SOURCE: Vital Images, Inc.

February 21, 2008 08:00 ET

Vital Images Announces Fourth Quarter and Full-Year Results and 2008 Guidance

MINNEAPOLIS, MN--(Marketwire - February 21, 2008) - Vital Images, Inc. (NASDAQ: VTAL)

--  Fourth quarter revenue of $16.7 million, compared to $20.0 million in
    the fourth quarter of 2006;
    
--  Fourth quarter net loss of $(1.6) million, or $(0.09) per diluted
    share, which included a pre-tax charge of $885,000, or $(0.03) per share
    net of tax, related to the resignation of the company's former president
    and chief executive officer, compared to net income of $2.3 million, or
    $0.15 per diluted share, in the fourth quarter of 2006;
    
--  Full-year 2007 net income of $1.4 million, or $0.08 per diluted share,
    on revenue of $70.2 million, compared with 2006 net income of $6.6 million,
    or $0.46 per diluted share, on revenue of $70.5 million;
    
--  For full-year 2008, the company expects revenue of $74.0 million to
    $78.0 million, adjusted EBITDA (non-GAAP) of $4.0 million to $6.0 million,
    and GAAP net (loss) income of $(0.05) to $0.08 per diluted share.
    

Vital Images, Inc. (NASDAQ: VTAL), a leading provider of enterprise-wide advanced visualization and analysis solutions, today reported revenue for the fourth quarter ended December 31, 2007 of $16.7 million, compared to $20.0 million in the fourth quarter of 2006. Net loss for the fourth quarter was $(1.6) million, or $(0.09) per diluted share, which included a pre-tax charge of $885,000, or $(0.03) per share net of tax, related to the resignation of Jay Miller, the company's former president and chief executive officer. This compares to net income of $2.3 million, or $0.15 per diluted share, in the fourth quarter of 2006.

"While our 2007 results did not meet our expectations, in part because of an industry-wide slowdown and reimbursement pressures, revenue was in line with the prior year and we were profitable for the year," said Michael H. Carrel, Vital Images president and chief executive officer. "One of the year's highlights was the August 2007 launch of Vitrea 4.0 and ViTALConnect 4.1, and we are pleased that Vitrea 4.0 received the Best New Radiology Software Award from AuntMinnie.com, the radiology community's online forum."

"Our three top priorities for 2008 are to re-ignite sales growth, continue to develop and deploy industry-leading software solutions, and take exceptional care of our customers. We have sold more than 4,700 licenses for our products, giving us one of the largest customer bases in our industry. With our outstanding balance sheet and partnerships with Toshiba and McKesson, we are well-positioned in the enterprise-wide advanced visualization marketplace."

Carrel continued, "We will maintain our investments in R&D, service, and international growth. However, we are assessing every part of the organization to determine ways we can be more productive. With less than ideal market dynamics, the benefits of these strategic investments may not be immediately apparent, but these investments support our long term strategy."

In the fourth quarter, Vital Images amended its worldwide distribution and licensing agreement with Toshiba Medical Systems Corporation, to provide advanced visualization and analysis solutions for Toshiba, including its recently launched AquilionONE™ 320-slice dynamic volume CT scanner. Each AquilionONE will ship with a Vitrea fX license, software ViTAL developed for this next-generation model. The renewed agreement includes, for the first time, distribution in Japan, the world's second-largest market for CT equipment.


Financial Summary

--  License fee revenue was $9.1 million during the fourth quarter of
    2007, compared to $12.3 million for the same quarter last year. License fee
    revenue for the full year 2007 totaled $39.7 million versus $46.3 million
    for 2006.
--  License fee revenue from software options (including third-party
    software) was $5.7 million in the fourth quarter of 2007, compared to $7.1
    million for the same quarter last year. License fee revenue from software
    options (including third-party software) totaled $25.0 million for the full
    year 2007, compared to $26.5 million in 2006. Top-selling options were CT
    Cardiac, General Vessel Probe and Automated Vessel Measurement -- all
    cardiovascular solutions.
--  Maintenance and services revenue was $7.3 million during the fourth
    quarter of 2007 compared to $7.4 million for the same quarter last year.
    Maintenance and services revenue rose to $29.5 million for the full year
    2007, a 30 percent increase over $22.6 million in 2006. The increase in the
    full year results was primarily driven by the higher number of customers on
    maintenance contracts.
--  Fourth quarter 2007 revenue from Toshiba was $8.0 million, or 48
    percent of total revenue, down 7 percent from $8.6 million, or 43 percent
    of total revenue, for the same quarter last year. Toshiba revenue for the
    full year 2007 increased to $32.7 million, or 47 percent of total revenue,
    up 13 percent over $28.9 million, or 41 percent of revenue, in 2006.
--  Fourth quarter 2007 revenue from the company's IT/PACS partnership
    with McKesson was $1.1 million, or 7 percent of total revenue, compared to
    $2.4 million, or 12 percent of total revenue, for the same quarter last
    year. Revenue through McKesson for the full year 2007 was $6.1 million, or
    9 percent of total revenue, compared to $7.3 million, or 10 percent of
    total revenue, for 2006.
--  Direct revenue (revenue generated outside of Toshiba and McKesson)
    during the fourth quarter of 2007 was $7.6 million, compared to $9.1
    million for the same quarter last year. Direct revenue for the full year
    2007 decreased to $31.4 million, compared to $34.3 million for 2006.
--  International revenue, both direct and through reseller agreements,
    was $4.2 million, or 25 percent of total revenue, during the fourth quarter
    of 2007, up 45 percent from $2.9 million, or 14 percent of total revenue,
    for the same quarter last year. International revenue for the full year
    2007 increased to $13.5 million, up 25 percent over $10.9 million in 2006.
--  Gross margin was 77 percent for the fourth quarter of 2007, compared
    to 80 percent for the same quarter last year. Gross margin was 78 percent
    for the full year 2007, compared to 80 percent for last year.
--  Interest income for the fourth quarter of 2007 increased to $2.2
    million, compared to $1.4 million for the same quarter last year. Interest
    income for the full year 2007 was $8.9 million, compared to $3.3 million in
    2006. The increase was primarily due to higher cash and investments, a
    result of the November 2006 secondary offering of 3.4 million shares of
    common stock which yielded net proceeds of $97.7 million, and cash
    generated by operations.
    

Operating Expense Summary

--  Fourth quarter 2007 operating expenses totaled $17.4 million, compared
    to $14.3 million for the same quarter in 2006. Operating expenses for the
    full year 2007 totaled $61.8 million, compared to $49.4 million for 2006.
--  Sales and marketing expenses totaled $9.1 million during the fourth
    quarter of 2007, compared to $7.7 million for the same quarter last year.
    For the full year 2007, sales and marketing expenses totaled $32.0 million,
    compared to $25.4 million for 2006. The primary factors behind the increase
    in sales and marketing expenses were additional employees to support the
    company's growth plans, higher marketing costs, and increased depreciation
    and international expansion costs, which were offset in part by lower
    commissions and bonus expense.
--  Research and development expenses increased to $3.9 million during the
    fourth quarter of 2007, compared to $3.6 million for the same quarter last
    year. For the full year 2007, research and development expenses increased
    to $15.2 million, compared to $13.1 million for 2006. The major driver of
    higher research and development expenses was higher compensation expense as
    a result of additional employees, offset in part by lower consulting and
    bonus expense.
--  General and administrative expenses totaled $4.4 million for the
    fourth quarter of 2007, compared to $3.0 million for the same quarter last
    year. For the full year 2007, general and administrative expenses totaled
    $14.6 million, compared to $10.9 million for 2006. The major drivers in
    this category were again increased compensation costs as a result of
    additional employees and a pre-tax charge of $885,000 related to the
    resignation of the company's former chief executive officer, increased
    international expansion costs, and higher accounting, auditing, legal and
    overhead expenses which were offset in part by decreased bonus expense.
--  Equity-based compensation expense for the fourth quarter of 2007
    includes $305,000 related to the resignation of the company's former chief
    executive officer. Equity-based compensation expense is summarized as
    follows:
    

                        For the Three Months Ended   For the Year Ended
                              December 31,              December 31,
                        ------------------------- -------------------------
                            2007         2006         2007         2006
                        ------------ ------------ ------------ ------------
Equity-based
 compensation expense
 (in thousands):
  Cost of revenue       $         89 $         95 $        389 $        372
  Sales and marketing            610          465        2,392        1,995
  Research and
   development                   202          201          729          840
  General and
   administrative                849          577        2,477        1,856
                        ------------ ------------ ------------ ------------
Total equity-based
 compensation expense   $      1,750 $      1,338 $      5,987 $      5,063
                        ============ ============ ============ ============

Full Year 2008 Guidance

This guidance and the factors below do not include the potential effects of any acquisitions. The following table summarizes the company's guidance for 2008:


                                                     2008 Guidance
                                                ------------------------
                                      2007         Low           High
                                    ----------  ------------------------

Revenue (in millions)               $     70.2  $    74.0   to  $    78.0
Change                                                  5%             11%

Adjusted EBITDA (non-GAAP) (1)      $      4.5  $     4.0   to  $     6.0
Change                                                -11%             33%

Net income (loss) (in millions)     $      1.4  $    (0.9)      $     1.4
Net income (loss) per diluted
 share (2)                          $     0.08  $   (0.05)  to  $    0.08



(1) Adjusted EBITDA (non-GAAP) for 2007 of $4.5 million is calculated as
    follows: net income of $1.4 million less interest income of $8.9
    million plus tax provision of $351,000, depreciation expense of $4.5
    million, amortization expense of $1.2 million and equity-based
    compensation of $5.9 million.
(2) Based on an estimate of 17.4 million to 17.7 million weighted average
    diluted common shares for 2008.

Factors considered in preparing guidance include the following estimates for 2008:

--  Gross margin of approximately 77 percent to 78 percent.
--  Sales and marketing expenses of approximately 44 percent to 46 percent
    of total revenue.
--  Research and development expenses of approximately 24 percent to 25
    percent of total revenue.
--  General and administrative expenses of approximately 17 percent to 18
    percent of total revenue.
--  Equity-based compensation of approximately $5.3 million to $5.6
    million.
--  Depreciation and amortization of property and equipment of
    approximately $5.3 million to $5.6 million and estimated capital
    expenditures of $4.8 million to $5.1 million.
--  Amortization of acquired intangibles of $1.0 million.
--  Estimated interest income of $6.0 million to $7.0 million. Interest
    income is significantly impacted by changes in interest rates. The company
    anticipates significantly lower interest rates in 2008 compared to 2007 due
    to general market conditions; further interest rate changes would have a
    significant impact on results.
--  The company's effective income tax rate may fluctuate significantly
    from quarter to quarter due to the relative proximity of results before
    taxes to break even, which causes research and development credits to have
    a greater impact on the effective tax rate. The company's effective income
    tax rate may range from a provision of 10 percent to a benefit of 65
    percent. Due to the utilization of deferred tax assets relating to net
    operating losses and tax deductions from the exercise of stock options, the
    company does not anticipate paying any significant cash for federal income
    taxes for the next two to three years. Actual results could accelerate or
    defer the utilization of our deferred tax assets. Additionally, if Vital
    Images is unable to generate sufficient taxable income causing management
    to believe that the company's deferred tax assets will not be utilized,
    additional valuation allowances may need to be established on the company's
    deferred tax assets, which could materially impact Vital Images' financial
    position and results of operations.
    


Conference Call and Webcast

Vital Images will host a live Webcast of its fourth quarter and full year earnings conference call today, Thursday, February 21, 2008, at 10:30 a.m. CT. To access this Webcast, go to the investors' portion of the company's Website, www.vitalimages.com, and click on the Webcast icon. The Webcast replay will be available beginning at 1:00 p.m. CT on the same day.

If you wish to listen to an audio replay of the conference call, dial (800) 405-2236 and enter conference call ID # 11108970. The audio replay will be available beginning at 1:00 p.m. CT on Thursday, February 21, 2008, through 5:00 p.m. CT on Thursday, February 28, 2008.

About Vital Images

Vital Images, Inc., headquartered in Minneapolis, is a leading provider of enterprise-wide advanced visualization and analysis software solutions. The company's technology gives radiologists, cardiologists, oncologists and other medical specialists time-saving productivity and communications tools that can be accessed throughout the enterprise and via the Web for easy use in the day-to-day practice of medicine. Vital Images also has offices in Beijing, China and Den Haag, the Netherlands. For more information, visit www.vitalimages.com.

Non-GAAP Information

Vital Images provides certain non-GAAP information to supplement GAAP information. Adjusted EBITDA (non-GAAP), is defined as earnings before interest, taxes, depreciation, amortization and equity-based compensation. Adjusted EBITDA (non-GAAP) excludes certain items that are non-cash in nature and/or items that are affected by market forces that are difficult to predict and may not be within the control of management. Accordingly, management excludes these items from its internal operating forecasts and models when establishing internal operating budgets, supplementing the financial results and forecasts reported to the company's board of directors, determining a portion of bonus compensation for executive officers and certain other key employees, and evaluating short-term and long-term operating trends in the company's core operations. Management believes that this presentation facilitates the comparison of the company's current operating results to historical operating results.

Non-GAAP information is not prepared in accordance with GAAP and should not be considered a substitute for or an alternative to GAAP and may not be computed the same as similarly titled measures used by other companies. Management expects to continue to incur expenses similar to the non-GAAP adjustments described above, and the exclusion of these items from its non-GAAP net income should not be construed as an inference that these costs are unusual, infrequent or non-recurring.

Forward-Looking Statements

Except for the historical information contained herein, the matters discussed in this news release are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are intended to enjoy the protection of the safe harbor for forward-looking statements provided by that Act. These statements involve risks and uncertainties which could cause results to differ materially from those projected, including but not limited to dependence on market growth, challenges associated with international expansion, the ability to predict product, customer and geographic sales mix, fluctuations in interest rates, regulatory approvals, the timely introduction, availability and acceptance of new products, the impact of competitive products and pricing, dependence on major customers, the ability to successfully manage operating costs, fluctuations in quarterly results, approval of products for reimbursement and the level of reimbursement, and other factors detailed from time to time in Vital Images' SEC reports, including its annual report on Form 10-K for the year ended December 31, 2006. Vital Images encourages you to consider all of these risks, uncertainties and other factors carefully in evaluating the forward-looking statements contained in this release. As a result of these matters, changes in facts, assumptions not being realized or other circumstances, the company's actual results may differ materially from the expected results discussed in the forward-looking statements contained in this release. The forward-looking statements made in this release are made only as of the date of this release, and the company undertakes no obligation to update them to reflect subsequent events or circumstances.

Vitrea® and Vital Images® are registered trademarks of Vital Images, Inc., Vital Images disclaims any proprietary interest in the marks and names of others.

Vital Images, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)


                       For the three months ended    For the year ended
                              December 31,              December 31,
                        ------------------------  ------------------------
                            2007         2006         2007         2006
                        -----------  ------------ -----------  ------------
Revenue:
  License fees          $     9,087  $     12,296 $    39,673  $     46,332
  Maintenance and
   services                   7,311         7,372      29,487        22,615
  Hardware                      304           354       1,016         1,565
                        -----------  ------------ -----------  ------------
     Total revenue           16,702        20,022      70,176        70,512

Cost of revenue:
  License fees                1,185         1,345       4,725         4,991
  Maintenance and
   services                   2,393         2,356       9,928         8,023
  Hardware                      188           337         694         1,196
  Impairment of patent            -             -         242             -
                        -----------  ------------ -----------  ------------
     Total cost of
      revenue                 3,766         4,038      15,589        14,210

     Gross profit            12,936        15,984      54,587        56,302

Operating expenses:
  Sales and marketing         9,073         7,744      31,991        25,374
  Research and
   development                3,906         3,562      15,204        13,092
  General and
   administrative             4,433         2,981      14,560        10,905
                        -----------  ------------ -----------  ------------
     Total operating
      expenses               17,412        14,287      61,755        49,371

Operating income (loss)      (4,476)        1,697      (7,168)        6,931

Interest income               2,199         1,352       8,886         3,342
                        -----------  ------------ -----------  ------------
Income (loss) before
 income taxes                (2,277)        3,049       1,718        10,273
Provision (benefit) for
 income taxes                  (724)          764         351         3,690
                        -----------  ------------ -----------  ------------
Net income (loss)       $    (1,553) $      2,285 $     1,367  $      6,583
                        ===========  ============ ===========  ============

Net income (loss) per
 share - basic          $     (0.09) $       0.15 $      0.08  $       0.49
                        ===========  ============ ===========  ============
Net income (loss) per
 share - diluted        $     (0.09) $       0.15 $      0.08  $       0.46
                        ===========  ============ ===========  ============

Weighted average common
 shares outstanding -
 basic                       17,044        14,762      16,972        13,463
                        ===========  ============ ===========  ============
Weighted average common
 shares outstanding -
 diluted                     17,044        15,509      17,457        14,259
                        ===========  ============ ===========  ============





Vital Images, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except per share amounts)

                                                December 31,  December 31,
                                                    2007          2006
                                                ------------  -------------
Assets
Current assets:
  Cash and cash equivalents                     $    146,685  $     144,382
  Marketable securities                               31,709         20,821
  Accounts receivable, net                            15,962         19,589
  Deferred income taxes                                3,472          1,661
  Prepaid expenses and other current assets            2,441          1,928
                                                ------------  -------------
          Total current assets                       200,269        188,381

Marketable securities                                      -            750
Property and equipment, net                           11,165          9,242
Deferred income taxes                                  8,621          8,969
Licensed technology, net                                   -             90
Other intangible assets, net                           1,852          3,209
Goodwill                                               9,089          9,089
                                                ------------  -------------
     Total assets                               $    230,996  $     219,730
                                                ============  =============

Liabilities and Stockholders' Equity
Current liabilities:
  Accounts payable                              $      3,330  $       3,830
  Accrued compensation                                 3,092          3,977
  Accrued royalties                                    1,113          1,158
  Other current liabilities                            2,282          2,083
  Deferred revenue                                    16,547         15,131
                                                ------------  -------------
          Total current liabilities                   26,364         26,179

Deferred revenue                                       1,140          1,174
Deferred rent                                          1,276          1,475
                                                ------------  -------------
     Total liabilities                                28,780         28,828
                                                ------------  -------------

Commitments and contingencies

Stockholders' equity:
  Preferred stock: $0.01 par value; 5,000
   shares authorized; none issued or
   outstanding                                             -              -
  Common stock: $0.01 par value; 40,000 shares
   authorized; 17,153 issued and outstanding
   as of December 31, 2007; and 16,908 shares
   issued and outstanding as of December 31,
   2006                                                  172            169
  Additional paid-in capital                         199,625        189,669
  Retained earnings                                    2,420          1,053
  Accumulated other comprehensive income (loss)           (1)            11
                                                ------------  -------------
          Total stockholders' equity                 202,216        190,902
                                                ------------  -------------
          Total liabilities and stockholders'
           equity                               $    230,996  $     219,730
                                                ============  =============





Vital Images, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
                                                    For the year ended
                                                        December 31,
                                                  ------------------------
                                                      2007         2006
                                                  -----------  -----------
Cash flows from operating activities:
  Net income                                      $     1,367  $     6,583
  Adjustments to reconcile net income to net
   cash provided by operating activities:
      Depreciation and amortization of property
       and equipment                                    4,517        2,910
      Amortization of identified intangibles            1,205        1,404
      Impairment of patent                                242            -
      Provision for doubtful accounts                     239           25
      Deferred income taxes                               (16)       3,472
      Excess tax benefit from stock transactions       (1,395)      (4,143)
      Amortization of discount and accretion of
       premium on marketable securities                  (857)        (382)
      Employee stock-based compensation                 5,987        5,045
      Non-employee stock-based compensation                 -           18
      Amortization of deferred rent                      (338)        (195)
      Changes in operating assets and
       liabilities:
          Accounts receivable                           3,388       (5,284)
          Prepaid expenses and other assets              (513)        (701)
          Accounts payable                               (363)         836
          Accrued expenses and other liabilities       (1,142)         194
          Deferred revenue                              1,382        4,429
          Deferred rent                                   199          561
                                                  -----------  -----------
             Net cash provided by operating
              activities                               13,902       14,772
                                                  -----------  -----------

Cash flows from investing activities:
  Purchases of property and equipment                  (6,577)      (6,436)
  Purchases of marketable securities                  (59,974)     (29,545)
  Proceeds from maturities of marketable securities    49,931       35,987
  Proceeds from sale of marketable security               750        1,376
                                                  -----------  -----------
             Net cash (used in) provided by
              investing activities                    (15,870)       1,382
                                                  -----------  -----------

Cash flows from financing activities:
  Proceeds from sale of common stock under
   stock plans                                          2,876        5,538
  Proceeds from sale of common stock, net of
   offering costs                                           -       97,703
  Excess tax benefit from stock transactions            1,395        4,143
                                                  -----------  -----------
             Net cash provided by financing
              activities                                4,271      107,384
                                                  -----------  -----------

Net increase in cash and cash equivalents               2,303      123,538
Cash and cash equivalents, beginning of period        144,382       20,845
                                                  -----------  -----------
Cash and cash equivalents, end of period          $   146,685  $   144,383
                                                  ===========  ===========


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