Vital Images, Inc. Q2 2010 Earnings Call Transcript

Vital Images, Inc. Q2 2010 Earnings Call Transcript
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Vital Images, Inc. (VTAL)

Q2 2010 Earnings Call

August 05, 2010 11:30 am ET

Executives

Mike Carrell - President & CEO

Peter Goepfrich - CFO

Analysts

Steven Crowley - Craig-Hallum Capital Group

Ernie Andberg - Feltl & Co.

David Larson - Leerink Swann

Richard Close - Jefferies & Company

James Cho - Oppenheimer & Co.

Mohan Naidu - Piper Jaffray

Steven Crowley - Craig-Hallum Capital

Ernie Andberg - Feltl and Company

Presentation

Operator

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Previous Statements by VTAL
» Vital Images Inc. Q1 2010 Earnings Call Transcript
» Vital Images Inc. Q3 2009 Earnings Call Transcript
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Good day everyone and welcome to the Vital Images second quarter earnings conference call. Today's call is being recorded. At this time I would like to turn the call over to Mr. Mike Carrell, President and CEO. Please go ahead, sir.

Mike Carrell

Thank you Marvin and good morning everyone. Welcome to our 2010 second quarter conference call. With me today is Peter Goepfrich, our Chief Financial Officer.

Our most [purposeful] comments are the Safe Harbor statement. Some of the comments made today will be forward-looking and are made under the Private Securities Litigation Reform Act of 1995. Actual results may differ and factors that may cause such results to differ are identified on page seven of the Form 10-K for the year ended December 31, 2009.

We are pleased to announce that in a tough market we grew 2010 second quarter revenue 4% to $14 million from $13.4 million in the second quarter of 2009. Additionally, our distribution partner Toshiba continues to face a challenging CT scanner market and therefore our revenues in that channel were below last year's levels. The encouraging news is that we offset the Toshiba shortfall with growth in our other channels, including one, significant increase in direct and other distributed revenue; two, our first sonar deal with the contract we signed during the quarter; three, continued enterprise growth in Europe; and fourth, market acceptance of Vitrea Enterprise Suite 1.3 which was rolled out in May.

We remain confident that our enterprise solutions are the right directions for the company and for our customers. The US News & World Report, hospital "Honor Roll" just released in July derives that point home. All of the 14 hospitals on the list use Vital Images software and solutions and 71% currently have or are in transition to have our enterprise solutions.

We are honored to contribute to this club of the distinguished hospitals. In addition to the sluggishness in CT sales the other down size in the quarter was gross margins, which were impacted by product mix including lower margin hardware sales than usual. Peter will go into some more details when he goes through the financials.

While we continue to control our operating expenses at the seven quarters of positive adjusted EBITDA, second quarter adjusted EBITDA was negative 213. That's not where we wanted to be or where it should be and not where we anticipate our numbers to be in the back half of the year. I want to emphasize that we continue to watch expenses very carefully.

At the end of the second quarter we had 241 employees, down from 246 for 2009 year end. Importantly, we continue to generate cash from operating activities and our balance sheet remains solid with over $143 million in cash, the same as the end of last quarter. As our news release noted our Board auto authorized to buy back stock of an additional $20 million of our common stock. This decision reflects Vital Images' financial strength and are confident in our business going forward.

For more financial details in the quarter, I'll now turn the call over to peter.

Peter Goepfrich

Thank you, Mike. I will begin with a few comments regarding revenue. License revenue increased $597,000 or 13% compared to the second quarter last year. The change consisted of an increase in direct and other distributor license revenue of $1.2 million or 356%, offset by a decrease in Toshiba license revenue of $631,000 or 15%.

License revenue decreased $359,000 or 6% compared to the first quarter of 2010. The change consisted of a decrease in Toshiba license revenue of $932,000 or 21% as second quarter is typically Toshiba's softest quarter. This was offset by an increase in direct and other distributor license revenue of $574,000 or 57%, primarily due to an increase in license revenue from our Hit Distribution Partners.

Maintenance and service revenue decreased $206,000 from the second quarter last year, primarily due to a decrease in educational revenue of $231,000 as a result of a decrease in US license sales across all distribution channels for the proceeding four quarters compared to the proceeding four quarters a year ago. Maintenance and service revenue decreased $639,000 from the first quarter of 2010, primarily due to a decrease of $438,000 for Toshiba billing adjustments relating to stark period in the first quarter 2010 as well as an uptick in bad maintenances in the first quarter compared to second quarter.

For the first time since 2006, McKesson represented more than 10% of total revenue at 12%. This consisted of license revenue of $395,000, maintenance and service revenue of $1.1 million and hardware revenue of $166,000.

Next, I would like to discuss gross margin by revenue category. License fee gross margin was 79.6%, down from the second quarter last year and from the first quarter of 2010, primarily due to a change in product mix, including one, a higher percentage of total license sales relating to installed base customer conversions to which we Vitrea Enterprise Suite which results in lower upfront revenue and therefore lower gross profit than net new sales; two, a lower number of net new Vitrea sales which more often carry higher upfront revenue margin and customer convergence to Vitrea Enterprise Suite, but its important to note that Vitrea Enterprise Suite results in higher long term maintenance and service revenue in Vitrea standalone sales; and three, an increase in third-party software sales which carry lower margins.

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