Vital Images, Inc. Q2 2008 Earnings Call Transcript

Sep. 5.08 | About: Vital Images, (VTAL)

Vital Images, Inc. (NASDAQ:VTAL)

Q2 2008 Earnings Call Transcript

August 7, 2008 11:30 am ET

Executives

Mike Carrel – President and CEO

Peter Goepfrich – CFO

Analysts

Ross Muken – Deutsche Bank

Charles Rhyee – Oppenheimer

Ernest Andberg – Feltl & Co.

Bret Jones – Leerink Swann

Alan Norton – Kairos Partners

Operator

Good day, ladies and gentlemen, and welcome to the Vital Images second quarter earnings conference call. At this time, all participants are in a listen-only mode. After conclusion of our remarks, we will conduct a question-and-answer session. (Operator instructions) As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Mr. Mike Carrel, President and CEO. You may begin your conference.

Mike Carrel

Thank you, Nicky. Good morning, everyone, and welcome to our second quarter conference call. With me today is Peter Goepfrich, our Chief Financial Officer. Before we begin, I must preface all comments with the Safe Harbor statement. 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 10 of the Form 10-K for the year ended December 31, 2007.

Let me start with an overview of our performance in the marketplace as we see it today. This morning, we reported second quarter revenue that was ahead of the same period last year. As we stated in our last conference call, the marketplace in 2008 is seeing many challenges. However, even in the face of a tough market, we believe we are gaining share against all of our competition and we are able to generate $4.6 million in cash from operations in the first half of 2008 and $3.5 million in the second quarter alone.

Additionally, our pipeline grew significantly due to our new enterprise approach. As such, we are maintaining our 2008 annual guidance. This fall, Vital celebrates its 20th anniversary. Our past success and strong financial position enables Vital to be future-oriented and ride out the current market dynamics.

We're investing and preparing for the market recovery, both in R&D to advance our solutions for the enterprise and clinical depth and in service to help our customers make the most of the investments in our products. These moves distinguish Vital from any of our independent competitors. The deals we are pursuing are getting larger. And with our new model and approach, and the success of our products in the field, our pipeline has grown considerably, both in size and quality of our deals. Thus we are pleased with our Vital’s position for 2009 and beyond.

Investing and building the best products for the enterprise from an access and clinical perspective is very important to our company and our customers and our future. That brings me to the important announcement that we made yesterday. For the past several months, we have had an ongoing search for the lead technical position at Vital. As you saw in our press release yesterday, Vikram Simha has joined Vital as our Chief Technology Officer and Executive Vice President of Engineering.

Vikram is no stranger to Vital Images. He worked here from 1994 to 1998 with one of the key engineers on our original Vitrea product. He left to join Mitsubishi, which was then purchased by TeraRecon where he most recently served as Chief Technology Officer and Senior Vice President of Engineering. I can say unequivocally that we are excited that Vikram joined our already strong technical team. Susan Wood, who has been helping us tremendously in this area over the past several years, can now devote her full attention to marketing and to the company’s strategic partnerships with Toshiba and McKesson, which represent over 50% of our revenue and have a lot of exciting developments underway.

In my first six months as CEO, I visited more than 100 customer sites across the United States as well as in Europe. Our customers are our best advocates. Again and again they have reinforced the direction that we’re taking, provide enterprise-wide solution and invest in R&D and service. We are doing that.

As we discussed briefly in our last call, today we are operating in two distinct markets. The CT scan market and the IT PACS market, and we are creating a third. We are segmenting our strategies to succeed in each of these markets. The CT market is tied to capital equipment spending and customer decision makers are watching their capital expenditures, largely due to reimbursement pressures, uncertainties driven by the deficit reduction act in the upcoming election. Further, there has been a lot of discussion around X-ray doses and the introduction of next generation technologies, which has disrupted the sales cycle for CT scanners in the US market.

In this market, GE, Siemens, and Philips have all announced disappointing quarters in 2008 outlook in their imaging modality businesses. In fact, the CT scanner market segment is down 18.5% in the US in 2008, that’s after declining 32% in 2007. However, there is good news. The CEO from Philips did note that he saw the markets starting to come back in the back half of 2008 and into 2009. Additionally, Europe, as you’ve seen in our numbers, remains a growth market.

On the other hand, the large IT or PACS companies are growing strong, although we are seeing lengthening sales cycles in a tough economy. Our primary PACS partners, McKesson and Cerner, are leaders in this market, and both reported solid quarters. In this arena, they are selling to the enterprise and are not tied to the CT scanner sales. The hospitals improving productivity throughout the enterprise is not just a priority, but necessity, and they are investing in healthcare IT. And we can now offer the ViTAL Enterprise, which goes after not only these two segments, but a third, advanced visualization for the enterprise.

Why is this exciting? Because there is a definite need for advanced visualization throughout an entire hospital enterprise. And our products are unique built to meet our customers’ growing needs and can scale to that fashion. We are working with our customers to build budgets for these needs into the future.

Additionally, currently we are building enterprise reference and show sites at facilities – facilities that you all know throughout the world and have a significant pipeline of more to come. The transaction to the enterprise is exciting and game-changing, but it will take time to see the full result in our numbers. We know we have the best and most brilliant advanced visualization technology and team just enhanced by a top leader and we are here to win for the long-term. This drives our priorities and our planning.

Before I ask Peter to discuss the second quarter financials in a little bit more detail, I want to comment on our stock buyback. After announcing a $25 million stock buyback in May, as of yesterday, we had purchased approximately 1.5 million shares at an average price of approximately $14.40. Based on our confidence in Vital’s long-term prospects, we believe our stock is still very attractive at current levels. And the Board has increased our stock buyback by another $15 million for a total of $40 million.

That said, we are generating cash from operations and retaining ample cash for acquisitions, particularly transactions that could broaden our current suite of applications. We are fortunate to have a strong balance sheet, which is definitely a competitive advantage and we want to maintain a healthy cash per share ratio.

Now I’m going to turn over to Peter to talk about the financials in more detail.

Peter Goepfrich

Thank you, Mike. I’ll not reiterate all the information provided in the earnings release this morning, but will instead focus on a few key items. As we stated during our first quarter conference call, the second quarter would be down from the first quarter. Second quarter revenue, net loss, net loss per diluted share, and adjusted EBITDA, while short of the consensus, were in line with our expectations for the quarter. Although revenue increased slightly over the second quarter last year, our net loss, net loss per diluted share and adjusted EBITDA did not improve primarily due to investments in R&D and international expansion offset in part by other cost reduction efforts.

Second quarter revenue was $15.7 million compared to $15.5 million for the second quarter last year. Second quarter net loss was $1.6 million, or $0.09 per diluted share, compared to a net loss of $379,000, or $0.02 per diluted share in the second quarter of 2007. Second quarter adjusted EBITDA, a non-GAAP measure, was a loss of $936,000 compared to a loss of $54,000 in the second quarter of 2007.

In the second quarter, we launched ViTAL Enterprise. ViTAL Enterprise provides customers with full access to Vital Images' best-of-class clinical solutions and comprehensive services, including education, consulting and maintenance. It has the flexibility to scale to the size of the customer's enterprise by providing access to the complete ViTAL solution based on unlimited users or concurrent users.

We are excited that within the first six weeks of launching ViTAL Enterprise, we closed $1 million in orders, which represented $534,000 of revenue in the second quarter. We are growing our pipeline significantly due to ViTAL Enterprise, and we anticipate both an increase in the number of ViTAL Enterprise orders and the average order size, as ViTAL Enterprise continues to gain traction in the market.

Additionally, as I noted last quarter, as we transition to ViTAL Enterprise, the number of Vitreas, ViTALConnect, and options sold as less meaningful, and we will begin to migrate away from such disclosure. That said, during the second quarter, outside of ViTAL Enterprise orders, we sold 172 Vitreas, 17 ViTALConnect at an average of approximately 5.5 options per Vitrea.

Next I want to review second quarter operating expenses. After the second quarter of 2007, we initiated certain cost control measures as a result of the downturn in the market. While we are investing in initiatives that support our long-term strategies, we are also focused in productivity and cost control. Specifically, we froze headcount in only hired key positions in research and development and customer service to support our top priorities for 2008 and long-term.

Total headcount was 328 as of June 30, 2007; 323 as of March 31, 2008; 322 as of June 30, 2008; and 319 as of July 31, 2008. Within our sales force, we have consolidated territories due to the downturn in the market and are confident that we have a strong sales coverage throughout the US.

During the second quarter, total sales headcount, which includes sales management and sales operations, decreased from 74 to 68, and direct sales reps decreased from 42 to 36. We are also carefully monitoring travel and other discretionary expenses.

Now let’s turn to the balance sheet, which continues to be strong. As of June 30, 2008, we had cash, cash equivalents, and marketable securities of $168.4 million, down $10.5 million from $178.9 million as of March 31, 2008. The share repurchase program represented a decrease in cash of $13.3 million during the second quarter. Excluding the share repurchase program, cash, cash equivalents, and marketable securities increased $2.8 million during the second quarter.

Specifically regarding the share repurchase program, through yesterday we had repurchased approximately 1.5 million shares at an average price of $14.40 million on an aggregate $22.4 million, which represented approximately 9% of the shares outstanding prior to the repurchase program being implemented, and approximately 12.5% of our cash, cash equivalents and marketable securities prior to the repurchase program being implemented.

As Mike noted, based on our confidence in Vital’s long-term prospects and today’s interest rate environment, we believe our stock is still very attractive at current levels, and the Board has increased our share repurchase program by another $15 million for a total of $40 million, which we expect to complete by the end of this year. We are fortunate to have a strong balance sheet and want to maintain a healthy cash per share as well as fund future strategic activities.

Next, Mike will discuss other noteworthy items from the quarter as well as provide an update on our 2008 priorities.

Mike Carrel

Thank you, Peter. With that background, I’ll now comment on the specific revenue channels. We will start with Toshiba. Toshiba had great quarter, specifically $77.9 million versus $6.2 million in the year-ago period. This partnership continues to be an important contributor in both the US and international markets. Several recent developments with Toshiba will benefit both of us in the future.

First, Toshiba America will start selling our web solutions to help us capture more enterprise transactions. Plans are underway to roll this out worldwide, which will provide long-term upside potential in the base for enterprise upgrades. Second, We have started the discussions for our next long-term strategic contract. Both companies remain committed to this relationship as evidenced by our co-development efforts in bringing the new clinical applications to market through the Vitrea fX and the AquilionONE. Additionally, we are working together in the Japanese market and continue to expect meaningful revenue from Japan beginning in 2009.

Next is maintenance and services revenue, which was up slightly over the year-ago period. About 82% of our US customers have maintenance and services agreements, which is up from 52% in 2005. You’ll recall, by taking exceptional care of our customers is one of our top priorities. Additionally, as a result of customer demand, earlier this week we announced that CME or Continuing Medical Education credit will be available for select courses offered by Vital. In line with CME standards, the courses are designed to meet the educational needs of physicians and we believe provide another significant differentiator in the market.

Internationally, we now have a total of more than 1,000 installations in Europe. In fact, Germany, France, UK, and Italy, each has more than 1,000 installations themselves. Toshiba continues to be a strong contributor to the European market. The pipeline continues to grow and is ten times larger than it was at this time last year. We now have sales coverage in all major European nations. I strongly believe that our investments in Europe are critical to our long-term growth and success there.

License fee revenue from McKesson, our primary US PACS partner, was $272,000 versus $754,000 in the year-ago period. While this was a like quarter for McKesson, it is somewhat planned as we looked at second quarter as an opportunity to work on our roadmap and our plan for the launch of our web-based solution to McKesson customers.

Like Toshiba, we recently began providing our web-based products in McKesson installed base through their sales force. There are over 270 McKesson-Vital joint customers today and we plan to offer them all web access to our clinical tools. This is a very exciting opportunity for both companies, and we are optimistic about seeing the results in coming quarters.

To build Vital Images business over the long-term, we are focused on our top three priorities. Let me update you on each. First is to reignite growth long-term by focused on larger enterprise-wide sales within the healthcare market and by focusing on helping our strategic partner Toshiba gain market share. As I said earlier, last quarter we announced ViTAL Enterprise specifically for the enterprise market. In conversations with customers, they helped drive us to this approach. This business model offers customers anywhere, any time enterprise-wide access to all our powerful advanced visualization solutions as well as the ability to expand the solution as their needs change.

Our aim is to make the customers’ experience extremely positive from the initial purchasing process to our easy-to-use clinical applications, education, and the ongoing resources for service excellence. The Enterprise model most definitely positions Vital well for the future. We believe this model will drive larger transactions, and our growing pipeline is proof of this.

The second corporate priority is to take exceptional care of our customers, what we refer to as service excellence. We have made significant progress in this area. KLAS, a company offering vendor performance information on health care providers recently released their 2008 mid-year rankings and we climbed to the number two spot above Philips, Siemens, and TeraRecon, closing in on GE.

The third priority is to continue to develop and launch the best advanced visualization analysis software solutions. We have a terrific engineering team that is solely focused on advanced visualization, and we have deepened it by adding Vikram to our team. Further, we have made important investments in R&D and we’ll continue to do so. Our products, as they exist today, are competing successfully and we are winning more deals than we are losing.

In May, we showcased our enterprise solution at Stanford University’s 6th Annual Workstation Face-Off. The demonstration highlighted Vital’s breadth and depth of clinical functionality through physicians’ interpretations of four highly complex and challenging CT studies. They were CT colonography, CT angiographic carotid showcase with the evaluation of brain profusion, a 10-phase combined coronary CT angiography of a thoracic aneurysm case and a thoracic PET-CT case to evaluate pulmonary nodules. We believe we showcased our capabilities exceptionally well.

Additionally, and as I’d like to do in this call, I have an outstanding example of an enterprise-wide customer site to share with you, Detroit Medical Center. The DMC is the leading academic integrated system in the metropolitan Detroit area and the largest healthcare provider in Southeastern Michigan. The system has more than 2,000 licensed beds and 3,000 affiliated positions. They needed a medical imaging solution they could work with over 350 modalities and handle more than 12,000 images an hour and 1 million images every year. The DMC thoroughly researched industry-leading solutions and selected ViTAL Enterprise Solution for its robust clinical functionality, flexible workflow, scalability, and depth of industry relationships.

DMC’s physicians have found our solutions intuitive and easy to learn, allowing them to focus on patient care. As Chad Grant, Corporate Vice President of Diagnostic Services, said, “We needed a solution that provided deep clinical value that’s flexible enough to fit our physicians’ and technologists’ needs and didn’t interrupt our commitment to exceptional patient care. The solution from Vital Images met our requirements and the overall experience we had with the company surpassed all expectations”.

As you can see, I’m excited not only about the future, but about how our products are being deployed today in the enterprise, which will absolutely improve patient care at facilities such as Detroit Medical Center.

Now let me transition to our guidance discussion. I cannot emphasize enough how confident I am in our new enterprise approach and how much I truly believe in the long-term market opportunities that are in front of us. While we cannot control the timing of the CT market rebound, we are committed to grow long-term building the best products and solutions and providing exceptional service.

Our guidance for 2008 is unchanged. I want to assure you that we are focused on matters we can take to regain our sales momentum and we are keeping close tabs on external factors affecting our markets. At the same time, we are tightly controlling expenses and continuing to analyze how we allocate the resources internally.

Now I’ll turn it over to Peter to go into some more detail.

Peter Goepfrich

As Mike noted, our guidance for 2008 is unchanged. For the full year we expect the following. Revenue of approximately $66 million to $72 million versus $70.2 million in 2007; adjusted EBITDA, a non-GAAP measure, breakeven to $5 million versus $4.8 million in 2007; GAAP net loss of $0.30 to $0.10 per diluted share. It is important to note that our guidance includes the estimated impact of the $40 million share repurchase program, which we expect to be completed by the end of this year. Further details regarding the underlying factors that impact our guidance are detailed in our earnings release this morning.

Now back to Mike.

Mike Carrel

In summary, 2008 is a transitional year for us and for the industry. I believe Vital is the best positioned [ph] player in the market and I believe that we are in the threshold of great long-term prospects. We remain committed to the three things I mentioned earlier; developing the best advanced visualization in analysis solutions, taking exceptional care of our customers, and long-term growth.

Now we’d like to turn it over to questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And our first question comes from Ross Muken, Deutsche Bank. Please go ahead.

Ross Muken – Deutsche Bank

Hi. Maybe if you could just sort of give a little bit more color in terms of what you are seeing in different segments of the hardware part in the market? I mean, is there anything you could point to specifically maybe trend-wise that sort of gives us a sense, maybe Toshiba-specific that we’re starting to see a bit of a turn? I know you sort of talked about where you grew relative to the market. So I think it’s kind of obvious you guys are still in share growth mode. But just in terms of the overall health, is there any other things you could sort of quote to give us a little bit more visibility there in terms of what you are seeing?

Mike Carrel

Well, I think the biggest piece from a visibility standpoint is the comments that were made by Philips’ CEO in the sense that they basically saw the back of the year and they started to see the CT market begin to grow and then they saw light there. There are a couple comments from GE that were mentioned kind of the same venue, but really looking more toward the early part of 2009. So those are some of the data points that are out there from comments made by some of the big players in the modality side. I mean, in terms of the overall health of the market, and I do believe that when you look long-term, the 320 will take hold. It’s got great clinical value and functionality to it. And we do believe that that’s going to basically begin to kind of help the market back in 2009 sometime.

Ross Muken – Deutsche Bank

And is that really sort of the just behind the increased share buyback, the fact that you do have sort of increased visibility into that potential turnaround next year, because clearly then you would be very leveraged to that in the case that we did see a rebound?

Mike Carrel

That’s exactly right. We believe that the strategies that we are deploying right now are going to have long-term strong impact to us and that our stock at these prices is very attractive. And we think that that’s a good use of our capital. And so when the rebound comes back, it will obviously show up in our share price and hopefully obviously in the bottom line as well.

Ross Muken – Deutsche Bank

And just on the cash, we did see departure of Phil Smith in the not-too-distant time. Should we still expect any sort of interest on the M&A front, or are you still pretty much internally focused getting that enterprise product where it needs to be and making sure you are prepared for this uptick if it does occur in ’09?

Mike Carrel

I mean, first and foremost, I mean, Phil Smith left to pursue some opportunities and did a fantastic job for this organization for over 5.5 years. It was a departure where he wanted to kind of go run an organization and kind of a startup mode in the medical device area. And he was somebody that obviously contributed a lot both to the strategy, not only the past strategy but where we are going in the future as well. And so my hats off to Phil and all the contributions that he made to this organization, and I keep in touch with him on a regular basis now as well. Looking forward, we are still committed to long-term to the M&A strategy, but in the short-term we are really focused on getting ourselves back on track in those three areas that we talked about, making sure this enterprise story gets out there. We will look at opportunistic acquisitions as they come in, but we are going to be very cautious about how we are spending our capital. And quite frankly, we think one of the best uses of it right now, as we talk about, is our share buyback. In addition to that, we do have some people internally that are focused on M&A and going to be looking at it, but again, we are really focused on making sure we get back on track and get the enterprise model out there.

Ross Muken – Deutsche Bank

Great. Thanks, Mike.

Operator

And our next question comes from Charles Rhyee with Oppenheimer. Please go ahead.

Charles Rhyee – Oppenheimer

Yes, I have a couple of questions. Thanks, guys. First, Mike, I think you touched on it a little in the beginning. There was some – I think there was that article in the New York Times about a month or so ago talking about concerns on build the radiation dosing for CTA. And can you give a sense on what you’re hearing from the manufacturers? And speaking with – if you could just respond a little bit to that concern, particularly given my understanding that especially 320 gives a fairly large amount of radiation dose?

Mike Carrel

I’ll make a couple of comments on it. First of all, that was obviously a very one-sided piece. There have been a lot of other pieces that have come out since then that have been very positive quite frankly. And I think that most of the clinical evidences show that in the long-term that that article was mistaken. But that is one person’s opinion quite frankly, and unfortunately it came out on the mass press on the front page of The New York Times. We still do believe in our technology and the impact that has on healthcare positively. If you look at the 320 specifically, it actually reduces dosage overall when you look at all the different exams that you can avoid by actually leveraging it. So I’m not going to comment much more specifically than that on that topic. Feel free to go into Toshiba’s website or listen to a lot of the things that they are talking about around it. They have been doing tours around the country specifically talking about in terms of the way that it impacts radiation dose. All of the modality vendors are very focused on ways to reduce the dosage. I mean, it is something that is out there. I believe that it will be something that we will continue to focus on and build good technology for the long-term.

Charles Rhyee – Oppenheimer

Okay, thanks. And speaking of the share repurchase here, I mean, you have a healthy cash balance. When you think about what’s out there in terms of M&A activity, I mean, is there any reason why your share repurchase couldn’t – authorization couldn’t have been bigger, maybe returning more of that cash to buying back stock, given the current valuation and the feeling that the shares are extremely undervalued at this point?

Mike Carrel

A couple of comments on that. Very specifically, we can’t buy back much faster than we’re buying it back right now because you can only buy a certain amount per day. So, in between the quarters, like what we did last time, we did $25 million. We increased it by $15 million to get the $40 million today. And if we continue to see that our stock is at low points that we feel are attractive, we’ll do it at the end of the next quarter possibly. And so, you can only buy a certain amount per quarter. I mean, we were active in the market the entire quarter, every single day buying stock up to the maximum we are capable of buying it. And so, quite frankly, it’s really more of just a mathematical piece from that standpoint. And so now we are up to $40 million of the money that’s out there. That said, obviously as we look out and we evaluate every quarter, we get a chance to look at it and see if there is other acquisition candidates to see what’s going on from that standpoint. So –

Charles Rhyee – Oppenheimer

Okay, great. And then Peter, I don’t know if you gave these numbers, I might have missed it here. Can you give us the license fee versus maintenance split for the Toshiba portion of revenues?

Peter Goepfrich

I didn’t, but I can. The Toshiba revenue – total revenue for Toshiba at $7.9 million, license revenue $5.1 million, maintenance and services $2.8 million.

Charles Rhyee – Oppenheimer

Okay. And then also for the direct business – I’m sorry, business outside of Toshiba or McKesson?

Peter Goepfrich

For the direct side, $2.4 million in license revenue, $4.2 million maintenance, and about $200,000 for hardware.

Charles Rhyee – Oppenheimer

$200,000 for hardware.

Peter Goepfrich

The total of just rounding up to $6.8 million.

Charles Rhyee – Oppenheimer

$6.8 million. Okay, great. Thanks a lot guys.

Peter Goepfrich

Yes.

Operator

And our next question comes from Ernest Andberg, Feltl & Company. Please go ahead.

Ernest Andberg – Feltl & Co.

Good morning, Mike.

Mike Carrel

Good morning, Ernie.

Ernest Andberg – Feltl & Co.

You said or Peter said in his comments that the sales force – sales headcount was bound from 74 to 68, and the direct sales was down from 42 to 36. Is this a planned headcount or are you losing some people there?

Mike Carrel

We consolidated our zones from six zones to five zones in the United States. And this was a combination of plans and – from non-performers, quite frankly. And then kind of looking at basically giving larger territories to some of our top performers and kind of look at it in terms of the efficiency of those that we’ve forgot [ph]. We’ve got a fantastic sales force out there today that we are very confident in. And we want to make sure that we’ve got the best and the brightest out there doing the work. And so – some of it was some loss attrition. It was a little bit of a combination of both.

Ernest Andberg – Feltl & Co.

Does that mean that we could see lower sales and marketing dollars in an absolute sense versus the $8.1 million in Q2, ex the increase in Q4 for RSNA?

Mike Carrel

The tough part about that is that it’s not just RSNA. You’ve got a very tradeshow period from September all the way through the end of the year. So there is – we do spend a lot on tradeshows. We’ve increased our investment in Europe on that particular side, as we talked about. And so from that standpoint, we are talking about – it’s not going to change materially. So – now, it will impact it for sure, but it won’t change materially.

Ernest Andberg – Feltl & Co.

Fair enough. Thank you.

Operator

Our next question comes from Bret Jones, Leerink Swann. Please go ahead.

Bret Jones – Leerink Swann

Thank you very much. Mike, I understand the issues within the OEM business, and you’ve given the steep decline of CT scanner sales. What do you attribute the decline in the direct revenue to? And how do you go about reinvigorating that growth?

Mike Carrel

I mean, as I mentioned before, and I think overall the market has been soft in general. But I actually think we’re gaining market share on that particular side. And the way we are reinvigorating growth is the role of our new enterprise model. We believe we are investing in the right areas. Our R&D and our services, and we’re getting fantastic feedback from our customers. We’re getting great feedback on our enterprise model, and we’re winning more deals than we’re losing. So we are gaining share in that particular part of our market as well. And so from our standpoint, we are doing the things that are necessary for the long-term. As I mentioned about our pipeline, our pipeline has grown tremendously from last quarter very specifically because of the way that we are approaching it from an enterprise standpoint. We trained our sales force. We put more people on our sales operations functions to support them out in the field and reinvigorate that. We’ve done some new things specifically around the Toshiba and McKesson relationships that we talked earlier about on the last conference call and a little bit today about giving them our web-based solution to be able to sell. And again, most of these things take sometime. And I anticipate that you will see some results in the back half of this year, but you’ll really begin to see the results in 2009.

Peter Goepfrich

And I’ll add one comment to it, which is on this past quarter, Enterprise – the ViTAL Enterprise was 20% of our direct revenue, which shows that it is gaining traction in the market. And that is why we’re confident that we’re transitioning some of these legacy pricing deals into the Enterprise model which are larger. I mean, we’ll take a little bit more time and educate the customer in defining the budgets. But we’re definitely seeing the upside of the pipeline.

Bret Jones – Leerink Swann

Okay, great. And I just wanted to make sure I understood. The sales headcount did decline in the quarter. Is that correct?

Peter Goepfrich

Correct.

Bret Jones – Leerink Swann

Okay. I just want to make sure about that. I’m curious about how you reconciled the statement of gaining market share. I assume that it implies that the market is declining in your opinion?

Mike Carrel

I’m sorry?

Bret Jones – Leerink Swann

When you are talking about gaining market share, I’m just curious how you derive the idea that you are gaining market share, given the fact that your sales have been flat essentially for the last – I mean, given the guidance, will be flat with ’06 for two years in a row. And I don’t know if you saw a press release from one of your competitors, in response to the hiring of the CTO, they talk about how they have been able to grow their Aquarius revenue for the last – double digits last year and it’s been up this year. So I’m just curious how do you go about the defining how you’re gaining market share.

Mike Carrel

There is no specific market share number that are out there that kind of do from an external standpoint. In the deals that we’re tracking and that we are involved in, we’re winning more deals against our competition than we’re losing, number one. And number two, I understand what our pipeline looks like specifically as we are looking forward. But we’re winning more deals than we’re losing against our competition. So I do know that. In terms of – yes, of course, I saw the press release that our competition put out there in response. And from my perspective, it’s tough to say that they are a private company. And they can make statements like that. I guess – we are public. You see all the financials out there in the marketplace. You know that we’re financially strong. We’re generating lot of cash flows. So from my standpoint, until that is the case on that side, it’s tough to actually understand and know the validity of the statements that are being made.

Bret Jones – Leerink Swann

All right. Fair enough. And then finally, I just want to understand that I understand the direction you are going to with product development and the hiring of the new CTO. You’ve targeted somebody who has been part of a company that has really built their company around the web-based solution. Is that part of the reason as to why you selected this individual? And does this – do you anticipate any changes in the direction of your product strategy? And I think you have a new release that’s scheduled to come out later this year. Is that still on target?

Mike Carrel

Combination of things. So, Vikram who I met recently, we started the process before I actually had the opportunity to meet with Vikram. And he is a fantastic addition to the team. He was part of Vital many, many years ago. He was actually trained under the tutelage of our Founder and Former CTO, Vincent Argiro. If you talk to Vikram, he’ll tell you that Vincent really kind of helped train him and build him about [ph] what advanced visualization was all about. So from that perspective, he has got a long history, not only at his former company, Tera, but also at Vital Images as well. In terms of targeting, I mean, if you meet him, you’ll understand the guy is fantastic. And quite frankly, he showed my vision. He came in and met with me and said, hey, I like your vision, I like where you are taking this company and where you are taking the industry and I want to be a part of that. And so, our vision doesn’t necessarily change. Quite frankly, I think it’s a testament to the vision that we have and to the commitment that customers we have and the financial resources that we have out in the marketplace, much like we mentioned in the press release today.

Bret Jones – Leerink Swann

So, no change in product development strategy at all?

Mike Carrel

No.

Bret Jones – Leerink Swann

Okay. And then finally, can you give us an update on the Canadian deal that you have, that you are working with McKesson?

Mike Carrel

I’m not sure I know what deal you’re talking about.

Bret Jones – Leerink Swann

The deal with the 90 hospitals in Canada with the McKesson is inputting the PACS and you’re inputting advanced visualization.

Mike Carrel

We’ve done a lot of deals with McKesson. We do have a deal up in Canada that we’ve won with them. And we’ve got a great relationship with McKesson in terms of rolling out that product.

Bret Jones – Leerink Swann

Okay. So the timeline remains the same. And have there been any displacements in that base?

Mike Carrel

Not that I’m aware of, no.

Bret Jones – Leerink Swann

Okay. Thank you very much.

Operator

(Operator instructions) And we’ll take our next question from Alan Norton with Kairos Partners. Please go ahead.

Alan Norton – Kairos Partners

Hi, Mike.

Mike Carrel

Hi, Al.

Alan Norton – Kairos Partners

With respect to Toshiba performance, which was so good, what can you tell us about the mix of their CT placements? Are they now shipping their new AquilionONE? I know that they had had ten installed for quite some time as part of their clinical trial process. But I saw somewhere, read somewhere that one source is indicating that shipments in quantity would start in late summer and that they had something like 50 on order. And I realize you can’t violate any confidences with Toshiba, but what can you tell us about that machine and how it might impact the market?

Mike Carrel

I can’t talk about any numbers from a Toshiba standpoint on that. I’ll let them speak to what their numbers are and what they are seeing in the market from that standpoint. What I can say is that they’ve got the best technology in the market today. There is no question about it. They are an incredibly strategic partner of ours that we are working even more closely with every single day. And that’s something that we are obviously very proud of to be associated with somebody of that caliber. And we’re going to continue to get closer and closer with them over time, and focus on them as one of our largest customers. We do see expansion in that particular relationship and helping them grow market share. And so we believe they have got the best scanner out there in the world, and we’re going to continue to work very closely with them on that front. But in terms of the shipments of the product in that, that’s really up for Toshiba to talk about.

Alan Norton – Kairos Partners

Okay. I realize you can’t talk about metrics. Can you tell us whether or not that machine added at all to your second quarter and whether or not you expect it to add meaningfully to your third quarter?

Mike Carrel

It definitely has had an impact to some degree on our numbers. And as I mentioned in the script, you’re really going to see meaningful impact of that in 2009. And that’s when we anticipate to be able to see meaningful impact on that.

Alan Norton – Kairos Partners

Okay. Thanks a lot.

Operator

And there are no further questions at this time. I would like to turn the conference back over to Mr. Carrel for any additional or closing remarks.

Mike Carrel

Great. Thank you very much. Thanks everyone for attending today. As we talked about the slowdown in the scanner market that’s created a difficult sales environment, but does not change the value of our technology in the healthcare enterprise. Employing the true enterprise-wide advanced visualization solution and enhancing our partnerships with Toshiba and McKesson are key to our long-term growth. Every facet of our organization is focused on this and we’re excited about the prospects in front of us. Again, thank you for joining us today. Good bye.

Operator

Ladies and gentlemen, that does conclude today’s conference. Thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!