VanEck Vectors Emerging Markets Aggregate Bond ETF
Q4 2007 Earnings Call Transcript

Published:

  • Operator:
    Good day ladies and gentlemen and welcome to the Quarter Four 2007 Emageon Incorporated Earnings Conference Call. (Operator Instructions)I would now like to turn the presentation over to your host for today’s call Mr. Chuck Jett, Chairman and CEO.
  • Charles A. Jett:
    Welcome everyone to Emageon’s investor call. Today, we will discuss the financial results for the fourth quarter and for the full year 2007, the state of our business today, and our financial guidance for 2008. Joining me at company today is Chris Perkins, our Chief Operating Officer; and Randy Pittman, our Chief Financial Officer. Before we talk any further about our financial results, Randy has some comments to make about the call.
  • W. Randall Pittman:
    Some of the comments we will make today are forward-looking statements. These statements represent Emageon’s current views with respect to among other things future events and financial performance. Any forward-looking statements we make are based on our historical performance and on current plans, estimates and expectations. The inclusion of forward-looking information should not be regarded as a representation by the company that the future plans, estimates or expectations will be achieved. These forward-looking statements are subject to risks and uncertainties, and a discussion of these risks and uncertainties is included in the Form 10-K we filed with the SEC on March 16, 2007, and our latest Form 10-Q filed with the SEC on November 8, 2007. You should carefully read these documents and the risk factors discussed therein. If one or more of the risks or uncertainties referred to above materialized or if our underlying assumptions prove to be incorrect, actual results may vary materially from projections. Except as may be required by law, Emageon undertakes no obligation to update forward-looking statements, to reflect changes and assumptions, future operating results, financial condition, business strategies or the occurrence of unanticipated events.
  • Charles A. Jett:
    We reported our financial results for the quarter and year ended December 31, 2007 late yesterday afternoon. As we disclosed in the press release, our revenue in the fourth quarter of 2007 was $28.6 million, which was a decline of 14.7% compared to the fourth quarter of 2006. Our revenue for the full year 2007 was $104.2 million, a 15.6% decline compared to 2006. Our total revenue for the year fell in the range of our most recent guidance, which we provided in our Q3 press release, last November. We ended 2007 with positive cash earnings with a solid balance sheet including $18 million of cash and no debt. Randy, will make more specific comments about the financial results later in the call. For the next few minutes, I would like to make some comments about our business in 2007, the market we operate in today, and where we believe we are headed as a business in 2008 and beyond. Since late 2006, we have been in a mature PACS market for large hospitals and hospital networks. Industry analysts have published data suggesting that close to 90% of the hospitals with greater than 200 beds have implemented a PACS System. As a result of the 90% penetration rate of PACS in a large hospital market, our sales effort almost always involve a replacement of the legacy departmental PACS System. In this environment, sales cycles are longer and more difficult to forecast accurately. Historically, we’ve built our business around these large hospitals. Our bookings slowdown in 2007 and corresponding downturn in revenue was almost exclusively attributed to these market dynamics. We anticipate that these conditions in a large hospital markets are not going to change much in 2008. We believe that a major replacement cycle will likely begin in early 2009 with resulting revenue recognition impact in the last half of 2009. While 2007 was difficult, operationally, there are a number of bright spots. Our bookings in 2007 were largely from our own base of almost 600 hospital customers. Millennium Research, an independent research organization, recently published a study that showed Emageon with approximately 8.6% share of the U.S. PACS market. Also interesting is that all the companies with a larger market share than Emageon are very large multinational Fortune 100 companies. This gives you an idea of our competitive environment. In spite of our smaller size, we were able to claim the number one spot in the PACS Perception Report last April, published by the KLAS organization. In the cardiology area, we were very proud. And in the fourth quarter, we received the highest overall KLAS ranking of all cardiology PACS vendors, and we were ranked as the best cardiology vendor by 63% of all respondents to the KLAS survey. During Q3 of 2007, we introduced RadSuite Express, our standardized offering of content management, advanced visualization and workflow tools aimed at the less penetrated market of hospitals with fewer than 200 beds. Initially, we’ve conceived RadSuite Express as a small hospital product. As we have matured the architecture and the configuration of RadSuite Express, our internal testing has confirmed that we can sell and implement RadSuite Express in facilities with as many as 250,000 imaging procedures annually. While there is not a direct correlation between bed size and procedure volume, we believe RadSuite Express is appropriate for a larger portion of the market than we had originally projected. We continue to team with Dell to bring this price advantage product to market. In Q4, we conducted three seminars with Dell, and we currently have two planned with Dell in the first quarter of 2008. The Q4 seminars produced real prospects, and we are confident that they will lead to new bookings. At the 2007 Radiological Society of North America meeting, RSNA, we had very strong booth traffic. Many of the hospital teams that visited the booth were new to us. The two categories of new prospects were smaller hospitals showing interest in RadSuite Express, and importantly, a couple of dozen of large hospitals and hospital systems stopped by, indicating that they were on the very front end of a replacement decision process. We were very encouraged by the reappearance of new prospects in the large hospital category. During 2007, we added new customers and deepened relationships with existing customers. At December 31, 2007 we had contractual relationships with 604 hospitals, up from 588 at the beginning of 2006. Also, at year-end 504 of these hospitals had installed one or more of our products, up from 460 at the end of 2006. During 2007, we also converted 81 cardiology customers to five year support contracts. Even though we expect 2008 to again be a difficult year for large radiology system sales, we are optimistic about the value we believe we can create in the next market cycle. The current standard of care in inpatient settings, the emergency departments and surgery suites are all image-intensive. The emerging standards of care in these areas are even more so. Bedside and portable ultrasound, single plane C-arms, CTs, CT and MR-guided biopsy, and ever advanced modalities like 3.0 Tesla MRs, 256-slice CTs and 3D ultrasounds are all creating exploding demands on the IT infrastructure of hospital systems. We will continue to invest in significant research and development, so that we can increase and expand the capabilities of our core products and meet the demands of this exciting and rapidly changing market. Randy will now give you some more detailed information about our 2007 financial results.
  • W. Randall Pittman:
    Our revenue in the fourth quarter was $28.6 million and for the full year 2007 was $104.2 million. Fourth quarter revenue from system sales was $15.4 million or 53.7% of total revenue. And fourth quarter revenue from support services was $13.2 million or 46.3% of total revenue. Total revenue in the fourth quarter was down 14.7% from the fourth quarter of 2006, and was up 25.6% sequentially over the third quarter. Full year revenue from system sales was $51 million or 48.9% of revenue. And full year revenue from support services was $53.3 million or 51.1% of revenue. Compared with 2006, revenue from system sales declined by 32.4%, while revenue from support services increased by 10.6%. Total revenue from radiology systems and services represented 64% of revenue, while total revenue from cardiology systems and services represented 36% of total revenue. Our recurring revenue from support, maintenance and contracted monthly services was $36.9 million or 35.4% of our total revenue in 2007. During 2007, our total bookings were $92.7 million, with our quarterly bookings as follows
  • Charles A. Jett:
    With inputs from our Board of Directors, we have in recent days reorganized our management team. Our team has been through a very thorough evaluation of every area of our business. Our goal is to maximize the effectiveness in meeting the needs of our market, and doing it in the most efficient and profitable manner. Specifically, some of the changes we are making are, in December we announced that we have recruited Chris Perkins to join Emageon as Chief Operating Officer. Chris has a strong financial and operations background and is a seasoned veteran in the healthcare technology industry. During his eight years at Per-Se Technologies, he led a team that worked through some lean years, and ultimately created tremendous value for shareholders. Chris is leading the efforts of restructuring our business, and will share with you the business plan for 2008 in a few minutes. Later today, we will file an 8-K announcing that Randy Pittman will step down from his position as Chief Financial Officer. Randy’s last day will be March 31. Randy and I had begun talking about his desire to pursue other interests last summer. While fully supporting and respecting Randy’s desire to take his career in a different direction outside of our industry, I and along with our Board asked that he stay on with Emageon through the filing of the 2007 Form 10-K, which he agreed to do. We are very appreciative of Randy’s contributions to the company during his tenure as CFO. Today, we are also announcing that John Wilhoite will succeed Randy as CFO. John is currently our Controller and Chief Accounting Officer. A position he has held for almost two years. We are extremely fortunate to have someone with John’s credentials on our staff, and ready to step into this role. John began his career with 12 years of public accounting experience at TWC, and since then had 20 years in corporate finance, including spending three years as CFO of Intergraph, and three years as CFO of Integrated Defense Technologies, while they were public companies. John will assume responsibilities as CFO concurrent with Randy’s departure on March 31. We have promoted Keith Stahlhut to the role of Senior Vice President of Sales. For the past several years, Keith has been in sales management with Emageon. Keith has been responsible for the development of many of our largest hospital network customers. Prior to joining Emageon, Keith led the healthcare sales force at EMC and Data General. Keith will be leading our sales force with a focus on our health HeartSuite product, RadSuite Express, and the development of relationships in large hospital systems expected to make decisions early in the replacement cycle that we expect to begin in 2009. Brian Booth has been promoted to the position of Senior Vice President of Marketing. Brian joined Emageon in 2000 as a Sales Executive and has earned promotions to increasingly into senior roles. Brian understands our market, our products and our unique value proposition. There are other management and operating changes across our entire organization. All of the changes being implemented are geared towards three simple goals
  • Chris E. Perkins:
    I joined Emageon as the Chief Operating Officer in December. While the business faced some sizeable challenges during the past year, I was excited to join the company because I saw strong potential to create value, through the strengths of our products, our people, and our customers. From my perspective, Emageon is a relatively young company that has grown rapidly through its organic growth and acquisitions. However, I feel there is a great deal of opportunity to improve our operations focus, business processes and execution that should result in improved performance. The lack of focus in operational leadership was clearly reflected in the past year, when there was a slowdown in the radiology market, and the company experienced challenges in its execution. I know why I am here. Beginning in January, I have established a new operations management team, and we have worked successfully to create a new culture in the organization focused on the following key areas
  • Charles A. Jett:
    To help investors better understand our business, we have added new information to the Investor Relations section of our company website. There you will find historical bookings in revenues broken down by radiology and cardiology, as well as hardware, software, professional services, and support services. We will update this information as of June 30, and December 31 each year. Also as you probably just noted, on our quarterly calls, we will provide guidance on revenue and profitability for the next quarter. If you look at our history, you will note that distribution of our annual revenue has been skewed towards the latter half of the year. We expect this to again be the case in 2008. 2007 was a difficult year for our industry and our company. While 2008 also presents its share of challenges, our management team, and Board of Directors are positive on the outlook for the long-term future of Emageon. We have a great customer base, a re-energized management team, financial strength, and a clear vision to win share and create value during the next market cycle. Now, we will be glad to take some questions.
  • Operator:
    (Operator Instructions) Your first question comes from the line of Bret Jones - Leerink Swann.
  • Bret Jones:
    With the support services revenue, I am trying to figure out the guidance. If I look at this, it looks like the recurring, I think you said Randy the recurring revenues are $36.9 million was in 2007?
  • W. Randall Pittman:
    That’s correct.
  • Bret Jones:
    And if I assume, just a minimal amount of growth in that, like 5%, and then assume, just call it another $10 million of implementation, I am just trying to ballpark what your systems sales guidance would be for next year, it would be about $40 million. Does that sound about right or am I weighing too much on the implementation and professional services?
  • Chris E. Perkins:
    Again, I think our recurring revenue would probably be in the 45% range of our total revenues next year.
  • Bret Jones:
    So, 45% of it, let’s call it $88.
  • Chris E. Perkins:
    Right and I think that you can kind of get there from that perspective that the remainder of that will be driven by systems revenues and professional services.
  • Bret Jones:
    So, I would assume, then, systems sales are expected to climb probably more than 25% year-over-year, ballpark.
  • Chris E. Perkins:
    Yes, there will be a positive increase in systems revenue, but it’s going to be impacted by a few things. One, we expected there to be a lower hardware content in that. But we will see growth in our cardiology systems revenues and expect there to be flat to slightly positive growth in our radiology systems revenues, driven by really our RadSuite Express product line in 2008.
  • Bret Jones:
    I am sorry, just to be clear. You said, you expect systems sales to be up year-over-year, I just don’t see how that could possibly be with the recurring revenue coming in about $40 million in total?
  • W. Randall Pittman:
    Bret, our system sales revenue should decline in 2008. What we were talking about was the Heart, the certain components of it, some should go up and some should go down. But the general overall systems sales revenue should be down from 2007, while we think support services will be closer to where it’s been in 2007.
  • Bret Jones:
    Can you give us any sense for what HeartSuite contributed? And I assume there was almost no contribution from RadSuite Express in ‘07? Is that safe to say?
  • W. Randall Pittman:
    In terms of recognized revenue in ‘07, there was very little RadSuite Express. We sold a few systems, we implemented a few of them in Q4, but it was very minimal, and we would anticipate that part to grow in 2008. Your specific question about cardiology was what? I am sorry.
  • Bret Jones:
    I was just wondering what kind of contribution that made because I guess the overall thinking is it’s a pretty massive decline, it looks like from the RadSuite Premium product. And if I am just trying to get to roughly where I think systems sales would have to be, given the growth we are going to see for RadSuite Express, and the growth that’s expected in HeartSuite, I would say the decline is a little larger than I would have expected in that premium segment?
  • W. Randall Pittman:
    The question that you asked, though, was it specific to cardiology revenue in 2007?
  • Bret Jones:
    Cardiology systems sales.
  • W. Randall Pittman:
    Cardiology systems sales in 2007, was $18.4 million.
  • Bret Jones:
    On the replacement cycle, I was wondering what kind of average life you have assumed for the existing PACS systems. If you expect that to kick-off really at the end of ‘09 or at the back half of ‘09?
  • Charles A. Jett:
    Yes. We see the life of the systems being typically in the four to six year range. And kind of whether it’s four or six years depends a lot on the attributes of the hospital and how fast it’s growing, and so forth. Most of the systems, the big bulk of systems, for the large hospital marketplace, were bought in the mid ‘02 through very end of ‘05 timeframe, so, starting to see the early part of that cycle, starting now. Although we believe it will again be a lengthy selling process, probably in the 12-month kind of timeframe. As I noted in my prepared comments, we were very encouraged to have a couple of dozen of large hospitals and hospital systems initiate sales processes with us at RSNA this past December.
  • Bret Jones:
    Dovetailing on that, what gives you confidence that you are going to be able to steal share? I mean, if we look at market share, those wins in 2002 to 2004, ‘05, where GE, McKesson, Philips did very well and had a strong market share, what gives you confidence that you are going to be able to switch those customers over to Emageon? And what’s really driving that from an architectural standpoint, from this architecture of the system that’s going to drive them to just want to switch vendors?
  • Charles A. Jett:
    I will point out that in that cycle from ‘02 to mid ‘05, that’s when we built our customer base. And we won the largest and most complex hospital systems out there during that period of time and the competition was GE, and Siemens, and Philips, and those type of big multinational competitors. In fact, that was really a replacement cycle at that point because most of those had been a first generation PACS adopter in the mid to late-90s. And they had to go through an replacement process then. The reason that we won then, and we believe we will continue to win going forward is we are the only vendor that has an absolute vendor-neutral content management solution, that allows for a standards-based collection of all image data from all departments
  • Bret Jones:
    Previously, you’ve talked about the international opportunity and going into Canada and I was wondering if you are scaling back on those initiatives?
  • Charles A. Jett:
    There remain some opportunities in Canada. As you can appreciate they are large. We are competing in a couple of provinces this year. Those decisions will be more in the middle part of the year when they are made. At this point, we have been conservative and we have not included any revenues from those potential opportunities in our guidance.
  • Operator:
    And your next question comes from the line of Sean Wieland - Piper Jaffray.
  • Sean Wieland:
    Can you comment on the confidence that you have in the resurgence of growth in 2009, and specifically maybe other than RSNA, what are some of the data points that you have, to point to that replacement cycle? And secondly, are your customers going to be going through the same replacement cycle and looking at other vendors or do you feel confident that your customers will be sticking with you?
  • Charles A. Jett:
    Yes, Sean, one of the great things about our customer base is, due to the nature of the relationships being at the corporate level, CIO level, we have opportunity to converse with them about their plans, and how they are seeing the world, and what they believe is coming forward. I was recently at a strategic planning meeting with one of our hospital groups, their strategic planning meeting. And they had an interesting chart that showed the current standard of care across the service lines in a hospital, the inpatient setting, the OR, the ED, diagnostic, interventional imaging and ambulatory settings. The current standard of care is indeed already very image-intensive. But if you look at what’s the emerging standard of care, it is dramatically even more image-intensive. And if you look at what’s on the horizon kind of thinking about what’s coming in the next two to five years, it’s overwhelming the amount, the image-intensiveness of what’s going on. And for that reason, we believe that it is fundamental that these large hospital organizations have an ability to manage image data separate and apart from the diagnostic workflow in the department, and we believe that that’s why we will win share going forward. We believe that we are not in danger of losing our customers because we have already provided a very valuable service for them. And in fact, we are talking at the CIO level, with our advisory group of CIOs about expanding the capabilities of our content manager to be more broad, and include things beyond DICOM in future generations of our product. So, we see at is an opportunity to capture share and begin serving content that is outside of just DICOM, or image data, to a much wider group of users in the hospital settings.
  • Sean Wieland:
    Can you just also comment on your visibility into 2009 and that replacement cycle, and maybe some of the data points you have pointing to that replacement cycle?
  • Charles A. Jett:
    Again, Sean we are looking and basing most of our thoughts based on the historical reality of when systems were bought in ‘02 through ‘05 or ‘06, really, I guess. The general life of these systems is four to five years. Unless it’s a system like ours where there is a continuous upgrade as a part of the system and where there is a disassociation at the departmental level with the data. So, what we are looking at, and what we see is 60% to 70% of the market bought systems in ‘03 through ‘06. We believe that 80% of that, 60% to 70% are going to have to buy again in the 2009 to 2011 timeframe.
  • Sean Wieland:
    The ‘08 revenue guidance, can you quantify the amount of hardware that you expect to sell in 2008 versus 2007 or just directionally comment on that?
  • Chris E. Perkins:
    I can directionally comment that it will be lower. The revenue for 2008 will have a lower content of hardware.
  • Sean Wieland:
    And can you say by approximately how much?
  • Charles A. Jett:
    Sean, we are hesitant to do that, because it can vary based on, frankly, the desires of some of our customers, but I would tell you and tell everyone that from a mindset perspective, we are attempting to minimize hardware sales to the greatest extent possible.
  • Operator:
    Your next question comes from the line of Newton Juhng - BB&T Capital Markets.
  • Newton Juhng:
    Building off Sean’s question, on a typical sale, we were looking at hardware being 25%, even 30% of a sale. Going forward, can you give us an idea what a typical hardware component would be, what kind of percentage of that overall sale?
  • Charles A. Jett:
    Yes, Sean I’ll let Randy comment a little bit more on the specifics of this, but one of the things that I would like everyone who is building models to appreciate. There are no longer any typical sales. The typical sale framework that you are referring to is the typical sale on a large hospital marketplace where our RadSuite Premium products are. As we’ve talked many times over in our comments, we expect sales in that segment of our business to again be depressed in 2008. So, the average sale for HeartSuite Express varies in the components they are buying. The average sale of RadSuite Express varies widely including and that we are offering that on a per click model as well. So, I’ll let Randy pick up and try to take care of explaining some of those averages.
  • W. Randall Pittman:
    Let me give just a little bit of color, around what some of that hardware would have included in previous years, when we were selling the large enterprise wide premium product. Most of the times, the hospital was upgrading their x-ray systems and including in there one or two computer radiography devices, that we would provide from an outside vendor as part of an overall hardware components. Most hospitals now have those, and you won’t see quite as many of those in our hardware sales in the future. Second, in our standardized product that we are calling RadSuite Express, we built that on single server architecture, as opposed to a whole rack of servers that we might have had in previous larger installations. And just by the nature of that you are going to have lower hardware components. So, in terms of trying to put a percentage on a typical sale, we’ve really got several types of typical sales now. We have cardiology products and the cardiology products in the HeartSuite line. It would depend on the number of cath labs that are going to be associated with our VERICIS system. It would depend on whether or not they needed our hemodynamic solution. And so our cardiology sale might be over a million dollars and it might be $500,000. In the RadSuite Express area, what we are finding is, we assumed that we would be selling that to very small hospitals, and it might be a $5 or $600,000 of total sales. What we are finding is it does scale up, and some facilities that have larger amounts of volumes of transactions or volumes of studies will now look favorably towards the RadSuite Express product, and we might end up with the $900,000 or a million dollar sale in that thing. So, trying to put a specific average on our sales price is going to be very difficult in 2008. Generally speaking, one of the reasons our guidance is a bit lower in 2008, versus 2007 is the type of systems we’ll be selling will be somewhat smaller than what we did historically in ‘05 and ‘06. The amount of hardware that is included in that overall sales will be lower than it was in those systems we sold in ‘05 and ’06. The absolute percentage, I am not sure I can give you any guidance on that, right this minute.
  • Newton Juhng:
    I guess I look at as a gross margin then should be shooting up as a result of this lesser hardware component?
  • W. Randall Pittman:
    I do expect gross margin to see some improvement. It will again be at our lower level in the first quarter. But I do expect to see some improvement as we trend through the year. So, I think there is an opportunity to see a positive impact on our gross margin, impacted by that product mix that we’ve talked about, as well as, some of our cost reduction initiatives that we’ve undertaken.
  • Newton Juhng:
    On that cost reduction fund, one of the things that I was wondering about was R&D expense, which you talked in your prepared comments quite a bit about the importance of it, yet we are seeing the number come down pretty significantly off of the third quarter and, just relative to my model was about a half a million. So, I am just wondering how we should be looking at that expense as we move out into 2008, versus what was posted the $20.1 million or so that we saw posted in 2007.
  • W. Randall Pittman:
    Yes, and I think in the fourth quarter, our R&D spend was about $4.8 million. And I think that we are going to continue at that level of investment in R&D throughout 2008. So, I think it will be generally consistent with that Q4 run rate, as far as what we are investing. I do believe that we are going to get some positive benefit out of that investment, because of our strong product management focus, making sure that our product development initiatives are providing value. So, I am confident we will derive more value from these focused R&D investments going forward.
  • Operator:
    At this time there are no further questions. I will now turn the call back over to Mr. Chuck Jett for closing remarks.
  • Charles A. Jett:
    Thanks everyone for participating with us on our call today. I’d like to point out that we will be the HIMSS Trade Show next week. We will be happy to see anyone there. Just give us a call, and we will happy to set up a meeting, and then we will be participating at the Raymond James Investor Conference also in Orlando on March, the 5th. We look forward to seeing you there. Thanks everyone and have a good day.