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| VTAL > SEC Filings for VTAL > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-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.
Revenue decreased for the three months ended September 30, 2009, compared to the same period in 2008, reflecting the markets' continued weakness. Operating expenses for the 2009 third quarter decreased as well, as we experienced lower compensation costs, compared to the same period in 2008, resulting primarily from our 11% workforce reduction in November 2008 and other cost-control measures.
† Revenue for the 2009 third quarter decreased 19% to $14.3 million, compared to $17.7 million for the third quarter of 2008.
† Gross margin was 76%, compared to 77% for the third quarter of 2008.
† Loss before income taxes was $(814,000), compared to $(437,000) for the third quarter of 2008.
† Net loss was $(750,000), or $(0.05) per diluted share, compared to $(243,000) or $(0.02) per diluted share, for the third quarter of 2008.
Revenue decreased for the nine months ended September 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 nine months ended September 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 and other cost-control measures.
† Revenue decreased 16% to $42.5 million, compared to $50.7 million for the first nine months of 2008.
† Gross margin was 76%, compared to 77% for the first nine months of 2008.
† Loss before income taxes was $(6.0) million, compared to $(3.9) million for the first nine months of 2008.
† Net loss was $(20.6) million, or $(1.44) per diluted share, compared to $(2.4) million, or $(0.15) per diluted share, for the first nine months of 2008.
† Non-cash charges totaling $18.1 million for the first nine 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 $140.3 million as of September 30, 2009, compared to $141.1 million as of June 30, 2009 and $147.0 million as of December 31, 2008. Working capital (defined as current assets less current liabilities) was $116.5 million as of September 30, 2009, an increase from $113.9 million as of June 30, 2009 and a decrease from $135.4 million as of December 31, 2008. The decrease in cash, cash equivalents and marketable securities during the three and nine months ended September 30, 2009 was primarily the result of repurchases of our common stock totaling $323,000 and $6.1 million, respectively, under our share repurchase programs, a decrease in interest earned on our marketable securities, and the timing of payment of accounts receivable, which may fluctuate in any quarter. The decrease in working capital during the nine months ended September 30, 2009 was due primarily to 2009 purchases of marketable securities totaling $15.1 million classified as noncurrent as of September 30, 2009.
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."
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. We did not have any significant changes in our critical accounting policies or estimates since December 31, 2008.
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 Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
Revenue:
License fees 39.3 % 51.6 % 38.1 % 51.6 %
Maintenance and services 57.9 46.1 59.4 46.4
Hardware 2.8 2.3 2.5 2.0
Total revenue 100.0 100.0 100.0 100.0
Cost of revenue:
License fees 5.2 6.7 5.4 6.6
Maintenance and services 16.4 14.5 16.5 15.0
Hardware 2.5 1.8 2.3 1.2
Total cost of revenue 24.1 23.0 24.2 22.8
Gross profit 75.9 77.0 75.8 77.2
Operating expenses:
Sales and marketing 36.4 35.6 38.0 41.8
Research and development 29.7 30.7 28.7 31.1
General and administrative 16.8 18.9 18.0 19.6
Asset impairment - - 7.4 -
Total operating expenses 82.9 85.2 92.1 92.5
Operating loss (7.0 ) (8.2 ) (16.3 ) (15.3 )
Interest income 1.4 5.7 2.2 7.6
Loss before income taxes (5.6 ) (2.5 ) (14.1 ) (7.7 )
Provision (benefit) for
income taxes (0.4 ) (1.1 ) 34.5 (2.9 )
Net loss (5.2 )% (1.4 )% (48.6 )% (4.8 )%
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Revenue
A comparison of revenue by category is as follows (dollars in thousands):
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2009 2008 Change 2009 2008 Change
Revenue:
License fees $ 5,624 $ 9,114 $ (3,490 ) (38 )% $ 16,183 $ 26,178 $ (9,995 ) (38 )%
Maintenance and
services 8,274 8,157 117 1 % 25,206 23,502 1,704 7 %
Hardware 402 408 (6 ) (1 )% 1,074 1,023 51 5 %
Total revenue $ 14,300 $ 17,679 $ (3,379 ) (19 )% $ 42,463 $ 50,703 $ (8,240 ) (16 )%
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License fee revenue (dollars in thousands)
The following table sets forth information on license fee revenue by source (dollars in thousands):
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2009 2008 Change 2009 2008 Change
License fee
revenue:
Direct and other
distributors $ 928 $ 2,296 $ (1,368 ) (60 )% $ 2,633 $ 8,143 $ (5,510 ) (68 )%
Toshiba 4,696 6,818 (2,122 ) (31 )% 13,550 18,035 (4,485 ) (25 )%
Total license fee
revenue $ 5,624 $ 9,114 $ (3,490 ) (38 )% $ 16,183 $ 26,178 $ (9,995 ) (38 )%
Percent of license
fee revenue:
Direct and other
distributors 17 % 25 % 16 % 31 %
Toshiba 83 % 75 % 84 % 69 %
Total license fee
revenue 100 % 100 % 100 % 100 %
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The decrease in license fee revenue during the three and nine months ended September 30, 2009, compared to the same periods in 2008, was driven primarily by continued pressure on hospital capital spending in the U.S.
Maintenance and services revenue (dollars in thousands)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2009 2008 Change 2009 2008 Change
Maintenance and
services revenue:
Maintenance and
support $ 7,132 $ 6,741 $ 391 6 % $ 21,592 $ 19,214 $ 2,378 12 %
Customer education 875 1,199 (324 ) (27 )% 2,776 3,454 (678 ) (20 )%
Professional services 267 217 50 23 % 838 834 4 0 %
Total maintenance and
services revenue $ 8,274 $ 8,157 $ 117 1 % $ 25,206 $ 23,502 $ 1,704 7 %
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The increase in maintenance and support revenue for the three and nine months ended September 30, 2009, compared to the same periods in 2008, was due to an increase in the number of customers on maintenance contracts from new license sales. The decrease in customer education revenue for the three and nine months ended September 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 and nine months ended September 30, 2009, compared to the same period in 2008, due to the timing of services provided.
The following table sets forth information on maintenance and services revenue by source (dollars in thousands):
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2009 2008 Change 2009 2008 Change
Maintenance and services
revenue:
Direct and other
distributors $ 5,051 $ 5,288 $ (237 ) (4 )% $ 15,338 $ 15,218 $ 120 1 %
Toshiba 3,223 2,869 354 12 % 9,868 8,284 1,584 19 %
Total maintenance and
services revenue $ 8,274 $ 8,157 $ 117 1 % $ 25,206 $ 23,502 $ 1,704 7 %
Percent of maintenance
and services revenue:
Direct and other
distributors 61 % 65 % 61 % 65 %
Toshiba 39 % 35 % 39 % 35 %
Total maintenance and
services revenue 100 % 100 % 100 % 100 %
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Hardware revenue
Hardware revenue decreased 2% to $402,000 during the third quarter of 2009, compared to $408,000 during the third quarter of 2008, and increased 5% to $1.1 million during the first nine months of 2009, compared to $1.0 million 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 Nine Months Ended
September 30, September 30,
2009 2008 Change 2009 2008 Change
Gross profit:
License fees $ 4,875 $ 7,933 $ (3,058 ) (39 )% $ 13,906 $ 22,833 $ (8,927 ) (39 )%
Maintenance and services 5,923 5,596 327 6 % 18,210 15,890 2,320 15 %
Hardware 38 90 (52 ) (58 )% 77 399 (322 ) (81 )%
Total gross profit $ 10,836 $ 13,619 $ (2,783 ) (20 )% $ 32,193 $ 39,122 $ (6,929 ) (18 )%
Gross margin:
License fees 87 % 87 % 86 % 87 %
Maintenance and services 72 % 69 % 72 % 68 %
Hardware 9 % 22 % 7 % 39 %
Total gross margin 76 % 77 % 76 % 77 %
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License fee gross margins for the three and nine months ended September 30, 2009 were consistent with the same periods in 2009. Factors affecting gross margin for the three and nine months ended September 30, 2009, compared to the same periods in 2008, included decreased amortization expense, which positively impacted gross margin, and increased pricing pressure in a difficult market, which negatively impacted gross margin. For the three and nine
months ended September 30, 2009, amortization expense included in license fee cost of revenue decreased $171,000 and $447,000, respectively, compared to the same periods in 2008, due to an intangible asset becoming fully amortized. Changes in sales mix also positively impacted gross margins for the three months ended September 30, 2009 and negatively impacted gross margin for the nine months ended September 30, 2009.
Maintenance and services gross margins increased for the three and nine months ended September 30, 2009, compared to the same periods in 2008, due to increased pricing on Vitrea Enterprise Suite maintenance and services. The increase in gross margin for the nine months ended September 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 nine months ended September 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 Percent
Change for Change for
the the
Percent of Revenue for Three Months Percent of Revenue for Nine Months
the Three Months Ended the Nine Months Ended
Ended September 30, September 30, Ended September 30, September 30,
2009 2008 2008 to 2009 2009 2008 2008 to 2009
Operating
expenses:
Sales and
marketing 36.4 % 35.6 % (17 )% 38.0 % 41.8 % (24 )%
Research and
development 29.7 30.7 (22 )% 28.7 31.1 (22 )%
General and
administrative 16.8 18.9 (28 )% 18.0 19.6 (23 )%
Asset impairment - - - % 7.4 - 100 %
Total operating
expenses 82.9 % 85.2 % (21 )% 92.1 % 92.5 % (17 )%
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Sales and marketing
Sales and marketing expenses were as follows (dollars in thousands):
For the Three Months Ended September 30,
2009 2008 Change
Salaries, benefits and bonuses $ 2,185 $ 2,600 $ (415 ) (16 )%
Overhead and other expenses 1,041 887 154 17 %
Travel, meals and entertainment 622 833 (211 ) (25 )%
Trade shows and advertising 259 399 (140 ) (35 )%
Commissions 379 880 (501 ) (57 )%
Depreciation 398 378 20 5 %
Equity-based compensation 316 321 (5 ) (2 )%
Total $ 5,200 $ 6,298 $ (1,098 ) (17 )%
For the Nine Months Ended September 30,
2009 2008 Change
Salaries, benefits and bonuses $ 6,542 $ 8,554 $ (2,012 ) (24 )%
Overhead and other expenses 2,680 2,940 (260 ) (9 )%
Travel, meals and entertainment 1,901 2,617 (716 ) (27 )%
Trade shows and advertising 1,484 1,963 (479 ) (24 )%
Commissions 1,307 3,005 (1,698 ) (57 )%
Depreciation 1,273 1,152 121 11 %
Equity-based compensation 940 976 (36 ) (4 )%
Total $ 16,127 $ 21,207 $ (5,080 ) (24 )%
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The decrease in salaries and benefits costs for the three and nine months ended September 30, 2009, compared to the three and nine months ended September 30, 2008, resulted from decreased headcount, primarily from our 11% reduction in workforce in November 2008. The decrease in commissions expense for the three and nine months ended September 30, 2009, compared to the same periods in 2008, was due to a decreased amount of direct sales. The decrease in other expense categories for the three and nine months ended September 30, 2009 was primarily due to decreased headcount and other broad-based cost control measures. We had 71 and 81 sales and marketing personnel as of September 30, 2009 and 2008, respectively.
We will continue to manage sales and marketing expenses based on market conditions and business opportunities.
Research and development
Research and development expenses were as follows (dollars in thousands):
For the Three Months Ended September 30,
2009 2008 Change
Salaries, benefits and bonuses $ 3,065 $ 3,340 $ (275 ) (8 )%
Overhead and other expenses 911 992 (81 ) (8 )%
Depreciation 221 262 (41 ) (16 )%
Equity-based compensation 233 332 (99 ) (30 )%
Consulting 78 496 (418 ) (84 )%
Development reimbursement (263 ) - (263 ) 100 %
Total $ 4,245 $ 5,422 $ (1,177 ) (22 )%
For the Nine Months Ended September 30,
2009 2008 Change
Salaries, benefits and bonuses $ 8,930 $ 10,105 $ (1,175 ) (12 )%
Overhead and other expenses 2,536 2,677 (141 ) (5 )%
Depreciation 686 780 (94 ) (12 )%
Equity-based compensation 698 971 (273 ) (28 )%
Consulting 118 1,205 (1,087 ) (90 )%
Development reimbursement (768 ) - (768 ) 100 %
Total $ 12,200 $ 15,738 $ (3,538 ) (22 )%
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The decrease in research and development expenses for the three and nine months ended September 30, 2009, compared to the same periods in 2008, was due to reduced headcount resulting from the November 2008 workforce reduction, lower utilization of consultants and other cost control measures. Additionally, during the 2009 first quarter, we entered into a development agreement with Toshiba, under which Toshiba provides funding in support of our research and development efforts, and the parties work collaboratively to develop and deliver innovative technology advancements for Toshiba's medical equipment and our advanced visualization software solutions. During the three and nine months ended September 30, 2009, we recognized a credit of $263,000 and $768,000, respectively, to our research and development expenses for reimbursement from Toshiba for development costs we incurred under the co-development agreement. We had 90 and 136 research and development personnel as of September 30, 2009 and 2008, respectively. The significant decrease in personnel as of September 30, 2009, compared to September 30, 2008, was the result of the 11% reduction in workforce in November 2008 and the termination of 20 employees in our Beijing office in August 2009 in conjunction with our decision to discontinue test and product development activities in Beijing.
We will continue to devote resources to develop applications and solutions to improve the cost, quality and accessibility of health care.
General and administrative
General and administrative expenses were as follows (dollars in thousands):
For the Three Months Ended September 30,
2009 2008 Change
Salaries, benefits and bonuses $ 1,071 $ 1,022 $ 49 5 %
Overhead and other expenses 587 927 (340 ) (37 )%
Accounting, auditing and legal fees 368 396 (28 ) (7 )%
Equity-based compensation 319 583 (264 ) (45 )%
Consulting 60 420 (360 ) (86 )%
Total $ 2,405 $ 3,348 $ (943 ) (28 )%
For the Nine Months Ended September 30,
2009 2008 Change
Salaries, benefits and bonuses $ 3,333 $ 3,512 $ (179 ) (5 )%
Overhead and other expenses 1,844 2,490 (646 ) (26 )%
Accounting, auditing and legal fees 1,173 1,167 6 1 %
Equity-based compensation 1,043 1,667 (624 ) (37 )%
Consulting 252 1,099 (847 ) (77 )%
Total $ 7,645 $ 9,935 $ (2,290 ) (23 )%
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The decrease in general and administrative expenses during the three and nine months ended September 30, 2009, compared to the same periods in 2008, was due . . .
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