Vital Images Inc. Q3 2009 Earnings Call Transcript

Vital Images Inc. (VTAL)

Q3 2009 Earnings Call

November 5, 2009 11:30 am ET

Executives

Mike Carrel – President and Chief Executive Officer

Peter Goepfrich – Chief Financial Officer

Analysts

Michael Cherny – Deutsche Bank Securities

Richard Close – Jefferies & Company

Sean Wieland – Piper Jaffray

George Hill – Leerink Swann

Ernest Andberg – Feltl & Company

Charles Rhyee – Oppenheimer & Co.

Presentation

Operator

Welcome to the Vital Images conference. (Operator Instructions) I would now like to introduce your host for today's conference call President and CEO of Vital Images, Mr. Michael Carrel.

Mike Carrel

With me today is Peter Goepfrich our Chief Financial Officer. I must preface all comments with the Safe Harbor statement. Some of the comments made today will be forward-looking and our made under the Private Securities Litigation Reform Act of 1995. Actual results may differ in factors that may cause such results to differ are identified on page ten of the Form 10-K for the year ended December 31, 2008.

In the third quarter we saw modest but encouraging indications that our market may be improving and we are cautiously planning for a slow recovery. Specifically revenue overall improved 7% sequentially over the second quarter and in the U.S. we saw a sequential increase in our direct revenue compared to the second quarter of 2009 while also solidifying many strong direct relationships.

Again these are modest improvements yet a promising sign amidst this tough market. Therefore we believe our strategies remain sound and we continue to be focused on the following. Number one, increasing our base of marquee customers in winning key deals against our competition. Two, aggressively controlling costs and managing our business profitably. Three, delivering a great solution for the enterprise. Four, solidifying relationships with key partners and finally evaluating acquisition candidates for a strong fit.

Our strategic focus on enterprise solutions and integration with the electronic medical records or EMR systems is the right direction for Vital and our customers. Although U.S. hospital spending is tight, physician customers want easy to use advanced visualization solutions and they want access to them from anywhere at anytime. Internationally, Toshiba, our longstanding distribution partner continues to provide strong results and we are launching strategic distribution relationships in regions with high potential, such as China and Australia.

On today's call we will cover our third quarter results and the progress against our 2009 strategic objectives. Overall I am confident about Vital Images future. We reported positive adjusted EBITDA of $1.2 million with $140 million in cash and investments and strong adjusted EBITDA and positive cash flow for the first nine months of the year, we have the financial strength to weather tough times.

We created our 2009 business plan focusing on adjusted EBITDA profitability and building for the future. Positioning the company to be ready when the economy turns and we are beginning to see encouraging signs of that. Our bottom line benefited from the aggressive cost management measures that we started in 2008 and for the first nine months of 2009 we generated over $3.2 million in adjusted EBITDA, on track with our forecast and allowing us to continue to invest in the key areas mentioned above.

Before I get into the strategic priorities, I'd like to turn the call over to Peter first.

Peter Goepfrich

I want to comment on a few items in yesterday's press release beginning with revenue and gross margin. Third quarter license revenue compared to the second quarter of 2009 increased $1.1 million or 23%. The change was due to an increase in direct and other distributor license revenue of $582,000 and an increase in Toshiba license revenue of $476,000. Third quarter license revenue compared to the third quarter last year decreased $3.5 million or 38%, due to continued pressure on hospital capital spending in the U.S. as well as a decrease in international license revenue year-over-year.

Third quarter maintenance and service revenue was $8.3 million a slight increase from the second quarter of 2009 and the third quarter last year. Second quarter gross margin was 75.8%, flat compared to the second quarter of 2009 and a decrease from 77% in the third quarter last year. A decrease in total gross margin for the year-over-year quarters was primarily due to an increase in maintenance and service revenue as a percentage of total revenue.

Moving on to operating expenses and adjusted EBITDA. Sales and marketing, R&D and G&A expense for the third quarter decreased $3.2 million or 21% compared to the same period last year. Sales and marketing, R&D, and G&A expenses year-to-date decreased $10.9 million or 23% compared to the same period last year.

Adjusted EBITDA for the third quarter was $1.2 million compared to $1.4 million in the third quarter last year and adjusted EBITDA year-to-date was $3.2 million compared to $568,000 in the same period last year. The decrease in operating expense and improvement in adjusted EBITDA year-to-date despite the decrease in revenue was due to a variety of cost controlled measures implemented during and since 2008.

We've done an excellent job controlling costs in this challenging market while still maintaining our strategic investments for future growth. Total employee count was 253 as of September 30, 2009 compared to 280 as of June 30, 2009 and 320 as of September 30, 2008. The decrease in headcount was a result of the discontinuing of our test and product development activities in China, which Mike will elaborate on shortly.

It is important to note that the fourth quarter is always our highest sales and market expense quarter by a significant amount because the fourth quarter is our busiest trade show quarter including RSNA, the major U.S. Radiology Conference every year. Fourth quarter sales and marketing expense is typically $1.2 million to $1.5 million greater than the third quarter.

Also note that during the third quarter we recognized a tax benefit of $64,000 which consisted of two items. The first was a one time $100,000 tax benefit related to the monetization of certain historic tax credits. That benefit was offset by $36,000 tax provision related to foreign ops. Going forward we anticipate a consolidated tax provision of approximately $20,000 per quarter relating entirely too foreign operations.

In summary, we've been controlling costs in this challenging market while still maintaining our investments. With over a $140 million in cash and investments and $3.2 million in positive adjusted EBITDA year-to-date Vital Images is well positioned for the remainder of 2009 and beyond.

Next Mike will provide an update on our corporate priorities.

Mike Carrel

As I discussed earlier while it does remain a tough market, we see modest but encouraging indications that our market may be improving and we are cautiously planning for a slow recovery. The investments we made in 2008 and 2009 allow us to be well positioned for the remainder of 2009 and beyond and we expect strong adjusted EBITDA in 2009 and remain committed to long-term top line and bottom line growth.

Now let's recap Vitals' progress against our strategic priorities. First, we must continue to transform Vital Images into an enterprise imaging solution provider. Our enterprise solution highlighted by the release of Vitrea Enterprise suite in August is receiving industry validation and our message is resonating in the marketplace.

Specifically in late October we were honored to receive the Minnie award for best new radiology software for 2009 for our Vitrea Enterprise suite. The Minnie awards are presented by Aunt Minnie an important online community for medical imaging professionals. This year the Minnie's considered 137 candidates. Receiving this award reflects the high regard radiology professionals have for our technology.

Additionally the marketplace is excited about our technology. As of the end of the third quarter we had already installed over 32 new solutions from the rollout that we did in early August. We look forward to showing off the Vitrea Enterprise suite at the upcoming RSNA, the major U.S. radiology conference in Chicago later this month. At RSNA many physicians will have their first look at the breadth depth of the capabilities within the Vitrea Enterprise suite. In addition, we plan to introduce major clinical upgrades at RSNA as well.

Our transition to an enterprise model started in 2008 and we began retooling our product, pricing, sales and service organization for larger deals that innovate our solutions with the health care systems PACS and EMR solutions. We have said before that enterprise transactions are larger and more complex.

Although many customer decisions have been delayed in this current environment wherever our enterprise solution has been implemented customers recognize and are excited about the value. You can be confident in our solutions capabilities and superiority over the competition and that we will continue to invest in building great technologies.

Second, building a platform enabled technology. The Vital Images management system or VINs capability within our Vitrea Enterprise suite is a strong example of our commitment to developing industry leading technology. We remain absolutely committed to building the best single multimodality, multiology enabled platform and are expanding our clinical applications as we continue to support improved clinical work flows.

In mid-August we welcomed Erkan Akyuz to Vital. Erkan is our new Executive Vice President of Research and Development and he has an exceptionally strong medical imaging IT experience with Global Technology Organizations. He is responsible for product development while Vikram Simha continues as our Chief Technology Officer focused on setting our direction for enterprise platform and expanding relationships with our key marquee customers.

Erkan has already initiated several steps to improve the productivity of our U.S. R&D team. He restructured our test team which will be come more integrated with our development activities. His focus on productivity improvements also led to the decision to discontinue our test and product development activities in China.

Third we continue to gain market share in a tough market. We've installed base of more than 3,800 customers in the U.S. and abroad. As I noted earlier many of these institutions have already adopted our enterprise model and I can assure you that when hospitals are ready to begin to buy again, they will already know that Vital and the advantages that our solutions offer.

Despite the sluggish economy, our team and products are winning in the field. An excellent example is our deployment of Vitrea Enterprise Suite at a large Midwestern health system where our deployment will support advanced visualization in the systems facilities across the entire region that it serves.

In addition to broadening our reach through enterprise customers, we have announced several developments with distribution partners, all leading health care companies that position Vital for long-term potential.

Just last week we announced the expansion of our integration capabilities with an agreement with Sectra, a leading health care IT provider in Sweden with more than 1,000 hospital customers worldwide.

Sectra is now offering Vitrea Enterprise Suite with centralized data management as an option that can be integrated into Sectra's PACS platform. With this addition, Sectra customers will have full range, Web-based solution with specialized clinical applications that are accessible across the entire enterprise.

We're also excited about the recent signing of a new multi-year agreement with McKesson, and we are seeing substantial activity this quarter with them, as they continue to execute in the U.S. PACS replacement market, especially with large systems.

Currently, Vital and McKesson have a significant number of joint customers. With this agreement in place, we can upgrade customers to our Vitrea Enterprise Suite; significantly improve customer satisfaction, while generating revenue for both companies, in new license sales and long-term maintenance and services agreements.

Additionally, our integration work with several EMRs fits with Vital's long-term strategy to target the electronical medical record market and we are making significant progress on several fronts. As discussed in the last call, outside the U.S. we are developing our distribution partnerships with Chindex in China and DDI in Australia. Both regions will grow in importance over time.

In China, we are training the Chindex sales team and expect to see modest sales contribution in 2008 and growing in 2011. In mid-June, we signed an agreement with Chindex International to sell Vital software in China as part of their product portfolio.

Chindex is a leading independent provider of Western health products and services to more than 3,000 hospitals and health care solutions for facilities in China and Hong Kong. As many of you know, China is investing heavily in health care reform, including EMR solutions and the integration to advanced visualization. With DDI, we are partnered with the largest electronical medical records company in Australia and we have won several deals this year and the relationship remains sound.

Finally, I was in Japan to meet our Toshiba colleagues in September and came away knowing this long-term relationship is stronger than ever. Toshiba has become a major contributor to both Enterprise and international sales.

In the third quarter, revenue through this partnership totaled $8 million, a sequential improvement over the second quarter, and much of this in the U.S. was in partnership with our direct sales team selling Enterprise solutions, a trend that we expect to continue.

You may also recall that at the beginning of 2009, we expanded our alliance with Toshiba by signing our first co-development and collaboration agreement. From our meetings in Japan, they are pleased with what we are delivering.

Fourth and finally, our focus on potential to expand and drive through mergers and acquisitions; in 2009, we are continuing to evaluate acquisition candidates which would deepen both our clinical capabilities and accelerate our growth.

In closing, we have many reasons to be confident about the future of Vital Images, including launching and seeing the customer adoption of our award-winning Vitrea Enterprise Suite, building our base of marquee Enterprise customers, expanding our relationships with health care IT providers including Sectra and McKesson, developing distribution partnerships in China and Australia and maintaining strong adjusted EBITDA profitability and $140 million in cash.

The third quarter represented a modest improvement over the second quarter and we are seeing encouraging indications that our markets may be improving and we are cautiously planning for a slow recovery.

Again, the investments that we have made in 2008 and 2009 allow us to be well-positioned for the remainder of 2009 and beyond and we expect strong adjusted EBITDA in 2009 and remain committed to long-term top and bottom line growth. Now we'd like to open the call up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Michael Cherny – Deutsche Bank.

Michael Cherny – Deutsche Bank Securities

So I just want to dig a little bit more into these comments you made regarding some modest but encouraging signs about the market turnaround. I guess can you dive a little deeper into kind of what specific points you can make regarding that market turnaround? And then also more importantly, kind of what it would take to move from kind of a modest but encouraging sign to a truly encouraging sign of recovery?

Mike Carrel

Well I'd say the specifics that we're pointing to are obviously our own results, which is we continue to see our – obviously it's modest, so we're not trying to say that the growth is coming in fast. But we have quarter-over-quarter sequential increase and we feel good about what we're looking at into our fourth quarter as well relative to that.

And so from our standpoint, that's what we're seeing. And looking at our pipeline, having conversations with our customers, we're beginning to have more and more conversations about actually budgeting for things in 2010 and 2011. That was not the case six months ago. Six months ago there was complete freeze and I was on this call saying that 70% of the hospitals had basically frozen their capital spending.

There's still a lot of tension there, so I'm not saying that money is freed up from that standpoint. But there are a lot more conversations going on. And it also comes from our conversations with many of our industry partners in terms of, again, just conversations relative to more dialogs that are going on and there are possibly some more dollars that might be freed up.

In terms of the second part of your question which is what it's going to take. I mean there's just a lot of uncertainty in the health care market today because of health care reform. And I think until that dust has settled over the next 12 months or so, you're going to – there's going to be uncertainty in the marketplace in general. I'd say that's the biggest piece of uncertainty relative to our marketplace.

Michael Cherny – Deutsche Bank Securities

And then just on the cost side, you guys have obviously done an exemplary job of continuing to remove costs from the business to right size yourself ahead of this pending market recovery. I guess as we look to model out, especially into next year, how much more leverage do you have in this business?

I know you've talked about kind of tight cost controls, but is most of the heavy lifting done and now we're going to see kind of bits and pieces here and there? Or are there still kind of major chunks that you think need to be right sized?

Mike Carrel

I think we've done most of the major lifting in terms of any kind of cost management at this point. Right now it's really – the leverage is going to come on growth on the top line more than anything else. I think we've got our cost structure to a point where we're investing in the key areas that we think are important.

And those things – and I'll repeat them again – are we're continuing to invest in research and development and technology to make sure that we have the best technology that's out there, obviously proven by the award that we just won.

Two is maintaining exceptional service, which we got the SSPA certification last year. We continue to invest in our customer success and aligning towards that. We continue to look at revenue diversification and adding new channels, whether it's through the [MR] or other areas. And those are areas that we're going to continue to invest in.

So I think we're at the right place right now. And right now it's about leverage on the top line and – without having to add a lot of cost when we do that.

Operator

Our next question comes from Richard Close – Jeffries & Company.

Richard Close – Jefferies & Company

Yes. Mike, I was curious if we could focus in on – a little bit on the maintenance and services line item. It looks as though it declined sequentially a little bit, continues to go down. First quarter was higher than second quarter, second quarter higher than first – third. Can you talk a little bit about that and why that is? I would have thought that with your Enterprise model it would be maybe a more smoother progression upward.

Peter Goepfrich

I can cover that, Richard. First if you recall, fourth quarter and first quarter benefited from some one-time maintenance billings to Toshiba which is why there was a spike there. Sequentially, overall we're on track. We're clearly feeling pressure because of the direct revenue being down.

Attrition, we're feeling a little pressure, but it's holding reasonably steady. So overall, the pressure you see – any pressure you see in maintenance and services is more a result of net new deals transactions. And again early in the year and the end of last year, we had some one-time benefits to the – to maintenance and service line.

Richard Close – Jefferies & Company

As a follow up on that, Mike, when he was CFO, really hit upon a couple of years ago getting people to sign on for maintenance and re-up and things along those lines; is that not occurring? Is it just the economy, people are saying okay I can do without the maintenance? Talk a little bit about that.

Mike Carrel

I'd say that there's still a tremendous focus on maintenance coverage. And as Peter described, the first piece is that when we had the lower revenue side that we did in the beginning part of the year that's where you get the carve-outs for some of the maintenance revenue. And also education and services that kind of go along with it, which is why you don't see it growing, you more see it basically staying stable.

But we continue to focus on maintaining long-term relationships through these contracts. It's something that's very important to us as an organization. And we're seeing pressure and a lot of conversation. So it's obviously a lot more difficult because it's out of our operating budget, and we're seeing pressure from that standpoint.

But I wouldn't necessarily say that we're seeing a tremendous amount of pressure, the people are not wanting or not seeing the value. It's more of the delaying a decision or pushing it a little bit, but it's not something that's significant by any means.

Richard Close – Jefferies & Company

Is there any metric that you can share in terms of the percentage of people currently deals that include maintenance, as compared to maybe a year or two ago?

Mike Carrel

Well we actually have 100% of our customers that sign up on maintenance contracts when start. They average are called automatic renewals every year they renew, or they sign up to long-term maintenance contracts. And so that really hasn't changed. That's been instituted for a long period of time.

The ones that you have more conversations on in the ongoing years from a retention standpoint are specifically with those that are on the annual renewal ones, where you'll have conversations about what do they need coverage for, etc., and they may have questions on it, and those are the ones that we're having conversations.

But if you actually look, I mean our percent of customers that are on maintenance are still on that same 78% to 80% in the U.S. Historically though, internationally they're not. And that's the other dynamic that occurs, which is when you look at the international marketplace, especially when it's being sold through Toshiba, those customers are not on maintenance contracts.

And as you know, that's been where there's been a lot of growth. And so we're worked to try to get them onto maintenance, but it's not as much a part of the culture necessarily. And so there's a lower rate on the international side. We continue to work with some of those customers, but there's a little bit of a lower rate as well.

Richard Close – Jefferies & Company

Okay, and then when we think about the enterprise pricing model that where you switched I guess it was a little over a year ago or about a year ago. How does that flow into the revenue bucket, if we can walk through that again, exactly how those deals flow through? And then is that like 100% of your new deals now the newer pricing model, or maybe a percentage breakdown?

Peter Goepfrich

On the latter part of the question, yes the vast majority of the transactions are the enterprise type transactions. There's a few smaller transactions, but the vast majority of net new direct license revenue is the enterprise transaction.

As far as the revenue allocation goes, the mix changed a bit in the amount of services, as well as the value in the maintenance provided under our enterprise. So where it's historically under our old model, you would get – of a transaction you'd get about 75% that would turn into license revenue, and the 25% would be allocated out over some service period.

Now the mix is anywhere from 50% to 60% is upfront revenue and 40% to 50% is the side of the service side of it. So, you've changed a mix. You've moved essentially the revenue component on some of the enterprise transactions from license revenue to a servicer of new element.

Richard Close – Jefferies & Company

So given that wouldn't the maintenance and service line item be growing, or is it just those one-time things that happen in the fourth and first quarter that are making it optically odd?

Mike Carrel

You just hit on it. I mean your fourth and first quarter ones are optically impacting it, and the international piece that I talked about before, where you just don't have maintenance contracts with some of the growth you've got on the maintenance side. So the carve-out – so you've got a mix of both of those things going on. If you look at pure maintenance, we're basically stable.

And with international kind of driving a lot of license revenue. What you see is maybe that's actually reasonably good, given the U.S. We're actually driving more relative to what we're selling because of the enterprise model as you've indicated.

Richard Close – Jefferies & Company

Okay, so it's that international component, which has been a little bit stronger obviously than the domestic.

Mike Carrel

That's exactly.

Richard Close – Jefferies & Company

Mike, you talk about market share gaining market share. How do you come up with that? Just curious. Is there any way for us to follow that I guess a little bit better? I mean where do the stats come in from? Are they coming from like the amount of deals that you see and what you're walking away with. What exactly is driving that comment?

Mike Carrel

Well, it's a combination of things. So if you recall back in March of this year, we had an independent firm Dominic & Irvine do a study where they actually interviewed and talked to 2,800 hospitals in the U.S. that have 100 beds or more, which is really our primary market. Through that study, what they showed was that we had market-share declines in 2008 – through 2007, and then in 2008 and into early 2009 we had actually market share gains through those.

They talked to about 10,000 people at those 2,800 hospitals about the implementations that were going on and who they were using and who had the best technology. And again, it was something that was done completely independent. So that's the first piece is that we actually got it from an independent outside source, Dominic & Irvine, that gave us a lot of that information that we were gaining share relative to everybody else in the market, and that we were effectively gaining share fastest, GE was number two, and everybody else was on the decline.

So that was the first piece. The second piece is not as quantitative, just because other than the deals that we're seeing, where we're just not losing the competition in head-to-head battles. We are continuing to win the deals where we're head-to-head against GE, Phillips or [Terricom], which is the other major player that's out there. And we continue to see the people like our solution and our winning, and we're not seeing deals that we're necessarily losing.

So, I mean, just in terms of our win rate is north of 70% on head-to-head competition like that. And so that's part of it. Obviously there may be deals that we're not seeing. So especially when you talk about the major modality players that bundle it into their transactions. Those are more difficult for us to quantify specifically, and I wish I had that information, but it's much more qualitative as opposed to quantitative when I look at it that way.

Richard Close – Jefferies & Company

The final question would be on McKesson resigning that. Obviously very good news for you guys. Is there any way to let us know whether that – is the contractor the resigning at similar economics as it was before, or did you have to take any type of cut?

Mike Carrel

Well it's a different model than before and the reason for that is because it's really focused on the Vitrea Enterprise Suite. So it's actually focused on this product line, making sure that they're getting access to everything, everywhere, as opposed to it being a thick client on the PACS system. And so it's actually a different product that we're effectively selling to them. They'll be shipping out servers with all the solutions, and so it's a different economic model from that standpoint.

But they're very happy with the product. We've got it up and running at several different places, and that's what took so long, to kind of get certain things done and wrapped up. But they're very happy with it, and we feel good about the relationship with them right now.

Richard Close – Jefferies & Company

And did you say how much revenue you got from McKesson in the quarter?

Mike Carrel

It was about $380,000 of revenue this quarter.

Peter Goepfrich

That's $380,000 of license revenue. We've got about $900,000 of total revenue, which includes service contracts.

Operator

Our next question comes from Sean Wieland – Piper.

Sean Wieland – Piper Jaffray

My question's around the relationship with Toshiba and how do you manage the channel conflict, if any, with their acquisition of Barco? Do you ever find yourself competing with Barco?

Mike Carrel

Yes, that's a good question, but we're really not competing with Barco in any way. They are really focused on the console technology and not the enterprise and the distribution end, and what used to be known or it really is the workstation side and the deep clinical applications. They're just not out in the marketplace. They've got a very small team that supporting existing customers, which is the right thing for them to do.

But we're actually in partnership and conversation with Toshiba all the time and we just don't have any channel conflict relative to them out in the field. They're not positioning it. Their sales forces isn't selling it and we're not seeing them out in the marketplace.

Sean Wieland – Piper Jaffray

The Toshiba revenue that you reported in the quarter, how much of that is service?

Peter Goepfrich

The service revenue amount is $3.2 million.

Sean Wieland – Piper Jaffray

Last question, at RSNA are you going to be in the booth with Toshiba?

Mike Carrel

Yes, absolutely. We will be there, and we'll have I believe it's six systems, but don't quote me on that. But we have six systems and people there, and we're going be demonstrating accessibility to all of the applications, including our FX software as well, which is the Toshiba software for the 320 scanner, so we've done a lot of really interesting work with them on that. Made more improvements to it from a clinical standpoint, and we will be in their suite. You can see the same product in their suite and in our suite as well.

Sean Wieland – Piper Jaffray

On the 320 scanner, what kind of catalyst do you think that will be for your sales?

Mike Carrel

I think the biggest thing for 320 is when the high-end market comes back and I think that's going to – so when the high-end market comes back, I think it'll be a great catalyst for us. But unfortunately, the CT market in the U.S. has been very, very difficult and just globally around the high-end scanners. I think it's going to come back.

But again, much like this slow recovery, it'll have a slow recovery back. If you saw the CT numbers from a market standpoint, they have been down. As that comes up and people wind up getting into the high-end scanners again, you'll wind up seeing some uptick relative to that.

Operator

Your next question comes from George Hill – Leerink Swann.

[Dave] for George Hill – Leerink Swann

This is [Dave] in for George. Looks like a good recovery this quarter, congratulations, guys. Just a quick question, how much McKesson revenue did you book last quarter?

Mike Carrel

We did about $380,000 in licensed revenue from them.

[Dave] for George Hill – Leerink Swann

Last quarter and this quarter?

Mike Carrel

Oh, you mean in terms of Q2?

[Dave] for George Hill – Leerink Swann

Yes.

Mike Carrel

Oh, Q2 we did not do any licensed revenue from them in Q2.

[Dave] for George Hill – Leerink Swann

Okay. So this quarter was 380 licensed, 900 total?

Mike Carrel

We have maintenance contracts that – we have a large installed base of customers with McKesson that we continue to service and support and provide upgrades to as they are today. And so that has always been a consistent piece of our revenue stream relative to that.

[Dave] for George Hill – Leerink Swann

Okay, so it's 900 in maintenance revenue from McKesson this quarter or 900 in total revenue this quarter?

Peter Goepfrich

It's 900 in maintenance. So total revenue with our little two hardware transactions to go with the Vitrea Enterprise was about $1.3 million, and that compares to about 900,000 last quarter, which would have been entirely maintenance.

[Dave] for George Hill – Leerink Swann

And then, I'm sorry, for the Toshiba revenue this quarter, what was the total dollar amount again?

Peter Goepfrich

$8 million.

[Dave] for George Hill – Leerink Swann

For that sequential increase, with like Philips and GE they both reported pretty significant sequential declines in health care revenues sequentially. So I mean, what do you attribute that increase to for the Toshiba? Did they actually sell more CTs this quarter relative to last quarter?

Mike Carrel

We haven't seen the market share data that has come out relative to their market share gains. But if you actually look at it, most of it from our side is on the international footprint. That's really a big one for them. And if you also look, typically we have a, the third quarter is a better quarter with us from Toshiba. It's their quarter-end, they're trying to book and ships and transactions, etc., so you see some of that coming into the third quarter as well. So just timing of how they do their quarters because they go by halves versus by quarters.

Operator

Your next question comes from Ernest Andberg – Feltl & Company.

Ernest Andberg – Feltl & Company

Peter, do you have a breakdown of U.S. and outside the U.S. sales?

Peter Goepfrich

As far as revenues? Yes, they're, it's in the press release.

Ernest Andberg – Feltl & Company

I missed that, thank you. I'll get the press release back out. Mike, I'm a little confused. I'd thought you had said in your comments that Toshiba was stronger here in the U.S. And then you just animated in the last answer that the gains were coming outside the U.S. in the quarter in Toshiba, which is it?

Mike Carrel

In my comments, to be clear, internationally is what we're doing very well with Toshiba from a market standpoint, and that's actually just, I think it's very consistent with the way the CT market is running. So that's number one.

In terms of in my comments around Toshiba in the U.S., what I was saying is that we're partnering close with them on our Enterprise transactions because as people are selling this, there's more competition out there. Companies like GE & Philips are selling their port order server technology and we help support Toshiba as they try to position against that in the U.S. market. So maybe there was confusion in the way that I stated that.

Ernest Andberg – Feltl & Company

Okay, I'm with you. The CMS payment physician payment guidelines have obviously come out and there's going to be some pressure on reimbursement, possibly mitigated by a phase-in. How do you think that affects or delays the new CT side of things, Mike, as opposed to where you're getting your business right now on the Enterprise side?

Mike Carrel

I think it clearly impacts just hospital spending in general around imaging. And so any time that they're seeing pressure and uncertainty, I'd say that's why you're not looking at some sort of fast recovery necessarily, you're looking at a slow recovery as people look at their wallets and look at ways to be more productive. And so it clearly impacts decision making. It's one of several things that they evaluate.

They look at things such as cost avoidance and then if they see pressure on revenue, then they see that as obviously and obviously reimbursement impacts that, that impacts the way that they're making some of their decisions. But you've also got a replacement cycle that's going to come up at some point in time. The question is how long are they going to keep some of the older scanners and are they going to move to the higher end scanners?

And I'd say quite frankly, nobody has a great answer to that. If you listen to Philips and GE's call, I don't know that they've got a great answer from that standpoint in terms of when they see the light on that particular side of it.

Ernest Andberg – Feltl & Company

So looking forward over the next four or five quarters in the next year, the license kind of revenue gains that you may get are probably going to come out of more the Enterprise side and Toshiba outside the U.S., am I reading you right?

Mike Carrel

I'd say that's a fair read. And other types of channels that we might look at.

Ernest Andberg – Feltl & Company

Okay, last question. In the past, in the acquisition side you've talked about two or three kinds of areas, applications, distribution, I'm not sure what the third was, but in your comments about still being active on the looking on the acquisition front, you suggested that you could increase the growth rate of the company. Is it still in the distribution applications kind of area? Or is it in other technology in the visualization packs, EMR kind of space?

Mike Carrel

It's more in the applications and distribution or geographic growth etc., so very consistent.

Operator

Your next question comes from Charles Rhyee – Oppenheimer & Company

Charles Rhyee – Oppenheimer & Company

Just really kind of following up on one of the earlier questions just now really Mike, when we think about the turn and you talk about at some point there's got to be, there should be a replacement cycle as people try to buy the higher end scanners again, which obviously would reinvigorate sales to the 320 scanners with Toshiba.

But really, as you move into the Enterprise side of things, how much of this recovery, at least from the way Vital Images stands, at some point does it matter whether you get a big turn on the CT scanner market, particularly as you shift more and more to the Enterprise side? Or will we always have to be dependent also on equipment side of the equation as well?

Mike Carrel

I'd say they're complementary. I mean clearly, our numbers are going to be impacted by the CT side because a good portion of our business today continues to come from being sold as part of that. And there are still budgets that we do attach to and actually get some of the dollars from. So it's not, we're not going to completely be divorced from that.

At the same time, diversifying our revenue into the Enterprise space, finding dollars and other parts of the health care is absolutely critical for our long-term growth. So I'd say that it's a balancing act to there, we're not again, not going to be completely divorced from the CT or from other modalities. But at the same time, we're going to look for and are looking for ways to expand from the Enterprise, too.

Charles Rhyee – Oppenheimer & Company

All right, so then as, if we were to try to make a stab at how the recover will look like let's say next year and even into the year after, do you think it's fair to think that your growth rate could outpace the CT scanner market recovery, in so much as you're also benefiting from Enterprise sales? Or is there anything like a tradeoff that as you get Enterprise deals, I wouldn't say capitalizing, but taking away resources from, focus on the equipment side of the equation?

Mike Carrel

It absolutely could, but I'm not here to give guidance for 2010. And I don't know that there's guidance out there right now in terms of what the CT cycle is going to look like in 2010. I think it's right now mixed and nobody has a great feel for it. Is it going to be flat year-over-year? Or what's going to happen with it from that standpoint.

Charles Rhyee – Oppenheimer & Company

To the extent that let's say it's even just flat, I mean is it possible to think that you could still see some growth just from the expanding on the Enterprise side? As capital budgets free up, they might not be looking to spend a million and change on a CT scanner. But they might want to expand users on their Enterprise system.

Mike Carrel

That's absolutely our intent. That is why we're going after and diversifying our revenue stream and going after the Enterprise and that is absolutely our intent.

Operator

And with no further questions in queue, I'd like to turn the call back over to Mr. Carrel for any additional or closing remarks.

Mike Carrel

Great, thank you everyone and thank you for your questions. In summary, Vital Images remains the market leader in advance visualization analysis solutions, the strongest, most nimble player in our industry. We've made important progress this year in developing the best software solutions, taking exceptional care of our customers and positioning ourselves for long-term growth and profitability. Thank you for joining us today and have a great week.

Operator

That does conclude today's conference. Thank you for your participation.

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