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| VTAL > SEC Filings for VTAL > Form 10-Q on 10-Aug-2009 | All Recent SEC Filings |
10-Aug-2009
Quarterly Report
Executive summary
The financial results for Vital Images, Inc. (also referred to as "we", "us" and "our") have continued to be affected by the general decline in the U.S. economy, which has resulted in contracted capital spending by U.S. hospitals and lower interest rates on our cash and investments. Additionally, we have been impacted by weakness in the high-end computed tomography, or CT, and picture archiving and communication systems, or PACS, markets and the impact of the Deficit Reduction Act of 2005.
Revenue decreased for the second quarter of 2009, compared to the same period in 2008, reflecting the markets' continued weakness. Sales and marketing, research and development, and general and administrative expenses for the 2009 second quarter decreased as we experienced lower compensation costs, compared to the same period in 2008, resulting primarily from our 11% workforce reduction in November 2008. Other cost-control measures also contributed to decreases in operating expense categories during the 2009 second quarter, compared to the same period in 2008.
† Revenue for the 2009 second quarter decreased 15% to $13.4 million, compared to $15.7 million for the second quarter of 2008.
† Gross margin was 76%, compared to 77% for the second quarter of 2008.
† Loss before income taxes was $(4.6) million, compared to $(2.6) million for the second quarter of 2008.
† Net loss was $(19.6) million, or $(1.37) per diluted share, compared to $(1.6) million, or $(0.09) per diluted share, for the second quarter of 2008.
† Second quarter non-cash charges of $18.1 million for the second quarter of 2009 consisted of a $15.0 million valuation allowance against our deferred tax assets, and a $3.1 million write-off relating to the unimplemented portion of our enterprise resource planning system as a result of our cost-control efforts.
Revenue decreased for the six months ended June 30, 2009, compared to the same period in 2008, reflecting the markets' continued weakness. Sales and marketing, research and development, and general and administrative expenses for the six months ended June 30, 2009 decreased as we experienced lower compensation costs, compared to the same period in 2008, resulting primarily from our 11% workforce reduction in November 2008. Other cost-control measures also contributed to decreases in operating expense categories during the six months ended June 30, 2009, compared to the same period in 2008.
† Revenue decreased 15% to $28.2 million, compared to $33.0 million for the first six months of 2008.
† Gross margin was 76%, compared to 77% for the first six months of 2008.
† Loss before income taxes was $(5.2) million, compared to $(3.5) million for the first six months of 2008.
† Net loss was $(19.9) million, or $(1.38) per diluted share, compared to $(2.2) million, or $(0.13) per diluted share, for the first six months of 2008.
† Non-cash charges totaling $18.1 million for the first six months of 2009 consisted of a $15.0 million valuation allowance against our deferred tax assets and a $3.1 million write-off relating to the unimplemented portion of our enterprise resource planning system as a result of our cost-control efforts.
Total cash, cash equivalents and marketable securities were $141.1 million as of June 30, 2009, compared to $144.9 million as of March 31, 2009 and $147.0 million as of December 31, 2008. Working capital (defined as current assets less current liabilities) was $113.9 million as of June 30, 2009, a decrease from $121.3 million as of March 31, 2009 and $135.4 million as of December 31, 2008. The decrease in cash , cash equivalents and marketable
securities during the three and six months ended June 30, 2009 was primarily the result of repurchases of our common stock totaling $2.5 million and $5.8 million, respectively, under our share repurchase programs. The decrease in working capital was also due to purchases of noncurrent marketable securities totaling $4.9 million and $16.8 million, respectively.
Overview
We are a leading provider of advanced visualization and analysis solutions for use by medical professionals in clinical analysis and therapy planning. We provide software, customer education, software maintenance and support, professional services and, on occasion, third-party hardware to our customers. Our technology rapidly transforms complex data generated by diagnostic imaging equipment into functional digital images that can be manipulated and analyzed using our specialized applications to better understand internal anatomy and pathology. Our solutions are designed to improve the cost, quality and accessibility of health care by improving physician workflow and productivity, enhancing the ability to make clinical decisions, facilitating less invasive patient care, and complementing often significant capital investments in diagnostic imaging equipment made by our customers. Our software is compatible with equipment from all major manufacturers of diagnostic imaging equipment, such as CT scanners, and can be integrated into PACS. Many hospitals use PACS to acquire, distribute and archive medical images and diagnostic reports, reducing the need for film and increasing reliance on advanced visualization solutions such as ours. We also offer a Web-based solution that provides physicians with anywhere, anytime access to medical images and visualization tools through any Internet-enabled computer.
We operate and manage our business as a single business segment - the development and marketing of software and related services for advanced visualization and analysis solutions for use by medical professionals in clinical analysis and therapy planning. We market our products and services through a direct sales force, resellers and independent distributors in the United States and in international markets. Our common stock is currently traded on The NASDAQ Global Select Market under the symbol "VTAL."
ViTAL Enterprise, introduced in May 2008, enables unlimited enterprise access to the complete ViTAL solution offering, including Vitrea, Vitrea Web, ViTALConnect and our specialized clinical options. ViTAL Enterprise provides customers with full access to our clinical solutions and comprehensive services, including education, consulting and maintenance. ViTAL Enterprise has the flexibility to scale to the size of the customer's enterprise by providing access to the complete ViTAL solution based on unlimited users or concurrent users. Additionally, ViTAL Enterpriseoffers customers the ability to license the solution through capital or subscription pricing, and it is available to our worldwide installed base of existing customers. We anticipate an increasing percentage of license fee revenue will be from sales of ViTAL Enterprise.
Vitrea® software, our flagship software product, is an easy-to-use, intuitive, high-speed volume rendering technology that creates interactive two-dimensional, or 2D, three-dimensional, or 3D, and four-dimensional, or 4D, images from information generated by standard CT scanners. Vitrea is commonly deployed on standalone workstations, as well as on PACS, using standard computer hardware, and provides advanced visualization for radiological, cardiac, oncological and surgical applications. Vitrea renders vibrant, clear color images at high speeds and enables users to interactively navigate within these images to visualize, measure and understand internal structures and disease conditions. We believe our user interfaces are intuitive, and they are specifically configured to assist physicians in optimizing their clinical workflow.
Vitrea Web provides users with everywhere access to Vital Images' powerful advanced clinical applications via the Web. With Vitrea Web, customers have the same capabilities of a standalone workstation to review, analyze and communicate findings, all from any PC that has Web access. Vitrea Webenables advanced best of breed clinical applications access throughout the healthcare enterprise.
ViTALConnect® software allows multiple physicians to collaboratively use advanced visualization in their medical practices. It provides radiologists and referring physicians anywhere, anytime access via the Web to interactive 2D, 3D and 4D medical images and the ability to measure, rotate, analyze and segment those images. Our latest release includes features previously available only on multimodality workstations, such as a variety of multi-planar
reformat, or MPR, modes, thick slab rendering in MPR, 3D volumetric visualization with simple point of interest navigation, 4D dataset visualization, CT/positron emission tomography, or PET, fusion and advanced analysis tools.
Advanced visualization options expand the relevance of our products beyond the radiology department to referring physicians and surgical specialists, particularly in the areas of cardiology, cardiovascular, oncology, neurology and gastroenterology. Our advanced visualization options allow physicians to customize their Vitrea software according to their unique requirements. Most options are proprietary; however, Vitrea also serves as an integration platform for applications offered by our visualization technology partners. Our options include:
Option Clinical Use
†Vscore -Quantifies calcium in the four major coronary
arteries
†CT Brain Perfusion -Analyzes the blood flow of stroke victims
†Innerview GI (virtual -Locates and analyzes polyps in the colon
colonoscopy)
†Automated Vessel -Characterizes the course and dimensions of diseased
Measurements blood vessels
†CT Cardiac -Determines the extent of obstructive coronary
artery disease
†SUREPlaque™ -Aids in evaluating, characterizing and quantifying
plaque inside the coronary arteries
†Vessel Probe -Defines vascular anatomy and the extent of
obstruction in vessels other than the coronary
arteries
†CT Lung and Lung Tools -Visualizes and measures nodules in the lungs
†ImageChecker® CT -Detects pulmonary nodules in the chest
†Fusion7D™ -Visualizes images and fuse studies from multiple
modalities, such as magnetic resonance, or MR, and
PET
†CADstream™ -Analyzes MR breast exams
†QMass™ MR -Analyzes MR cardiac images
†EP Planning -3D advanced visualization and modeling tool for the
electrophysiology lab
†Collaboration -Enables two users to collaborate while viewing the
same study at the same time
†PET/CT Overlay -Provides the ability to overlay PET and CT images
with Standardized Uptake Value (SUV) calculations
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Our software solutions are used with medical diagnostic equipment, primarily in clinical analysis and therapy planning. Our software applies proprietary technologies to a variety of data supplied by CT scanners to allow medical clinicians to create 2D, 3D and 4D views of human anatomy and to non-invasively navigate within these images to better visualize and understand internal structures and pathologies. Our main customers are hospitals and clinics, university medical schools and diagnostic imaging companies. We market our products and services to these customers both directly through our own sales force and indirectly through digital imaging equipment manufacturers and PACS companies, which sell our products with other products they either manufacture or acquire from third parties.
Our products work with equipment from all major manufacturers of diagnostic imaging systems, including Toshiba Medical Systems Corporation ("Toshiba"), GE Medical Systems, Siemens Medical Systems, Inc. and Philips Medical Systems. Our products may also be integrated into PACS, such as those marketed by McKesson Corporation and Sectra AB, and run on off-the-shelf third-party computer hardware.
Critical accounting policies and estimates
Our discussion and analysis of financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. We have adopted various accounting policies to prepare the Condensed Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America. The most significant accounting policies are disclosed in Note 2 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2008. The preparation of
these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. We continually evaluate our critical accounting policies and estimates. We discuss our critical accounting estimates in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008. The adoption of Emerging Issues Task Force ("EITF") Issue No. 07-1, "Accounting for Collaborative Arrangements" and its application to our collaborative arrangement with Toshiba was the only significant new accounting policy during the six months ended June 30, 2009.
Results of Operations
The following table sets forth information from our Condensed Consolidated
Statements of Operations, expressed as a percentage of total revenue.
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2009 2008 2009 2008
Revenue:
License fees 34.1 % 49.1 % 37.5 % 51.7 %
Maintenance and services 62.6 49.7 60.1 46.5
Hardware 3.3 1.2 2.4 1.8
Total revenue 100.0 100.0 100.0 100.0
Cost of revenue:
License fees 4.2 6.4 5.4 6.6
Maintenance and services 16.9 15.8 16.5 15.3
Hardware 3.2 0.7 2.3 0.9
Total cost of revenue 24.3 22.9 24.2 22.8
Gross profit 75.7 77.1 75.8 77.2
Operating expenses:
Sales and marketing 45.2 51.7 42.6 49.0
Research and development 23.8 27.9 22.9 26.2
General and administrative 20.3 21.2 20.1 21.1
Asset impairment 23.5 - 11.2 -
Total operating expenses 112.8 100.8 96.8 96.3
Operating loss (37.1 ) (23.7 ) (21.0 ) (19.1 )
Interest income 2.5 7.4 2.7 8.6
Loss before income taxes (34.6 ) (16.3 ) (18.3 ) (10.5 )
Provision (benefit) for income taxes 112.1 (6.3 ) 52.3 (3.9 )
Net loss (146.7 )% (10.0 )% (70.6 )% (6.6 )%
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Revenue
A comparison of revenue by category is as follows (dollars in thousands):
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2009 2008 Change 2009 2008 Change
Revenue:
License fees $ 4,565 $ 7,706 $ (3,141 ) (41 )% $ 10,559 $ 17,064 $ (6,505 ) (38 )%
Maintenance and
services 8,371 7,811 560 7 % 16,932 15,345 1,587 10 %
Hardware 439 190 249 131 % 672 615 57 9 %
Total revenue $ 13,375 $ 15,707 $ (2,332 ) (15 )% $ 28,163 $ 33,024 $ (4,861 ) (15 )%
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License fee revenue (dollars in thousands)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2009 2008 Change 2009 2008 Change
License fee
revenue:
Vitrea licenses $ 1,348 $ 2,134 $ (786 ) (37 )% $ 2,923 $ 5,154 $ (2,231 ) (43 )%
Vitrea options
and third party
software 2,650 4,724 (2,074 ) (44 )% 6,048 10,619 (4,571 ) (43 )%
ViTAL Enterprise 567 453 114 25 % 1,137 453 684 151 %
ViTALConnect - 395 (395 ) (100 )% 451 838 (387 ) (46 )%
Total license fee
revenue $ 4,565 $ 7,706 $ (3,141 ) (41 )% $ 10,559 $ 17,064 $ (6,505 ) (38 )%
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ViTAL Enterprise, introduced in May 2008, enables unlimited enterprise access to the complete ViTAL solution offering, including Vitrea, ViTALConnectand our specialized clinical options. We expect revenue from sales of ViTAL Enterprise will become a larger portion of our total license revenue, which will cause revenue from sales of individual Vitrea licenses, Vitrea options and third party software to continue to decrease in significance. The decrease in license fee revenue during the three and six months ended June 30, 2009, compared to the same periods in 2008, was driven primarily by continued pressure on hospital capital spending in the U.S., which was partially offset by growth in our international license fee revenue, primarily in Europe and Latin America.
The following table sets forth information on license fee revenue by source (dollars in thousands):
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2009 2008 Change 2009 2008 Change
License fee
revenue:
Direct and other
distributors $ 345 $ 2,650 $ (2,305 ) (87 )% $ 1,705 $ 5,847 $ (4,142 ) (71 )%
Toshiba 4,220 5,056 (836 ) (17 )% 8,854 11,217 (2,363 ) (21 )%
Total license fee
revenue $ 4,565 $ 7,706 $ (3,141 ) (41 )% $ 10,559 $ 17,064 $ (6,505 ) (38 )%
Percent of
license fee
revenue:
Direct and other
distributors 8 % 34 % 16 % 34 %
Toshiba 92 % 66 % 84 % 66 %
Total license fee
revenue 100 % 100 % 100 % 100 %
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Maintenance and services revenue (dollars in thousands)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2009 2008 Change 2009 2008 Change
Maintenance and
services revenue:
Maintenance and
support $ 7,089 $ 6,356 $ 733 12 % $ 14,460 $ 12,473 $ 1,987 16 %
Customer
education 946 1,201 (255 ) (21 )% 1,901 2,255 (354 ) (16 )%
Professional
services 336 254 82 32 % 571 617 (46 ) (7 )%
Total maintenance
and services $ 8,371 $ 7,811 $ 560 7 % $ 16,932 $ 15,345 $ 1,587 10 %
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The increase in maintenance and support revenue for the three and six months ended June 30, 2009, compared to the same periods in 2008, was due to an increase in the number of customers on maintenance contracts both from new license sales and increased maintenance contract capture rates. The decrease in customer education revenue for the three and six months ended June 30, 2009, compared to the same periods in 2008, was due to the general timing of training sessions and the effect of decreased license sales. Professional services revenue increased for the three months ended June 30, 2009, compared to the same period in 2008, due to the timing of services provided. Professional services revenue decreased for the six months ended June 30, 2009, compared to the same period in 2008, due to the amount and timing of installations and the effect of decreased license sales.
Hardware revenue
Hardware revenue increased 131% to $439,000 during the second quarter of 2009, compared to $190,000 during the second quarter of 2008, and increased 9% to $672,000 during the first six months of 2009, compared to $615,000 for the same period in 2008. We offer to sell hardware to our customers in conjunction with license sales, and fluctuations are driven by individual customer purchasing preferences. Sales of hardware systems are not core to our strategy and will fluctuate from period to period depending upon the needs and preferences of our customers.
Cost of revenue and gross profit
A comparison of gross profit and gross margin by revenue category is as follows (dollars in thousands):
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2009 2008 Change 2009 2008 Change
Gross profit:
License fees $ 4,007 $ 6,695 $ (2,688 ) (40 )% $ 9,031 $ 14,900 $ (5,869 ) (39 )%
Maintenance and
services 6,103 5,332 771 14 % 12,287 10,294 1,993 19 %
Hardware 15 79 (64 ) (81 )% 39 309 (270 ) (87 )%
Total gross
profit $ 10,125 $ 12,106 $ (1,981 ) (16 )% $ 21,357 $ 25,503 $ (4,146 ) (16 )%
Gross margin:
License fees 88 % 87 % 86 % 87 %
Maintenance and
services 73 % 68 % 73 % 67 %
Hardware 3 % 41 % 6 % 50 %
Total gross
margin 76 % 77 % 76 % 77 %
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License fee gross margins for the three and six months ended June 30, 3009 were consistent with the same periods in 2009. Factors affecting gross margin for the three and six months ended June 30, 2009, compared to the same periods in 2008, included decreased amortization expense and changes in sales mix, which positively impacted gross margin, and increased pricing pressure in a difficult market, which negatively impacted gross margin. For the three and six months ended June 30, 2009, amortization expense included in license fee cost of revenue decreased $171,000 and $276,000, respectively, compared to the same periods in 2008, due to an intangible asset becoming fully amortized.
Maintenance and services gross margins increased for the three and six months ended June 30, 2009, compared to the same periods in 2008, due to increased pricing on ViTAL Enterprise maintenance and services. The increase in gross margin for the six months ended June 30, 2009 was also impacted by a $552,000 benefit to maintenance and support revenue in the first quarter of 2009 arising from Toshiba billing adjustments relating to historic periods.
Hardware gross margins decreased for the three and six months ended June 30, 2009, compared to the same periods in 2008, due to variability in pricing during the periods.
Operating expenses
The following is a comparison of operating expenses as a percent of revenue, as well as the percent change in total expense:
Percent
Change for Percent
the Three Change for
Percent of Revenue for Months Percent of Revenue the Six
the Three Months Ended for the Six Months Months Ended
Ended June 30, June 30, Ended June 30, June 30,
2009 2008 2008 to 2009 2009 2008 2008 to 2009
Operating
expenses:
Sales and
marketing 45.2 % 51.7 % (26 )% 42.6 % 49.0 % (26 )%
Research and
development 23.8 27.9 (27 )% 22.9 26.2 (26 )%
General and
administrative 20.3 21.2 (19 )% 20.1 21.2 (19 )%
Asset impairment 23.5 - 100 % 11.2 - 100 %
Total operating
expenses 112.8 % 100.8 % (5 )% 96.8 % 96.4 % (14 )%
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Sales and marketing
Sales and marketing expenses are as follows (dollars in thousands):
For the Three Months Ended June 30,
2009 2008 Change
Salaries, benefits and bonuses $ 2,493 $ 3,379 $ (886 ) (26 )%
Overhead and other expenses 995 1,282 (287 ) (22 )%
Travel, meals and entertainment 697 1,015 (318 ) (31 )%
Trade shows and advertising 640 757 (117 ) (15 )%
Commissions 432 932 (500 ) (54 )%
. . .
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