the year-end EBITDA (earnings before interest, taxes, depreciation, and amortization) breakeven target it set earlier this year when it pursued a 211.5 billion won rights offering. In the medical AI market, where it has become difficult to secure corporate valuation based solely on growth expectations, all eyes are on whether Lunit Inc.’s earnings will serve as a turning point for restoring investor confidence.

Losses Persist Despite Subscription Revenue Growth… When Will the Break-Even Point Be Reached

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According to the medical AI industry on the 5th, Lunit Inc. is scheduled to announce its third-quarter earnings around the 12th. Consolidated revenue for the first half of the year reached 45.8 billion won, a 23% increase year-over-year, while the operating loss narrowed from 41.9 billion won to 29.0 billion won. Overseas revenue accounts for 95% of the total.

However, quarterly performance fell short of expectations. Second-quarter revenue was 21.8 billion won, a 9% decrease from the first quarter. The operating loss widened from 13.6 billion won to 15.4 billion won.

The decline in second-quarter revenue was largely due to a reduction in revenue recognized on a one-time basis. According to the semi-annual report, revenue from subscription-based services—which is recognized over the contract period—increased by approximately 30%, from 12 billion won in the first quarter to 15.5 billion won in the second quarter. In contrast, revenue recognized at a single point in time, such as from licenses and services, fell by nearly half, from 12 billion won to 6.3 billion won.

The subscription business is providing a floor for earnings. The total value of long-term subscription contracts secured is $166 million, of which $101 million represents the backlog that has not yet been recognized as revenue. These contracts extend through 2033 at the latest. Driven primarily by the U.S. breast cancer screening business acquired through the Volpara acquisition, revenue in the Americas for the first half of the year rose 32% year-over-year to 33.3 billion won.

In contrast, second-quarter revenue in the Asia-Pacific region fell 44% from the previous quarter. Revenue from major customers also declined. Even as recurring revenue grows, the company’s overall performance remains volatile depending on the timing of one-time sales and project revenue recognition.

Cost efficiency efforts are underway. Operating expenses for the first half totaled 74.7 billion won, a 5% decrease from the same period last year. Ordinary R&D expenses fell 27%, from 18.0 billion won to 13.2 billion won. However, stock-based compensation expenses rose 14% to 10.3 billion won.

The key question is whether cost reductions and revenue growth will lead to an improvement in EBITDA. The company reported a first-half EBITDA loss of 14.6 billion won, which is about half the level of the same period last year.

Based on a simple estimate by this publication using the interim report, assuming the second-quarter cost structure remains unchanged, quarterly revenue required to reach the EBITDA break-even point is approximately 29.6 billion won. This represents an increase of about 36% compared to the second quarter; however, the actual break-even point may vary depending on profitability and cost changes across business segments.

Lunit Inc. officials stated, “We are continuing our efforts to grow revenue and reduce costs in the second half of the year,” adding, “We expect improved performance thanks to securing contracts for cancer screening projects in European countries and expanding partnerships with global CROs (contract research organizations), research institutions, and new drug development companies.”

Summit Collaboration Presents an Opportunity… Commercialization and Financial Burdens Remain Challenges

The securities industry anticipates a rebound in the second half of the year. In May, KIWOOM Securities estimated Lunit Inc.’s third-quarter revenue and operating loss at 29.3 billion won and 3.7 billion won, respectively. For the fourth quarter, it projected revenue of 36.4 billion won and an operating profit of 500 million won, forecasting a quarterly profit.

The biggest variable is the AI biomarker platform “Lunit Inc. Scope.” This business analyzes tissue slides to predict responses to anticancer drug treatments, and the company has set a goal to expand this year’s revenue to two to three times last year’s figure of approximately 10.4 billion won. NH INVESTMENT & SECURITIES projected Scope revenue for this year at 17.0 billion to 20.0 billion won, while KIWOOM Securities forecast 14.9 billion won, reflecting a more conservative outlook than the company’s.

Lunit Inc. anticipates that revenue recognition from collaborations with pharmaceutical companies will be concentrated in the second half of the year. The research collaboration with U.S.-based Summit Therapeutics has raised expectations for Scope’s growth. On the 23rd of last month (local time), Lunit Inc. announced a research agreement with Summit regarding the new bispecific antibody drug “Ibonecimab.” The agreement involves analyzing the tumor microenvironment using Lunit Inc.’s Scope IO.

Ibonecimab is an anticancer drug that simultaneously targets PD-1 and VEGF. This collaboration is significant because it demonstrates that Lunit Inc.’s AI analysis technology can be utilized in the development of next-generation immuno-oncology drugs. Lunit Inc. has signed paid research agreements with eight of the top 20 global pharmaceutical companies, and is currently conducting late-stage clinical and companion diagnostic research with three of them.

NH INVESTMENT & SECURITIES has valued Scope’s business at a minimum of 500 billion won. Analyst Han Seung-yeon stated, “We believe Lunit Inc. is the stock most likely to see a revaluation of its business value in the domestic AI healthcare sector next year.”

However, some observers note that research collaborations do not necessarily guarantee immediate large-scale revenue. The Summit agreement is a research contract designed to evaluate the potential applications of Scope IO, and the contract amount and milestones have not been disclosed. Future clinical results, follow-up contracts, and the commercialization of companion diagnostics must be confirmed. Consequently, analysts suggest that the key point to watch in this earnings report is not revenue growth itself, but rather how close the company has come to establishing a revenue structure that reduces its reliance on external funding.

CEO Seo Beom-seok explained during the first-half earnings announcement, “Collaborations with numerous global pharmaceutical companies regarding Lunit Inc. Scope are progressing smoothly, so we expect to see even stronger growth in the second half of the year when revenue recognition is concentrated.”