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Vital Images Inc. (VTAL)

Q1 2010 Earnings Call

May 6, 2010 11:30 a.m. ET

Executives

Mike Carrell - President and CEO

Peter Goepfrich - CFO

Analysts

Ross Muken - Deutsche Bank

George Hill - Leerink

Richard Close - Jefferies

Steve Crowley - Craig-Hallum Capital

Sean Wieland - Piper Jffray

Ernest Andberg - Feltl and Company

David Larson - Leerink Swann

Presentation

Operator

Good day, everyone, and welcome to the Vital Images first quarter earnings conference call. Today's call is being recorded. At this time, I would like to turn the call over to Mike Carrel, President and CEO. Please go ahead, sir.

Mike Carrel

Thank you, [Catherine], and good morning, everyone, and welcome to our 2010 first quarter conference call. With me today is Peter Goepfrich, our Chief Financial Officer. Some of the comments made today will be forward-looking and are made under the Private Securities Litigation Reform Act of 1995. Actual results may differ and factors that may cause such results to differ are identified on page ten of the Form 10-K for the year ended December 31, 2009. Again, thank everyone for joining us today.

As you might expect, the biggest impact on our quarterly business results is the market and capital spending. While we are beginning to see signs of stability in the financial conditions of hospitals, winning key deals against our competition, signing new strategic partnerships with the likes of Cerner and Medtronic, continuing to improve our existing relationships with existing partners McKesson and Toshiba and establishing new customer and clinical relationships furthering our product portfolio, many institutions are not yet in a position to commit significant purchases and are focused on prioritizing stimulus funding provided by ARRA.

As has been the case the last several years, the second quarter is typically our lightest quarter for the year and we expect that to be the case this year as well. That said, our technology continues to get excellent reviews in the marketplace and we remain optimistic about Vital Images' long-term prospects and continue to plan for revenue growth and improved profitability for fiscal 2010.

Our first quarter revenue was $14.8 million, even with the year ago period and we are managing our business for profitability with adjusted EBITDA at a strong $1.3 million. Our balance sheet remains solid with over $143 million in cash, up from $142 million just three months ago. For more financial details on the quarter I'll turn the call over to Peter and then we'll talk about some of our strategic priorities.

Peter Goepfrich

Thank you, Mike. I will begin with a few comments regarding revenue and growth margin. First quarter license revenue decreased $473,000 or 8% compared to the first quarter last year. The change consisted of a decrease in direct and other distributor license revenue of $360,000 primarily due to the decrease in license revenue from sales outside of the United States and a decrease in Toshiba license revenue of $131,000 or 2%.

First quarter license revenue decreased $1.1 million or 16% compared to the fourth quarter of 2009. The change consisted of a decrease in direct and other distributor license revenue of $860,000 primarily due to a decrease in license revenue from Medtronic and a decrease in Toshiba license revenue of $202,000 or 4%.

First quarter maintenance and service revenue increased $243,000 from the first quarter last year primarily due to an increase in maintenance and support and professional service revenue of $625,000 offset by a decrease in education revenue of $382,000 as a result of decrease in US sales for the full year 2009 compared to the full year 2008.

Please note that maintenance and support revenue included Toshiba billing adjustments relating to historic periods of $438,000 in the first quarter of 2010 and $522,000 in the first quarter of 2009.

First quarter maintenance and service revenue increased $293,000 from the fourth quarter of 2009 primarily due to an increase of $438,000 for Toshiba billing adjustments previously discussed, offset by decreases in professional services and education revenue primarily relating to Medtronic.

First quarter gross margin was 74.9% compared to 76% in the first quarter last year and 75% in the fourth quarter of 2009. The fluctuation in gross margin was primarily due to an increase in third party software and hardware sales in the first quarter of 2010 as well as the revenue mix between distribution channels and revenue categories.

While typically low, the negative gross margins on hardware in the first quarter of 2010 was a result of a few strategic deals where the revenue allocated to hardware was lower than the cost of that hardware.

Moving on to operating expenses and adjusted EBITDA; sales and marketing, R&D and G&A expense for the first quarter were flat compared to the first quarter last year primarily due to decreases in headcount and incentive compensation which were offset by $692,000 equity-based compensation charge relating to the tender offer for certain employee stock options that closed in the first quarter of 2010 which represented a $0.05 per diluted share.

Sales and marketing expenses, R&D and G&A expense for the first quarter decreased $686,000 or 5% compared to the fourth quarter of 2009. The decrease in the expenses was primarily due to $1 million in expense in the fourth quarter of 2009 relating to RS&A which was offset by the $692,000 of equity-based compensation charge previously noted.

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