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Vital Images Inc. (NASDAQ: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

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.

Adjusted EBITDA for the first quarter was $1.3 million compared to $1.5 million in the first quarter last year and $1 million in the fourth quarter last year. Total employee count was 241 as of March 31, 2010 compared to 246 as of December 31, 2009 and 274 as of March 31, 2009.

During the quarter we recorded a tax revision of $24,000. Going forward, we continue to anticipate a consolidated tax revision of approximately $20,000 per quarter relating to foreign operations.

In summary, we continue to do an excellent job controlling costs while still maintaining our strategic investments for future growth. With $143 million in cash and investments and $1.3 million in adjusted EBITDA in the first quarter, Vital Images continues to be well-positioned for 2010 and beyond.

Next, Mike will provide an update on our corporate priorities.

Mike Carrel

Thanks, Peter. We continue to focus on growing our enterprise customer base in 2010 and are extending our technology leadership beyond radiology and cardiology and focusing on placing our productivity enhancing tools into the hands of more physician surgeons, much closer to the point of care.

In other words, we are redefining how imagining is used throughout the entire healthcare enterprise. As we talked about on previous calls, this year we are concentrating on four key strategies.

They are, one, continuing to diversify our revenue through alternative channels as well as corporate development; two, growing our direct enterprise sales channel; three, expanding our product platform for enterprise growth with platform and clinical application; and, four, aligning with customer success through our install-base programs and our commitment to service excellence.

With that as a background, let's recap our progress in the first quarter against these four priorities; first, diversifying our revenue channels.

On April 30th, Vital Images and Cerner agreed to deepen and expand our relationship. Specifically, they will seamlessly integrate our Vitrea Enterprise Suite into the Cerner Millennium Platform. This is the first deployment of advanced visualization through the MR in the industry and positions us with one of the US market leaders as well as gives us access to growing global Cerner business.

With the adoption and integration of VES, thousands of physicians currently utilizing Millennium Solutions, including EMR, will have the ability to obtain universal access to our advanced clinical applications, which include cardiac, colon, lung, neural oncology and vascular applications.

The Cerner partnership also brings to Vital the ability to provide Vitrea Enterprise Suite integrated with the Cerner Millennium Platform to more than 8500 healthcare facilities around the world including 2300 hospitals and 3400 physician practices.

As Vital Images provides access to advanced clinical applications and leverages applications across the enterprise, it makes sense to partners with a global healthcare leader like Cerner. This relationship is a natural fit for both companies as we are both committed to delivering ongoing value for healthcare organizations and practitioners while building our strategy of revenue and market diversification.

Next, in late 2009, we announced a partnership with Medtronic through which they provide access to our endovascular stent planning application to specialists using the Medtronic stent to treat aortic aneurisms. This potentially fatal condition affects more than 1 million people in the United States alone.

Medtronic is a leading player in the endovascular stent market and has 150 sales representatives in the United States alone and double that world wide. Our advanced application provides real-time 3D vies of anatomy for planning and streamlining the precise measurement and selection of proper device sizes followed by postoperative reviews of the implanted stent.

Medtronic purchases our application directly, integrating it with their solution. In the first quarter, rollout in the United States progressed as planned and in conjunction with Medtronic we have begun introducing our application in other parts of the world through Medtronic's regional offices.

Let's now turn to Toshiba, our long-time partner. Toshiba is a leader in the CT scanner market, which is facing a prolonged difficult CapEx spending environment. First quarter revenue through Toshiba was $8.2 million, up sequentially from $7.7 million in the fourth quarter and even with the year earlier period, a direct reflection of the market conditions.

That said, our relationship with Toshiba is stronger than ever. Many of our Toshiba sales are now enterprise transactions which is a strong install base for future leverage. Another source of revenue diversification is McKesson.

First quarter of 2010 revenue through McKesson was $1.2 million, a 40% increase over the same quarter a year ago. In 2009 we enhanced and extended our distribution [inaudible] McKesson for three years.

McKesson recognizes Vital Images as its preferred partner of advanced visualization products and our new product release has been well received by their customers. I recently completed a week visit to several McKesson Vital Images customer sites, including Fletcher Allen in Burlington, Vermont, Main Line Health in Philadelphia, Continuum Health in New York and Atlanta Medical Center.

Even though we were in mid implementation of Vitrea Enterprise Suites they were all pleased with what they had seen so far and excited about the new product rollout. We also saw several McKesson reference sites fully installed and up and running on our enterprise platform and our active discussions with our entire combined install base.

As capital budgets free up and hospitals allocate resources to projects like ours we are well-positioned to expand our Vitrea Enterprise Suite deployments through McKesson.

Our second priority is growing our direct enterprise sales channel. Most of our direct sales are now enterprise transactions that build on the number of physician users while leading to a substandard repeat revenue from maintenance and service agreements.

Since the beginning of 2009 we have established more than 101 direct Vitrea Enterprise Suite customers including over 20 in Europe. In 2010 first quarter, examples of some new Vitrea Enterprise Suite customers include the University of Michigan, Unity Hospital here in Minneapolis, University of California Irvine, Texas Children's in DeBakey, VA in Houston, Desert Regional Medical Center in Palm Springs, NASSA University Medical Center in New York.

In Europe, some new customers include Broomfield Hospital in the UK, the Hospital of Noter Dame in Belgium and the hospital of [inaudible] in Slovenia.

Additionally, this year we established a strategic account team focused on large healthcare systems and we are starting to see some progress in these high level relationships. Our results from this initiative are unlikely in 2010.

We are one of the few vendors able to address the complex requirements of an integrated health system and enterprise-wide platforms because these systems must be scalable, easy to integrate with healthcare IT and [pack] systems, support multiple modalities and be vendor agnostics. Vital Images is uniquely positioned to deliver on this promise.

Our third priority is expanding our product platform for enterprise growth with platform and clinical applications. At the mid-April annual meeting of the Society of Pediatric Radiology, we announced a collaboration with Dr. Bruce Greenberg, a nationally renowned radiologist in Arkansas Children's hospital in Little Rock to develop the Vitrea Pediatric Cardiac application.

This application is designed specifically for the unique cardiac needs of pediatric patients. With these youngest patients, reduced radiation exposure is imperative to patient safety and is an industry priority.

Currently, advanced visualization software designed for results is utilized to analyze pediatric patients. Vital Images' software for cardiac pediatrics, an industry first, takes a low radiation dose scan, which is very grainy and creates a very sharp image. The ability to obtain 3D and 4D images specifically for pediatric patients will ultimately provide pediatric radiologists with more specialized tools to improve patient outcomes.

Arkansas Children's is one of the largest pediatric medical centers in the nation and uses Toshiba's Aquilion ONE CT scanner. So this agreement also builds on our technology development agreement with Toshiba. We're planning the launch for Vitrea Pediatric Cardiac application in mid 2010.

At the same show we also participated in the Read with Experts session at the Pediatric Radiology Conference. The other participants were Phillips and Siemens. No other competitors entered, as their applications were not optimal for the pediatric market.

Dr. [Raj Kristamudi] of Texas Children's, a new Vital Image's customer as a result of our pediatric applications, presented on behalf during the session. It was clear that our applications were superior to the other vendors' and we are beginning to take market leadership position in the low-dose imaging and pediatric market. These are critical long-term investments for the business.

As for our platform, we made significant progress on our 2010 product release and remain committed to building the best multi-modality, multi-speciality enabled platform. We plan to expand our leadership in clinical applications by tailoring functionality for radiologists, neurosurgeons, orthopedists, oncologists and other specialists.

Our forward priority is aligning with our customer success to install base programs and a commitment to service excellence. Service excellence is a top priority at Vital Images, an essential factor in establishing and expanding customer relationships.

In March, we received the JD Power & Associates' Certification for Service Excellence. This certification included successfully completing an audit and exceeding a benchmark for satisfaction on a survey of our customers. We are unique in this category.

Vital Images' customers evaluated our performance in these areas: satisfaction, concern with resolution, contact duration, hold over time, etcetera, and other criteria determined by JD Power & Associates.

Our transition to an enterprise model, which started in 2008, we began re-queuing our product pricing sales and service organization for larger deals that integrate our solutions into the large healthcare system's EMR [impass].

Although the economic environment is stabilizing and Vital Images' products are second to none, hospital CapEx spending is still limited. That said, we remain committed to and anticipated growth in 2010 over 2009 on both the top and the bottom line. Now we'd like to open up the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Ross Muken - Deutsche Bank.

Ross Muken - Deutsche Bank

So as we think about kind of the imaging market, you talked a bit initially about some of the potential for delays because people are focused on some of the stimulus-oriented implementations or decision making that is currently taking up quite a bit of their time.

Historically, the market, I thought on the license side at least, was more tied to sort of box placements. We're starting to see some fairly good improvement from some of the larger vendors.

Is that kind of - hopefully it's a bit of a leading indicator as you sort of look at the Q1 results across most of those guys. How are you thinking about that and does that sort of say an historical leading indicator kind of still hold?

Mike Carrel

So you've coupled a couple of things there, Ross. The first on the box sales, what you're seeing from most of those vendors, if you read into the details on Siemens and GE specifically, who have announced some of the results, you're seeing softness in the EU and the US market but you're seeing strength in the Asia market.

We would say the same thing. We've actually seen our international kind of rest of the world outside of the US and Europe was strong with our relationship with Toshiba and also some of the activity that we have there and we feel like that will continue and they've shown some strength there.

As you know, we do not have a presence today in the Japanese market and some of the strength there has come from that market as well. But if you actually look at the US numbers, most of those actually continue to be down on the box sale. I do anticipate that that is, as we've talked about before, that we've stabilized there but it's not necessarily growing in any kind of rapid pace. I do think that it's a little bit of a leading indicator in the Asian market.

In terms of looking at the EMR market and kind of the spend and the prioritization on that front we're starting to see people shift some of their priorities and resources and those are just longer sale cycles for us to actually get some of those dollars and for them to think through where does AV fit within the priority in terms of integrating into EMR with the other things that they're focused on.

Ross Muken - Deutsche Bank

Is the thought then that that could impact you for much of this year because if you sort of look at the timelines from when they need to start making decisions and adopting visa vie kind of the penalties and reimbursement benefits, is that something you're assuming in your kind of recovery scenario that occurs for most of this year or do you think at some point that starts to even out as kind of the box market picks up?

Mike Carrel

I think it will a little bit of both. I mean, when we look at the full year we still feel good about growing our business on both top and bottom line for the full fiscal year. I think that you're going to see the impacts of a little bit of on the box side and you'll see a little bit on the EMR side on the back half of the year. I think the back half of the year you'll start to see that the major accounts and the things that we've been focused on will begin to show some promise.

Operator

Your next question comes from the line of George Hill - Leerink.

George Hill - Leerink

A quick question, with respect to the direct sales versus the Toshiba-related sales, I was just wondering is there anything we should read into that with respect to anything causing particular weakness in the direct sales line?

Mike Carrel

No, I don't think that you should see that at all. In fact, our bookings we felt were good on our direct sales side. As we've talked about on some of the previous calls, with our enterprise transactions, what we're seeing is we're actually carving out more on the maintenance and services numbers for that so you're seeing a little bit less on the licensed revenue side because of the longer kind of deployment cycles associated with that.

Then, two, Toshiba and us have actually partnered. They're selling our enterprise solution as well and we're working very closely with them. So some of that gets bundled and put into some of the Toshiba numbers. Then our new major account teams and some of the other things we've got in place for the rest of the year we still feel good about our direct team longer term.

George Hill - Leerink

I guess a quick follow-up, on the combined sales side, on the hardware, software side, are you seeing anything different in the dynamic where Toshiba's competitors are trying to bundle visualization tools with their hardware equipment? I guess is that flowing through to impact your net pricing in any way?

George Hill - Leerink

The first question is, yes, we're absolutely seeing that quite a bit from some of the competitors that are out there where they have relationships. We've definitely seen more activity in that area over the last three to six months, specifically from GE and Phillips, I'd say were the two that we're seeing the most in terms of doing that.

In terms of it impacting our pricing necessarily, it's not directly impacting our pricing, no, because really what we're trying to do is figure out how are they pricing that into those transactions and finding out what value are they ascribing to it and it's not impacting our pricing per se. It's more deal-by-deal.

Operator

Your next question comes from the line of Richard Close - Jefferies.

Richard Close - Jefferies

With respect to McKesson I think you said $1.2 million in the quarter in terms of revenue, up 40% year-over-year. Can you break that down versus license and maintenance and service?

Peter Goepfrich

Richard, I might be a little confused but we didn't talk about McKesson revenue.

Mike Carrel

Yes, the breakdown on that is it's about $300,000 or so in license revenue and about $900,000 or so in maintenance and services.

Richard Close - Jefferies

Then did you break out Medtronic at all? I'm sorry if I missed that.

Peter Goepfrich

The Medtronic license revenue decreased from fourth quarter to first quarter approximately $750,000 and then the service decrease from fourth quarter, first quarter was approximately $350,000.

Richard Close - Jefferies

Then how should we think about Medtronic on a go-forward basis? Will it be a pretty lumpy revenue source or just help us in and around that partnership. Then how do you sort of look at Cerner in terms of how it flows through your P&L on a go-forward basis?

Mike Carrel

On the Medtronic side there was an initial, obviously, large burst in the fourth quarter last year and we - I don't know that I would say it would be lumpy. I'd say that was kind of an initial kickoff to kind of roll out into the US market. So we'll consistently get revenue from them quarter-over-quarter on both the license side as we expand globally to the rest of their sales force. That would be number one.

Throughout 2010 we also have a maintenance and services line with them that will continue to growth every single quarter. That should continue to grow that. They have licenses. We're adding maintenance to those licenses as well.

Then there's a third one and some of the services that Peter talked about is a little bit lumpy which is on some of the specialized services we might do to tweak an application specifically for them or customize it to some of their requirements for their sales force.

Then obviously we're working to expand our relationship with those guys beyond just what we've done in the endovascular stent planning area as well.

Richard Close - Jefferies

Then Cerner?

Mike Carrel

Then on the Cerner side, obviously, we just signed the agreement. We have not really done any transactions with Cerner for many years and we're really looking forward to partnering with them on the EMR side and getting into the Cerner Millennium Platform.

They're beginning to roll this out to their sales team and beginning to hit on that. We've got reference sites up and running today. That was a critical piece of actually making sure before it rolled out that we had some of those in place. We're moving forward from that standpoint.

We're the only AV vendor that has actually integrated into their Millennium Platform and so I'd say that we'd begin to see some revenue stream come this quarter and then back half of the year for sure and really into next year where we start to see momentum coming in.

Richard Close - Jefferies

I guess just a final question as a follow-up on the Medtronic, now that that's, I guess, two quarters since you signed that or a handful of quarters. Has that generated any significant interest from other entities seeking you guys out maybe with respect to integration and development relationships?

Mike Carrel

I'd say that - I mean, first and foremost is the relationship with Medtronic is going well. We've been really focused on making sure that we deploy and we've got a really satisfied customer from that standpoint and that we're training and getting their sales force up and running, understanding how to use our software. That's the first thing that we've been focused on for the last five or six months and we'll continue a lot of that through this year.

That continues to go well. That enables us to actually talk to other areas within Medtronic, first and foremost. Beyond that, I'd say that nothing specific. We do have a business development group that obviously looks across the industry and we're going to continue to do that on the revenue diversification line that we talked about as one of the priorities.

Operator

Your next question comes from the line of Steve Crowley - Craig-Hallum Capital.

]

Steve Crowley - Craig-Hallum Capital

Following up on a number of the questions that have been asked, in terms of Cerner and their learning curve with advanced visualization and bringing it to the marketplace, it sounds like you had a relationship that revolved around their pack separates but hadn't done much there.

Is this similar to the kind of learning curve that you're undergoing with Sectra and Chindex or is there higher velocity here?

Mike Carrel

With Cerner there's definitely higher velocity. It's obviously a much bigger channel and we've been working that and wanted to make sure that we had the reference sites and everything up and running by the time we actually rolled this out. So we've done some pre-work in advance from that standpoint.

Sectra has just been a longstanding relationship where we improved it from a basic relationship to an expansion. We're starting to see some traction in Europe on that right now. So the velocity on that I anticipate will continue in the back half of this year because that's really started.

Then the Chindex one is a completely different type of relationship because we're really training them to bring something to market that's very, very new to them and as we've talked on this call, really don't expect much revenue coming out of that until 2011.

That being said, one of the things I did not talk about in my script was we actually trained about 30 doctors through the Chindex channel about two months ago who are excited about our product, so we're really doing a lot of training over in that marketplace and anticipate that will lead to good results most likely in the 2011 timeframe.

Steve Crowley - Craig-Hallum Capital

Then in terms of McKesson, obviously it looks like there's more evidence of vibrancy from that partner. But in terms of the pipeline of opportunity that you're looking at with McKesson, can you give us a little bit of color as to whether or not there's any tell in what you're seeing in the pipeline?

Mike Carrel

I'm not sure I understand the question, Steve.

Steve Crowley - Craig-Hallum Capital

Are you pleased with the growing pipeline of license opportunities that you're seeing with McKesson? There's been a little bit of variability. This was a good quarter. Do you have it all a feel from the sales funnel as to whether or not the vibrancy is likely to continue?

Mike Carrel

Yes, first and foremost is then that we really focused on getting the reference sites back up and running on our Vitrea Enterprise Suite and that's gone very well, which has actually created excitement within the McKesson sales force.

As I mentioned, I did a whole tour to their customer base and we do look at that pipeline building and being a real good contributor, not only this year but into next year as well. I'd say that we're very pleased with how that one's going, especially in terms of the product side of things because the product really has to lead into where we go from next. The feedback that we've been getting is really just top notch.

People are very excited about it, the speed at which our application is working on the integrated fashion. They're very, very happy and pleased with the level of depth that we had got with [inaudible] applications and so that's gone very well.

Steve Crowley - Craig-Hallum Capital

Final question for me; in terms of your effort, in terms of integrating advance visualization with EMR, is the Cerner relationship - how do you envision that? Is that your big play for a while or is this kind of the bell going off for some of the other EMR guys to wake up and pay attention to how advanced visualization can play a role in downstream leveraging in the investment in EMR?

Mike Carrel

On the EMR side we're really focused on Cerner right now. If some of the other players get interested to the point that they want to leverage it, obviously we do integrate and work with many sites that use other systems. But we're really focused on making the Cerner customer base really happy and making sure that they're really satisfied with the products that they've got in the market today. There's a big enough opportunity for us to provide the right kind of focus.

As we've done in these calls - and I listed many of our customers - our partners that are customers as well, Cerner, Medtronic, McKesson, Toshiba - we really focus on making sure that they are extremely happy and satisfied with our products and how they're getting deployed and I think that we need to put that kind of attention to detail to those.

Operator

Your next question comes from the line of Sean Wieland - Piper Jaffray.

Sean Wieland - Piper Jaffray

First, remind us the reason for the seasonality in the second quarter.

Peter Goepfrich

The seasonality in the second quarter, a lot of it is driven by Toshiba. Their year-end is March, so they're in the ramp-up for their next fiscal year in our second quarter.

Sean Wieland - Piper Jaffray

Then another question on Cerner; how is this being [inaudible] customers? Did the Cerner sales reps have a quota for selling Vital and how does that work from the whole sales strategy perspective.

Mike Carrel

The Cerner sales rep is on Cerner paper, so it will actually be going through Cerner and their sales reps will be selling it. Our sales force will be spending time with their sales force so they can understand the deep clinical applications we're effectively bringing them, the product expertise, the clinical expertise to the table. But it's being sold through Cerner's channel.

Sean Wieland - Piper Jaffray

How many Cerner customers are you deployed in right now?

Mike Carrel

We don't have a specific number. We're actually doing a reconciliation of what they have. The numbers are - things that we would anticipate from our database but we haven't reconciled it with Cerner because they're very protective, obviously, of their customer database. But it's hundreds.

It's hundreds of customers that have our systems in their install base but a lot of those are work station customers that might have been sold and not necessarily VES customers. From a VES standpoint we've got three that have been deployed on a purely integrated fashion that we are using as our references today.

Sean Wieland - Piper Jaffray

So how many have been signed with Cerner since you've had the initial relationship with Cerner?

Mike Carrel

We haven't signed any with Cerner. We just announced the relationship on Monday of this week and we anticipate that we'll sign some both this quarter and in the back half of this year we'll start to get some but to date we don't have any sales that we've done through Cerner.

Operator

Your next question comes from the line of Ernest Andbert - Feltl and Company.

Ernest Andberg - Feltl and Company

Peter, you said that the Medtronic segment of your business declined, I think you said $750,000 quarter-to-quarter. That explains some of the difference but does that mean that the Medtronic purchases were nominal in Q1 and we should see some improvement over the balance of the year?

Peter Goepfrich

Just to make sure the number's right, it was $750,000 on licensed revenue and about a little over $300,000 on service revenue, so roughly $1 million was the decrease. That was clearly the first time we initiated the relationship. That was their huge rollout of our integrated tool for them with their sales force. So do we anticipate?

We do anticipate incremental sales going forward. To the extent of the first rollout, we're not at liberty to speak of that right now.

Ernest Andberg - Feltl and Company

For working model purposes, should we assume that the first quarter was a more nominal level of revenue to Medtronic and theoretically it should improve going forward?

Peter Goepfrich

I would suggest it's the nominal for now. We're not giving any guidance to trending.

Ernest Andberg - Feltl and Company

On the issue of pricing and installs on imaging equipment and GE and Phillips, when Toshiba was out of the market years ago you people were able to influence sales of the Vitrea platform because the radiologist advocated for you. Is that still the case today as you're talking about what's going on and bundling of the software in your competitors?

Mike Carrel

Absolutely we have influence, especially as they want to go enterprise-wide. But we've got to prove the difference in terms of being able to scale these applications, work with multiple modalities and that's a huge advantage that we have. So we do have that.

One of the advantages that they have is that they can bundle it with not just a scanner but with other types of transactions that they may be doing. They may be selling light fixtures, for goodness sakes, into some of these hospitals. So as a result, we have to fight for those dollars and try to get the radiology community to influence the overall hospital purchasing side.

We're dealing with that day in and day out. We absolutely have influence but we don't always win every time on some of that influence.

Operator

Your next question comes from the line of David Larsen - Leerink Swann.

David Larsen - Leerink Swann

A really quick question; was there a billing adjustment for Toshiba this quarter one Q '10?

Peter Goepfrich

Yes, it was $438,000 in maintenance and service revenue.

David Larsen - Leerink Swann

Favorable, obviously, right?

Peter Goepfrich

Favorable.

David Larsen - Leerink Swann

So would that pretty much explain why there was a pretty decent increase sequentially in Toshiba revenue from four Q '09 to this quarter?

Peter Goepfrich

Yes, from Q4 but Q1 of last year had a similar event occur, of about $522,000.

Operator

With that, we have no further questions in queue. I would like to turn the conference back over to Mike Carrell for any additional or closing remarks.

Mike Carrell

Thank you, everyone, again. Again, we invite you to attend and listen to our webcast for annual meeting which is next week, Tuesday, May 11th at 1:00 central time or 2:00 eastern time. It will be here at the Vital Images headquarters.

Dr. Chip Truwit, who is the chief of radiology at Hennepin Country Medical Center in Minneapolis and a long-time Vitrea user, will discuss the hospital experience with our new enterprise solution. The webcast will also be available at the investor section of our website.

Again, thank you for joining us today and look forward to talking to you next Tuesday.

Operator

That does conclude today's conference, ladies and gentlemen. Again, we appreciate everybody's participation today. Have a great day.

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Source: Vital Images Inc. Q1 2010 Earnings Call Transcript

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