CEO on H1 Results. 20 February Open Briefing interview with CEO Sam Hupert. In this Open Briefing, Sam discusses:

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1 20 February 2015 CEO n H1 Results Open Briefing interview with Pr Medicus Limited 450 Swan Street Richmnd VIC 3121 In this Open Briefing, Sam discusses: Cntinuing grwth in US revenue, earnings Transactin based revenue ramping up Mving tward cash accretin in shrter term Recrd f interview: penbriefing.cm Pr Medicus Limited (ASX: PME) tday reprted net prfit after tax f $1.61 millin fr the first half ended 31 December 2014, up frm $0.20 millin fr the previus crrespnding perid. The result fr the six mnths was ahead f yur $1.51 millin NPAT fr the full 2014 year, even thugh first half revenue f $8.59 millin was significantly less than FY2014 s revenue f $14.27 millin. What were the key reasns fr the increase in prfitability and is it indicative f expected future earnings? One f the main tw factrs cntributing t the imprved prfitability was that we re beginning t see revenue grwth and margin expansin in the US as we gain tractin and scale in that market. We re als seeing imprvement in ur Australian business s the tw tgether have resulted in a strng peratinal result. A third factr was frex. We ve had a negative impact frm frex in the last cuple f years, but with the increased strength f the US dllar in the first half, we ve started t see that reverse. We re cnfident the margin expansin will cntinue as ur installed base f peratinal, r transactin-based, cntracts grws. We bviusly can t predict frex mvements, but given ur grwing level f US revenue, a strnger US dllar is psitive fr us. penbriefing.cm Yur Nrth American business reprted EBIT f $0.49 millin, cmpared with a lss f $0.44 millin in the previus crrespnding perid. Revenue was $3.69 millin, up frm $1.63 millin. Nevertheless, revenue was flat cmpared with the secnd half f FY2014, and EBIT was 43 percent lwer than the secnd half. Hw d yu recncile this with yur current fcus n Nrth America as the grwth driver f the cmpany? The tw halves are nt directly cmparable. In the secnd half f 2014, we had significant revenue frm ur cntract with the VISN23 reginal healthcare netwrk run by the US Department f Veterans Affairs. That was a capital sale, where the client pays up-frnt fr the prduct license. In cntrast, in the first half f 2015, the majrity f ur revenue frm the US was frm peratinal cntracts where custmers pay per view. Pleasingly, the grwth in peratinal revenue was strng enugh t mre than ffset the absence f a cntributin frm a capital sale. Ging frward, we expect we ll have varying cntributins frm capital and peratinal sales. While the majrity f ur recent sales have been peratinal, it really depends n the client ASX Annuncement: 20 February 2015/Open Briefing /Pr Medicus Limited 1

2 and s is very hard t predict. VISN23 is a gvernment rganisatin, which tend t favur payment under a capital mdel. Others prefer a transactin-based peratinal mdel. Either mdel is gd fr us. penbriefing.cm Can yu cmment n the cntributins t the Nrth American result f the majr cntracts that yu have wn in the regin in recent perids? Hw d the actual transactin vlumes f yur peratinal cntracts cmpare with the guaranteed minimums set ut in the cntracts? The secnd half f 2014 marked the phase-in perid fr sme f ur recent majr cntracts, particularly ur biggest cntract, which we ve previusly flagged wuld take 12 t 14 mnths t fully implement. Once we ve cmpletely implemented ur technlgy the minimum vlume cmmitments cme int play s we ll have a grwing baseline f transactins frm these cntracts, sme f which will be appraching this pint in the secnd half f FY2015 and the beginning f FY2016. The cntract wins we ve annunced ver the past three mnths, namely Wellspan and Zwanger-Pesiri, will start phasing-in in the secnd half f FY2015 s we anticipate these will be fully implemented late in the first half f penbriefing.cm What is yur prgress n implementing yur biggest cntract the $20 millin cntract yu wn last year with a majr US health netwrk? Hw has the cntract impacted yur ability t secure and service new cntract pprtunities? As I mentined, the implementatin was scheduled t take 12 t 14 mnths, and the prject is prceeding t the expected time line. We ll start t see the full impact f the minimum transactin vlumes in the secnd half f this financial year. There is n dubt there has been a step change in the market s perceptin f ur prduct suite as a result f this cntract. The grup is ne f the biggest in the US healthcare market and ur experience in implementing ur technlgy acrss such a huge netwrk is an advantage in winning new cntracts. In terms f servicing this and ther cntracts, ur grwing revenue in the US allws us t cntinue building up ur US team which is a key fcus fr us. We re actively expanding the team s we can sustain ur grwth. penbriefing.cm Yur recently annunced cntract with Zwanger-Pesiri Radilgy, an ut-patient imaging centre grup based in Lng Island, New Yrk, is a five-year, $5 millin peratinal cntract. The grup will use Visage 7 enterprise viewer as the cre cmpnent f a decnstructed picture archiving and cmmunicatin system (PACS). What is the ptential fr Visage 7 in the US imaging centre market? T what extent has the decnstructed PACS mdel been adpted in the segment? We think the prduct is ideally suited t the imaging centre market. The scalability, speed and accessibility f ur technlgy are just as crucial in this market as in the larger enterprise market. Als, pricing pressure is mre intense in this segment than in the hspital segment, s the efficiencies Visage prvides make it a very cmpelling slutin, particularly fr the bigger imaging centre grups The US imaging centre market is starting t cnslidate, and we believe this will be a driver f demand fr ur prduct. We think the decnstructed PACS mdel cmprising best f ASX Annuncement: 20 February 2015/Open Briefing /Pr Medicus Limited 2

3 breed cmpnents is just as relevant in the imaging centre space as the larger enterprise space. penbriefing.cm Can yu prvide an update n yur current sales pipeline in the US? Winning a number f high prfile cntracts has certainly helped us in terms f new pprtunities, and ur pipeline cntinues t shw healthy grwth. We re actively pursuing a number f pprtunities but lead times can vary depending n the institutin sme f the cntracts we ve wn have been negtiated in a matter f mnths, thers have taken significantly lnger. We believe there is a lt f pent-up demand in the US radilgy market fr a technlgy refresh, and we have a cmpelling prpsitin. The big cntracts we ve wn have demnstrated t the market that the decnstructed mdel is being embraced by sme f the healthcare technlgy leaders. We think the mdel will cntinue t gain tractin. penbriefing.cm The Australian business bked EBIT f $1.32 millin, up frm $0.26 millin in the previus crrespnding perid. Revenue was $3.34 millin, up 16 percent. EBIT was well ahead f the recent secnd half s $0.92 millin, even thugh revenue was just 2 percent up frm the secnd half. T what extent did the Australian result reflect ryalty incme frm Nrth America, and t what extent actual prduct sales t lcal clients in Australia? The Australian result reflected a mix f bth ryalty incme frm ur US sales and lcal sales. Our Australian business is imprving, with ur new generatin radilgy infrmatin system (RIS), Visage RIS, gaining tractin and cntinuing sales f the full Visage package (Visage PACS and Visage RIS). We re seeing sales f the RIS t new clients as well as refresh sales t existing clients as part f a sftware update. A number f ur sales f the Visage PACS-RIS package have been t new radilgy practices. Sme f these clients prefer the capital mdel but mre and mre are pting fr peratinal. penbriefing.cm The Eurpean business bked EBIT f $0.75 millin fr the first half, up frm $0.30 millin. Revenue was $1.56 millin, up 10 percent. Bth EBIT and revenue were als ahead f the recent secnd half. What were the key cntributrs t the grwth in Eurpean revenue and earnings and is the grwth sustainable? In Eurpe we saw sme imprvement in ur OEM business. These sales tend t be a bit lumpy. We als had sme sales f Visage 7, mainly under the capital mdel. We d expect ur Eurpean results t bradly cntinue their current trend. While the US is the current fcus f ur grwth strategy, we intend t relk at pssible pprtunities in Eurpe in the next 12 t 18 mnths. penbriefing.cm Net cash flw frm peratins was $2.24 millin in the first half, dwn frm $2.72 millin in the previus crrespnding perid. This partly reflected slwer grwth in receipts frm custmers (at 12 percent), cmpared with a 24 percent increase in wrking capital t $2.66 millin. Given grwth in revenue f 45 percent, t what extent des the slwer grwth in receipts reflect relatively lnger payment terms under yur new peratinal cntracts in the US? What is the utlk fr perating cash flw as the large transactin-based cntracts ramp up? ASX Annuncement: 20 February 2015/Open Briefing /Pr Medicus Limited 3

4 Our first half cash flw reflected temprary timing issues. We bill ur peratinal clients at the end f the quarter, and the cash receipt f thse funds falls int a later perid. Given many f ur peratinal cntracts are new and in the prcess f ramping up, the impact n cash flw was amplified in the first half. We expect the effect t level ut as we g frward and build up a stable base f quarterly transactin revenue flws. This will result in mre slid and predictable cash flws ver the lnger term. penbriefing.cm First half capitalised develpment csts ttalled $2.64 millin, up slightly frm $2.59 millin. Hw is yur prduct develpment spending changing with grwing use f yur prducts in Nrth America? Hw are yu seeking t ensure the Visage prduct suite maintains its cmpetitive edge? As we ve flagged t the market, we expect R&D csts t remain largely arund current levels. It s very imprtant t us that we retain ur prduct edge and ensure that Visage, including the new RIS, remains ahead f cmpeting prducts. Fr the present, we re cmfrtable ur current spend will allw us t d that. penbriefing.cm As at 31 December 2014, Pr Medicus had cash in hand f $14.65 millin, dwn frm $15.26 millin six mnths earlier, reflecting negative free cash flw, including the payment f $1.00 millin in dividends. Given cash in hand remains equivalent t nearly ne year s revenue (based n FY2014), are yu still cnsidering ptential acquisitins? What are yur acquisitin criteria? We ve always kept a healthy cash buffer. We believe it s in the interest f the cmpany and ur sharehlders t have funds available fr three purpses: reinvestment in the business in the frm f R&D and increasing ur presence in the US; making returns t sharehlders; and retaining funds fr acquisitins that might arise. Having successfully integrated Visage, ur last transactin, we re certainly in a psitin where we might cnsider a transactin shuld the pprtunity cme up. Any pprtunity wuld have t bring a prduct set that was cmplementary t ur existing prducts and be at a price pint that makes ecnmic sense. penbriefing.cm Pr Medicus has declared an unfranked interim dividend f 1.0 cent per share. In light f the investment required t cntinue grwing the business, is the dividend sustainable at this level if free cash flw remains negative? It s up t ur bard t reassess ur dividend payment at the end f every six-mnth perid. The current secnd half shuld be cash flw psitive and we re cnfident we ll be able t cver the dividend ut f free cash flw in the future. As we mve back int cash accretin mde, we ll cntinue t ensure that part f that cash ges t ur sharehlders. As I said earlier, ur plicy is t als ensure that an apprpriate share f ur cash ges back int the business, with sme retained fr ptential acquisitins. Certainly having a greater prprtin f revenue cming frm the transactin mdel gives us much better ability t predict future revenue and cash flw fr the purpse f capital management. ASX Annuncement: 20 February 2015/Open Briefing /Pr Medicus Limited 4

5 penbriefing.cm Thank yu Sam. Fr mre infrmatin abut Pr Medicus, visit r call Sam Hupert n (+61 3) Fr previus Open Briefings by Pr Medicus, r t receive future Open Briefings by , visit penbriefing.cm DISCLAIMER: Ramsgate Advisrs Ltd and Orient Capital Pty Ltd have taken all reasnable care in publishing the infrmatin cntained in this Open Briefing ; furthermre, the entirety f this Open Briefing has been apprved fr release t the market by the participating cmpany. It is infrmatin given in a summary frm and des nt purprt t be cmplete. The infrmatin cntained is nt intended t be used as the basis fr making any investment decisin and yu are slely respnsible fr any use yu chse t make f the infrmatin. We strngly advise that yu seek independent prfessinal advice befre making any investment decisins. Ramsgate Advisrs Ltd and Orient Capital Pty Ltd are nt respnsible fr any cnsequences f the use yu make f the infrmatin, including any lss r damage yu r a third party might suffer as a result f that use. ASX Annuncement: 20 February 2015/Open Briefing /Pr Medicus Limited 5