ACADEMIA
Vital Images Announces Record Revenue
Vital Images, a leading provider of enterprise-wide advanced visualization and analysis solutions, today announced record revenue for the second quarter ended June 30, 2006 of $16.9 million, a 42 percent increase over $11.9 million in the second quarter of 2005. Net income for the 2006 second quarter was $1.2 million, or $0.09 per diluted share, which included equity-based compensation costs of $887,000 (after tax). This compares to net income for the 2005 second quarter of $734,000, or $0.06 per diluted share, which included equity-based compensation costs of $61,000 (after tax). Pretax income excluding equity-based compensation (a non-GAAP measure) for the 2006 second quarter more than doubled to $3.4 million, or $0.24 per diluted share, from year-earlier pretax income excluding equity-based compensation for the 2005 second quarter of $1.3 million, or $0.10 per diluted share.
"Robust demand for our productivity-enhancing software by physicians and hospital managers resulted in another record quarter for the company. We now have more than 3,250 separate software licenses in the marketplace," said Jay D. Miller, president and chief executive officer. "In the 2006 second quarter, we saw continued strength in the enterprise IT/PACS market and more overlap between the scanner and IT/PACS markets." Financial Highlights * License fee revenue from all products increased to $11.4 million during the second quarter, up 43 percent over second quarter 2005 license fee revenue of $8.0 million. License fee revenue for the first six months of 2006 increased to $22.4 million, up 46 percent over $15.3 million for the same period in 2005. * Second quarter revenue from distribution partner Toshiba Medical Systems Corporation totaled $5.8 million, or 34 percent of total revenue, compared to $5.6 million in the second quarter of 2005, or 47 percent of total revenue. Toshiba revenue for the first six months of 2006 increased to $12.7 million, up 10 percent over $11.5 million for the same period in 2005. * Non-Toshiba license fee revenue increased to $7.4 million during the second quarter, an 82 percent gain over year-earlier second quarter non-Toshiba license fee revenue of $4.1 million. * Revenue generated through the company's IT/PACS partnership with McKesson Information Systems represented 11 percent of total revenue for the second straight quarter, up from 7 percent for full year 2005, and 2 percent for full year 2004. * License fee revenue from software options (including third-party software) increased to $6.3 million during the second quarter, up 43 percent over $4.4 million in the year-ago period. Top-selling options in the second quarter of 2006 were General Vessel Probe, Automated Vessel Measurement and CT Cardiac. * Revenue from maintenance and services rose to $5.0 million during the second quarter, a 43 percent gain over second quarter 2005 revenue of $3.5 million. Maintenance revenue alone increased 68 percent to $3.7 million in the second quarter of 2006, up from $2.2 million for the same period in 2005. * Second quarter international revenue was $2.2 million, or 13 percent of total revenue, a 6 percent gain from $2.1 million, or 18 percent of total revenue, in the same period in 2005. International revenue for the first six months of 2006 increased to $5.0 million, up 38 percent over $3.7 million for the 2005 first half. International sales were predominantly through Toshiba. * Gross margin improved to 79 percent for the second quarter of 2006 from 75 percent for the same period in 2005. Gross profit for the 2006 second quarter rose to $13.4 million from $8.9 million in the year-ago quarter. The overall gross margin gains were primarily due to greater software sales, including software-only enterprise sales that carry higher selling prices and margins. * Cash, cash equivalents and marketable securities increased $6.7 million to $60.6 million at June 30, 2006 from $53.9 million at March 31, 2006. Interest income increased to $685,000 in the second quarter compared to $237,000 in the year-ago period. Operating Expense Summary * Operating expenses for the second quarter totaled $12.0 million, which included $1.1 million of equity-based compensation, compared with second quarter 2005 expenses of $8.0 million, which included $91,000 of equity-based compensation. * Sales and marketing expenses for the second quarter totaled $6.2 million, which included $528,000 of equity-based compensation, compared with second quarter 2005 expenses of $4.0 million, which included $20,000 of equity-based compensation. Other than equity-based compensation, the primary factors behind the increase were additional employees to support the company's growth, increased trade show expenses and higher commissions on greater sales volumes. * Research and development expenses for the second quarter totaled $3.1 million, which included $173,000 of equity-based compensation, compared with second quarter 2005 expenses of $2.0 million, which included $10,000 of equity-based compensation. The company continues to invest in research and development by adding personnel focused on product innovation and development. * General and administrative expenses for the second quarter totaled $2.6 million, which included $432,000 of equity-based compensation, compared with second quarter 2005 expenses of $1.9 million, which included $61,000 of equity-based compensation. In addition to equity-based compensation, the major driver of higher expenses was growth in the employee base. Key Developments: During the second quarter of 2006, the cardiology segment of the advanced visualization and analysis market received a significant amount of press, and Vital Images' CT Cardiac option continued to be among the company's strongest selling options. Interventional cardiologists are very open to new technologies and cardiac CT angiography offers a less costly, minimally invasive alternative to current angiography procedures. The company believes that cardiovascular advanced visualization will continue to grow in the marketplace and that Vital Images can capitalize on this opportunity. In June 2006, the company participated in Stanford University's 8th Annual International Symposium on Multidetector-Row CT workstation face-off, a demonstration in which the top advanced visualization and analysis vendors each perform a series of case studies in an allotted amount of time. The company's Vitrea software solution completed each of the four case studies with ease, showcasing the speed and ease of use of Vitrea software and reaffirming the company's position as a market leader. Recently, McKesson announced that it has signed a distribution agreement with Toshiba under which Toshiba will offer McKesson's IT/PACS solution with Toshiba's diagnostic imaging devices, including CT scanners. In a joint statement, McKesson and Toshiba noted they believe this agreement is the best way to offer the hospital and imaging center market affordable, easily installed best-of-breed diagnostic imaging solutions. This announcement reflects the market trend towards advanced visualization and IT/PACS integration, and ideally positions Vital Images, as Toshiba and McKesson are the company's two largest partners. In February 2006, Congress passed the Deficit Reduction Act of 2005 (DRA), which includes imaging-related budget cuts to U.S. federal reimbursement programs. Under the DRA, federal reimbursement for imaging related procedures will be reduced by $2.8 billion from 2007 to 2010 and a total of $8.1 billion from 2007 to 2015. The imaging-related reductions focus on studies conducted outside of hospitals, such as at diagnostic imaging centers. Starting in 2007, the DRA will cut reimbursement for out-of-hospital imaging studies, which will result in reimbursement at rates similar to hospital outpatient facility reimbursement rates. More recently, a bipartisan bill was introduced which calls for a two-year delay on imaging-related cuts mandated by the DRA. The DRA has also been the subject of several lawsuits seeking to overturn the legislation on constitutionality grounds because, when it was signed, the House and Senate versions of the bill were different. Regardless, the company does not believe the DRA will have a material impact on its future business, as the majority of Vital Images' sales are derived from large hospital networks and facilities, and not the imaging outpatient diagnostic centers that are the targets of the DRA reimbursement cuts. Furthermore, the company is seeing substantial growth in the enterprise IT/PACS market, which is not significantly impacted by the DRA. It is also important to note that customers view the company's products as productivity tools that will help save time and reduce costs. 2006 Revenue and Earnings Per Share Guidance Raised For full-year 2006, the company has increased revenue guidance revenue to the range of $69.5 million to $71.5 million, or a 34 percent to 38 percent increase over 2005. Management is increasing revenue guidance as a result of the company's strong first half revenue results and a strong pipeline heading into the third quarter, and increasing earnings per share outlook as a result of the increased revenue guidance combined with lower than anticipated operating costs and equity-based compensation. The company also expects the following for full-year 2006: > GAAP net income of $0.38 to $0.44 per diluted share; the company's prior guidance was for $0.28 to $0.38 per diluted share. > Net income excluding equity-based compensation (a non-GAAP measure) of $0.66 to $0.71 per diluted share; the company's prior guidance was for $0.59 to $0.65 per diluted share. > Pretax income excluding equity-based compensation (a non-GAAP measure) of $1.02 to $1.12 per diluted share, up from $0.67 for 2005, or a 49 percent to 64 percent increase over 2005; the company's prior guidance was for $0.93 to $1.03 per diluted share. In addition, Vital Images anticipates the total balance of cash, cash equivalents and marketable securities will increase between $18 million and $24 million in 2006; the company's prior guidance was for an increase of between $15 million and $22 million.
"Robust demand for our productivity-enhancing software by physicians and hospital managers resulted in another record quarter for the company. We now have more than 3,250 separate software licenses in the marketplace," said Jay D. Miller, president and chief executive officer. "In the 2006 second quarter, we saw continued strength in the enterprise IT/PACS market and more overlap between the scanner and IT/PACS markets." Financial Highlights * License fee revenue from all products increased to $11.4 million during the second quarter, up 43 percent over second quarter 2005 license fee revenue of $8.0 million. License fee revenue for the first six months of 2006 increased to $22.4 million, up 46 percent over $15.3 million for the same period in 2005. * Second quarter revenue from distribution partner Toshiba Medical Systems Corporation totaled $5.8 million, or 34 percent of total revenue, compared to $5.6 million in the second quarter of 2005, or 47 percent of total revenue. Toshiba revenue for the first six months of 2006 increased to $12.7 million, up 10 percent over $11.5 million for the same period in 2005. * Non-Toshiba license fee revenue increased to $7.4 million during the second quarter, an 82 percent gain over year-earlier second quarter non-Toshiba license fee revenue of $4.1 million. * Revenue generated through the company's IT/PACS partnership with McKesson Information Systems represented 11 percent of total revenue for the second straight quarter, up from 7 percent for full year 2005, and 2 percent for full year 2004. * License fee revenue from software options (including third-party software) increased to $6.3 million during the second quarter, up 43 percent over $4.4 million in the year-ago period. Top-selling options in the second quarter of 2006 were General Vessel Probe, Automated Vessel Measurement and CT Cardiac. * Revenue from maintenance and services rose to $5.0 million during the second quarter, a 43 percent gain over second quarter 2005 revenue of $3.5 million. Maintenance revenue alone increased 68 percent to $3.7 million in the second quarter of 2006, up from $2.2 million for the same period in 2005. * Second quarter international revenue was $2.2 million, or 13 percent of total revenue, a 6 percent gain from $2.1 million, or 18 percent of total revenue, in the same period in 2005. International revenue for the first six months of 2006 increased to $5.0 million, up 38 percent over $3.7 million for the 2005 first half. International sales were predominantly through Toshiba. * Gross margin improved to 79 percent for the second quarter of 2006 from 75 percent for the same period in 2005. Gross profit for the 2006 second quarter rose to $13.4 million from $8.9 million in the year-ago quarter. The overall gross margin gains were primarily due to greater software sales, including software-only enterprise sales that carry higher selling prices and margins. * Cash, cash equivalents and marketable securities increased $6.7 million to $60.6 million at June 30, 2006 from $53.9 million at March 31, 2006. Interest income increased to $685,000 in the second quarter compared to $237,000 in the year-ago period. Operating Expense Summary * Operating expenses for the second quarter totaled $12.0 million, which included $1.1 million of equity-based compensation, compared with second quarter 2005 expenses of $8.0 million, which included $91,000 of equity-based compensation. * Sales and marketing expenses for the second quarter totaled $6.2 million, which included $528,000 of equity-based compensation, compared with second quarter 2005 expenses of $4.0 million, which included $20,000 of equity-based compensation. Other than equity-based compensation, the primary factors behind the increase were additional employees to support the company's growth, increased trade show expenses and higher commissions on greater sales volumes. * Research and development expenses for the second quarter totaled $3.1 million, which included $173,000 of equity-based compensation, compared with second quarter 2005 expenses of $2.0 million, which included $10,000 of equity-based compensation. The company continues to invest in research and development by adding personnel focused on product innovation and development. * General and administrative expenses for the second quarter totaled $2.6 million, which included $432,000 of equity-based compensation, compared with second quarter 2005 expenses of $1.9 million, which included $61,000 of equity-based compensation. In addition to equity-based compensation, the major driver of higher expenses was growth in the employee base. Key Developments: During the second quarter of 2006, the cardiology segment of the advanced visualization and analysis market received a significant amount of press, and Vital Images' CT Cardiac option continued to be among the company's strongest selling options. Interventional cardiologists are very open to new technologies and cardiac CT angiography offers a less costly, minimally invasive alternative to current angiography procedures. The company believes that cardiovascular advanced visualization will continue to grow in the marketplace and that Vital Images can capitalize on this opportunity. In June 2006, the company participated in Stanford University's 8th Annual International Symposium on Multidetector-Row CT workstation face-off, a demonstration in which the top advanced visualization and analysis vendors each perform a series of case studies in an allotted amount of time. The company's Vitrea software solution completed each of the four case studies with ease, showcasing the speed and ease of use of Vitrea software and reaffirming the company's position as a market leader. Recently, McKesson announced that it has signed a distribution agreement with Toshiba under which Toshiba will offer McKesson's IT/PACS solution with Toshiba's diagnostic imaging devices, including CT scanners. In a joint statement, McKesson and Toshiba noted they believe this agreement is the best way to offer the hospital and imaging center market affordable, easily installed best-of-breed diagnostic imaging solutions. This announcement reflects the market trend towards advanced visualization and IT/PACS integration, and ideally positions Vital Images, as Toshiba and McKesson are the company's two largest partners. In February 2006, Congress passed the Deficit Reduction Act of 2005 (DRA), which includes imaging-related budget cuts to U.S. federal reimbursement programs. Under the DRA, federal reimbursement for imaging related procedures will be reduced by $2.8 billion from 2007 to 2010 and a total of $8.1 billion from 2007 to 2015. The imaging-related reductions focus on studies conducted outside of hospitals, such as at diagnostic imaging centers. Starting in 2007, the DRA will cut reimbursement for out-of-hospital imaging studies, which will result in reimbursement at rates similar to hospital outpatient facility reimbursement rates. More recently, a bipartisan bill was introduced which calls for a two-year delay on imaging-related cuts mandated by the DRA. The DRA has also been the subject of several lawsuits seeking to overturn the legislation on constitutionality grounds because, when it was signed, the House and Senate versions of the bill were different. Regardless, the company does not believe the DRA will have a material impact on its future business, as the majority of Vital Images' sales are derived from large hospital networks and facilities, and not the imaging outpatient diagnostic centers that are the targets of the DRA reimbursement cuts. Furthermore, the company is seeing substantial growth in the enterprise IT/PACS market, which is not significantly impacted by the DRA. It is also important to note that customers view the company's products as productivity tools that will help save time and reduce costs. 2006 Revenue and Earnings Per Share Guidance Raised For full-year 2006, the company has increased revenue guidance revenue to the range of $69.5 million to $71.5 million, or a 34 percent to 38 percent increase over 2005. Management is increasing revenue guidance as a result of the company's strong first half revenue results and a strong pipeline heading into the third quarter, and increasing earnings per share outlook as a result of the increased revenue guidance combined with lower than anticipated operating costs and equity-based compensation. The company also expects the following for full-year 2006: > GAAP net income of $0.38 to $0.44 per diluted share; the company's prior guidance was for $0.28 to $0.38 per diluted share. > Net income excluding equity-based compensation (a non-GAAP measure) of $0.66 to $0.71 per diluted share; the company's prior guidance was for $0.59 to $0.65 per diluted share. > Pretax income excluding equity-based compensation (a non-GAAP measure) of $1.02 to $1.12 per diluted share, up from $0.67 for 2005, or a 49 percent to 64 percent increase over 2005; the company's prior guidance was for $0.93 to $1.03 per diluted share. In addition, Vital Images anticipates the total balance of cash, cash equivalents and marketable securities will increase between $18 million and $24 million in 2006; the company's prior guidance was for an increase of between $15 million and $22 million. 
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