Pro Medicus Limited (PME.AX) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Pro Medicus Limited Full Year Results Briefing. [Operator Instructions] I would now like to hand the conference over to Dr. Sam Hupert, CEO. Please go ahead.

Thank you. Good morning everybody, and thanks for joining us for our FY '25 full year results. As most of you know, we are leaders in enterprise imaging and radiology information systems. We work in 3 jurisdictions, our group headquartered in Melbourne, Australia. R&D center and support center in Berlin and our largest market, which is about 90% of our revenues from North America with our offices in San Diego. We have 2 product lines in Australia. It's the Visage RIS, which does more the practice management back-office billing scheduling and Visage 7, which is a clinical product. It's the radiologist desktop that they use to call up images, enhance them and make the diagnosis, and that's the product we sell globally and particularly in the U.S. In terms of our results, I think it's fair to say that all of our key financial metrics moved materially in the right direction revenue up just under 32%. Profit after tax, approximately around 40%, underlying EBIT around 40% and our margins, which are more than any of our competitors by multiples in the industry went up from mid 72% to 74%. As a result, we increased our retained earnings by about 36%, and we've announced a fully franked dividend of $0.30 per share for the half, up 37.5%. In terms of the summary of the year, it was another record year by any measure. We won 7 contracts totaling $520 million at minimums. We also renewed 2 large contracts worth $130 million, and we had upgrade for additional products with existing clients for a total of $39 million. So in all sales areas, new sales, renewals and upgrades, we made material strides. We also did 7 implementations. We signed a research collaboration agreement with new CSF that joins those from the Mayo and NYU. RSNA, which many of you know is our key conference that's in November, December in end of '24 was our business to date. We made significant progress with other ologies and AI, which I'll talk about a little bit later. And all of that, we think, forms a very strong growth base for continued growth in FY '26 and beyond. In terms of the highlights of the year, in terms of sales, our first sale came very early in the year. It was a Specialists Children's Hospital in Chicago. And then just after the AGM and some 5 months later, we had a slew of contracts that came in a short period. The largest being Trinity at $330 million. We think it's most probably the biggest contract led in the industry software only. Then Julie in December for $30 million, a key academic in U.K. health care for $33 million in January, then BayCare, a large IDN in Florida for $57 million. And then some more early on in March and April with Elucid Health, Iowa. As mentioned previously, we had 2 sales of additional products. We often get asked, will archive be sold back to additional clients and here were 2 examples, NYU Langone taking both Visage 7, Open Archive and worklist. Duke taking Visage 7 Open Archive. And as part of that process for both of them, we're transitioning them from on-premise to cloud. The 2 renewals I spoke about a little less earlier, Mercy and renewal of an Australian contract. And as we said, RSNA was busy, and we were very busy on the implementation front. In terms of revenue split, for those of you new to the graph, the sand color is recurring transaction revenue. The blue is recurring revenue normally around service contracts from the older style where we used to sell upfront licenses and service. The green is professional services, so we charge for implementation and training. Those costs are spread equally amortized equally across the life of the contract. So it's a 5-year contract. We take a 1/5 of that revenue every year. And the yellow is the data migration as we're doing more multiple stack, more and more archive, including NYU and Duke. The archive migration component this year did kick up, and we expect that it will continue to grow as more and more new contracts come in, particularly those that have archive as a component. So the model that most of you are familiar with, we believe it's highly scalable with a lot of operating leverage. We don't sell hardware. Cloud fees measured off below the line, so not part of any of these revenue figures. We charge for our training and implementation and travel once the contract is signed. We have maintained a highly contained cost base. And as a result, our margins, as I mentioned, would be industry-leading by long shot, continued to grow in the full year. So the transaction model, again, we talk about a concept of a minimum if we have a new opportunity. They tell us how many examinations they did prior 12 months. We usually get them to commit to on average around 80% of that volume. And that's what we call the minimum. So each of these contracts that we announced has material upside built into it even if they just do the same volume as they did the previous 12 months, which invariably they do. And we've noticed that our clients as a whole grow well above the industry average. So all that growth then gets captured an additional transaction volume. The forward revenue has increased materially with the recent sales. It's a 5-year window. It's moved up from 600 -- low $600 million to $948 million Again, these are minimums. We see upside as client examinations continue to grow, and we see this very much as an annuity style revenue base. In terms of who we service, many of you already know, we service pretty much all the markets or the segments of the market in the academic medical centers or we call Tier 1 academics. We do 11 out of the 20 -- top 20. Now these are usually all academic centers because they rated on clinical excellence and research. But I think we do at least 2, if not more multiples or higher multiples than our nearest competitor. The other area of the market, which is the biggest area of the market, is the IDNs, IDN stands for integrated delivery network. They are usually regional hospital systems. The bigger ones are often multistate, and we've seen that in some of the clients in early days, we had Mercy and Sutter then a number of years ago, again into Mountain MedStar then another save with [indiscernible] and [indiscernible] and recently, obviously, our biggest one to date, which is Trinity. So a very large section of the market, very important for us, and we have some material clients in that space. The next is the risk product. As mentioned, that's largely Australia focus. We do have some implementations in Canada. We have -- that was our core product prior to acquiring Visage in February 2009. We deal with the 2 largest groups in Australia and [indiscernible] to be primary now called Lumis. We are seeing some increased growth as new practices start to form in this market. And you will have noticed that our Australian business grew just under 5% this year, largely through new additions around the risk for not only existing clients, but some new or smaller clients. Visage 7, that's a key product we sell in the U.S. We believe we are still #1 in the 3 core areas that make the product that's so important to the product speed, functionality, the capability of doing 3D, 4D advanced visualization as well as 2 in the 1 product, we believe we're unique in that capability and scalability because some of our clients are literally dealing with petabytes of data through the year, and cloud is also a key part of that equation around scalability. In terms of what's driving the industry and continues unabated, the data sets are just getting exponentially bigger. Breast imaging is usually the canary in the coal mine. In the past, 2D mammography was a few hundred megabytes each itching. We have now 3D, which is called digital breast Tomosynthesis, where we're now talking about 3 gigabytes per exam and in high resolution, they can go as high as 6 gigabytes, for example. So the data sets are increasing massively with all of the new modalities. In other words, all the new acquisition devices. So what makes us different? We think that all of our competitors use a standard legacy technology of compress and send, where the files come from the scanner, they compress as much as they can be without losing any fidelity and that filed and sent to workstation that is highly configured unpacks the filings all the enhancements in manipulation locally on that workstation. We, on the other hand, have a unique and proprietary streaming technology where the fast come to a central spot today that's cloud all the 3D and advanced visualization is done in near real time, and we actually stream the pixels we don't actually move far. And this causes a delta, particularly around speed that can sometimes be many orders of magnitude. So we are one second in most exams, whereas in some cases, if compression technology was used. That could be many minutes as a comparison. So it is a huge differentiator particularly important as organizations get larger and more distributed and particularly now that pretty much every radiologist want some capability to work at home for part of the week and they need the same functionality and speed the payers they did within the hospital. Just going through some of the clients. I talked about Trinity that came just after the IDN. It is one of the top 10 IDNs in North America. I think they have facilities in 26 states. Just to give you an idea of the size, they have committed to us for 10 years for the full stack and will be fully cloud upon it. We will do our first go live in September this year. it will be phased over an 18-month period purely because of the regional spread and 2 of their smaller regions are getting new electronic health records, which they weren't completed before we complete those. But we believe Triple Trinity was one of the largest deals announced in our industry historically. The other market that we talked about in the past was the private market. There's usually partnerships with radiologists. A lot of them have sold fully or partially to consortiums of private equity. It had been dominant because there was a massive amount of M&A activity culminating up until 2023. But we are seeing movement in that market and landed 2 deals in the year 1 in December at Julie Health and one at Lucid, so a total of $70 million. Just at minimum for those private. So this joined some of our other private clients like daycare and CRL that we have previously announced. So I think the making about this is it opens up that segment of the market, but importantly, it also shows that the platform is well suited to a broad range of market segments and not confined just to -- we did have 2 renewals. Again, I won't go into too much our run rate for renewals is -- remains at 100%. Just post financial year end and beginning of July, we renewed the last renewal for this year which was FMLO that not only did a renewal but truly archived made the cloud transition at the same time. So our next renewal will be in calendar year '26 and all the renewals scheduled for this year. We also had the Visage 7 Open Archive upgrades, as I mentioned, 2 key clients, again, the material implementations, material revenue $24 million from NYU and $15 million from Duke. That is additional to the existing contracts for viewers. So that sits on top of the contracts we announced for those clients when they originally signed up with us years ago. And we believe that this is a logical upgrade path for many of the clients that currently are viewer-only and on-prem. They're looking to cloud, and we're able to transition seamlessly by putting the archive -- converting their archive on-prem to Visage 7 and cloud and then bringing the whole viewers back into cloud as we do for all our new implementations. So the solution we talk about when we look at what is a Nevada is on cloud instance with all of the branches of Diagnostic Imaging being serviced. So advanced visualization, 3D breast imaging, all in the lung viewer. And we're now looking at the connection connectivity with AI and with all the other modalities and ologies, which I'll talk about as we progress. The other strength we have, which clearly relies on the technology is the ability to implement. We believe it's unique to us. We are able to implement even the largest scale enterprises in the quarter, 15 the time of industry norm. As an example, we completed that go-lives for Vale within a 3-month window. And prior to Trinity, they were our biggest client. So give you an example how we are can do this seamlessly and quickly, which we believe is a significant factor in reducing the barrier to change because previously, companies would take 2, 2.5 years to complete an implementation where we do it in a matter of weeks or months. So ROI, we position ourselves as a premium product in the market. We believe we provide significant return on investment multiples of what the clients spend with us in 2 areas. One is infrastructure and unparalleled clinician efficiency. We quote between north of 25% radiologist improvement, which we've been able to log in a number of clients. But it's important as that is, there's also the clinical capability because it is a clinical product, and we do believe that we have moved the needle in terms of what a radiologist is capable of doing with our applications compared to others and that changes the clinical outcome, which clearly is a very important part of our technology stack going forward. In terms of our growth strategy, it is multifactorial, obviously, expanding footprint, which we did more in this last 12 months in terms of new sales than we've done previously. We have got transaction growth from our existing clients, which is we think about 2 to 3x the industry average across the plant base new product offerings, which I'll talk about in a minute. And we're leveraging our R&D capability in terms of not only new product and other ologies, but also in AI and some of the research collaborations that we have with existing clients, including the new [indiscernible]. The TAM, we've updated our figure from $650 million to $670 million based on growth rate of roughly 3% in any 1 year, the industry grows between 2% and 3% organically. We believe we are able to address 100% of that TAM from a product perspective and about 85% from a commercial perspective. That is the tail of 15%. Some of the opportunities are almost probably too small to address one-on-one. But that tail is shrinking as a lot of the smaller people are being merged into some of the larger health organizations in their area. Including a recent sale of few Colorado, which came just after 30th of June, we estimate that current penetration is a bit up 10% and growing. So whilst we have a material footprint, we still think we have a very much addressable runway. We often get asked about pipeline. Clearly, the pipeline is dynamic. We're standing up at the AGM in November. I think the pipeline was the biggest it's ever been. We had all of the sales that occurred within the next 3 to 4 months, still in the pipeline at that time, a week later, clearly, Trinity transition from pipeline to contract and then all the other contracts. But I'm pleased to say that as a result of RSNA '24 and other opportunities, the pipeline has been continually refreshed. And I think the in Colorado opportunity was a perfect example of that, but may have just come into the pipeline around then, but obviously came from pipeline to contract In early July. The product set has expanded over the years at half is the first. I won't go into too much other than to say it's an integral part of our strategy of moving people into cloud. So that strategy, like with Duke and NYU and of course, all the full stack solutions all cloud-based, all Visage 7 and Open Archive. So it's an integral part of our go-forward strategy. And like our view of its transaction-based model. So there's potential upside with every deal. The likes of our 3 core products, workflow we released a few years ago. Again, it's been very popular. We've been able to sell that back to NYU and to others like Yale, but also all of that new opportunities or the majority of them take the workflow as well as archive is part of full stack solution. Clearly increases our total contract value. And not only that makes the implementations easier, so we don't have to do with third parties. Again, it is a transaction-based model with outside One of our key strengths is cloud. We are -- we believe, the only company that does 100% full care at scale. So there is no hardware on-site anymore if there is no back hardware that book gets decommissioned and it's 100% in cloud, as you would expect. We have been able to show it suitable for all size implementations and some smaller IDNs that we do all the way up to the groups and the like of [indiscernible] with where we're talking about millions exams petabytes per year. I think the important thing about cloud is the market has shifted drastically towards cloud over the last 3 to 4 years and maybe a bit longer. For us, we are agnostic. In other words, we worked well in all through cloud environment, AWS, Azure and Google GCP. So far clients have an existing agreement with 1 of the 3. We enabled them to use that agreement because they make commitments that they want to use, and we allow them to do that without any delta between the 3. So we see that cloud and the ability to work in all 3 as a major advantage going forward. Just ramping out in the last few minutes, we have talked in the past about 1 view of 4 modalities. We did announce about 2 RSNAs ago, our cardiology product, which is not only out of the market, we had our first implementation in the year. But we are able to not only work in the other ologies, but also reflective like photo and video because we see image becoming a much bigger part of the patient's electronic health care record. So we did talk about cardiology. I think the important thing that often gets missed, it is in the same code base as the Visage 7 product. It's part of Visage 7. It's not a separate product. It's not a set of platform. So it's -- we believe it's the first offering that is fully integrated into the one platform. It has native tools per that allow specialist cardiology measurements that are required, and it has integration into third party because particularly in cardiac ultrasound, there's a statutory need to transfer those -- that information to a health care body. So you need an interface that allows for that to occur over and above what you normally do in radiology. But comiology, we think, as I mentioned, up and running. Our first implementation has gone well. And with Colorado, it was a material sum that was involved in the cardiology going forward. Something new most of you wouldn't have heard from us before, is digital pathology. Again, unlike others, it's not a separate platform. It's part of the same code base. We are starting to show into prospective clients if it is a work in progress. we believe we will have it out in the market this calendar year. It is, again, fully cloud-based and one of a few. And the other thing that's very interesting is I think we've also interfaced it with our businesses, Visages, they paid for Vision Pro, which means that pathologists can potentially use Vision Pro to replace both screen and microscope, which we believe no one has done before. We've also had it recently validated at the RIG Connectathon where it's an interoperability against standards to Connectathon, and we believe we were the first to satisfy the digital pathology pref. I have a few things that have transpired during the year and we think position us well. We have codeveloped a breast cancer detection algorithm with which is commercialization getting ready to commercialize pending FDA clearance. This will sit next to our breast density and provide a full breast AI suite. We have made investment in illicit for cardiac safety to help round out some of our cardiac offering and recently an investment in the Australian base full years [indiscernible] AI. We've also announced additional research collaboration agreement with UCSF, which is one of the top academic medical centers in the U.S., and we have a growing number of third-party AI integrations that we're bringing to market. Again, the Visages Vision Pro, without going through all the details, we were the first to release the product for this. We are seeing some real-world use cases emerging from our client base, particularly around interventional guidance for procedures. And as I said, we see some of this potentially moving into other fields as we release our pathology offering going forward. This gives you an idea of what it looks like through the gone a traded volume that you can manipulate using your fingers and gestures as well as being able to see what looks like a screen so you can actually do the 2 concurrently Finally, RSNA 2024, it was our biggest today. This is a shot of the booth that we built for 1 and this is yours truly in front of coming right next to me, we had about 52 people. Staff this year, we think, will be even bigger purely to meet demand. So in summary, most successful year in our company's history by any measure. We've extended our product portfolio a full stack, and that's proven to be very popular implementation and support capability continues. We're refining it and are able to do even the biggest ones even quicker than we were, say, 2 or 3 years ago. Cloud has a huge strategic advantage. Our North American footprint and pipeline, we believe continue to grow strongly. Cardiology, as I said, at the first site was implemented very successfully now with UC Health Colorado to follow in this financial year. We will be releasing digital pathology at end of this calendar year. We think the efforts we've done in the AI will be able to leverage as AI becomes mainstream, and we are seeing increases assets for is on Apple vision products. At that point, thank you, and we look to take questions.

[Operator Instructions] Your first question today is a phone question from Garry Sherriff with Royal Bank of Canada.

A question on pathology and a question on AI. The first one, the pathology product, certainly exciting. In terms of a market sizing perspective, we've done a little bit of digging on the size of the market. I just want to try and clarify it with you. In terms of volumes for those relevant areas of pathology like histopathology, it appears to be about 2/3 the size of the radiology market. I just know you wanted to clarify that, that was about right. And secondly, from a pricing perspective, how are you thinking about pathology exam pricing versus radiology exam pricing?

Yes. I think the pathology market is where the radiology market was about 20 years ago. Radiology, as you went from film to digital. The use case and the imperative of pathology to do so is slightly different because the Velko pathology is not a niche. It's what we call biochemistry like someone's cholesterol or hemoglobin count. Having said that, the big drivers for digital pathology are around and the ability, pathology is becoming very subspecialized much like radiology has, and you can't have a melanoma specialized pathologists that can be single point that you do it. So I think the ability to remotely agreed this become a little bit more acute in pathology than it was in the past. I think the market, we size it may be a bit less than what you think, but of that, to be honest, I don't think anyone really knows and it also will end on whether the organizations will scan their historical slides because of these glass slides that by all, they still have to keep margin small. There's 6 small gas slides on average per test. But I think a few things about pathology, we are seen as an emerging market. And we think our technology, particularly with cloud and the storage because pathology files is huge because they're color and I believe, platform is well suited. And as I said, I think it is an expanding market. So the figures we have may be slightly smaller than yours, but I don't think anyone really knows because it it's nascent in terms of overall adoption, but we think that will speed up pretty quickly from there.

And in terms of the pricing, how are you thinking about that relative to radiology?

Again, we haven't done that. We're doing some of that analysis. We do believe it will be a similar model. In other words, any tests you actually do and the all the hospitals now roughly how many new tests that they do. And we believe that will be a per test basis, but we haven't determined that pricing in.

Understood. Next question, just moving to AI. I mean, given the advances we're seeing in AI, ChatGPT 5, people are creating CRM systems in like 16 seconds. It's being a democratization, I guess, of software development and algorithm creation. As a consequence, I assume barriers to entry are starting to fall a little bit. How do you defend your existing technological leadership position when these barriers appear to be falling purely from a technological perspective?

Yes. So I suppose the 2 things. A lot of what we talk about generally of AI. We've seen more of that on what we call the reporting side because as you know, a radiologist, it takes a clinical impression of the images. And so we've seen that sort of ChatGPT, generative AI more in that area. The AI that we are also looking in other things like the breast cancer detection with NYU is clinical. And then you have to go through quite a rigorous clinical validation process. You can't just do it and say, well, we try it on 5 best mammography exams and therefore, it works, has to be quite a rigorous clinical process behind it. And that's actually not only time consuming, but you need willing partners, okay, at the hospitals to do that. So I think there are 2 streams of AI in our space, generally in where if it's going to help and do conclusions for a report. You don't need FDA and that's an aid and an efficiency. But I think the clinical part, there's still quite material barriers entry and FDA clearance, et cetera, that you have to go through. So I don't think coming in the way of learning has changed because of large language models, but the actual key parts of the process are the same.

Your next question comes from David Low with JPMorgan.

Sam, if I could just start with cardiology and the addressable market there. Just wondering how you think about the back book there. I mean like how much opportunity is there from the existing list of customers. And is that the first quarter call? Or is cardiology pretty different? And if you could size it for us, that would be great.

Yes. So cardiology works with the same equipment as radiology. The one that was always deemed to be cardiology specific with ultrasound of cardiac echo, which is the first option that we put forward. We are seeing a lot. A significant increase in cardiac CT as a screen test instead of angiography that it's replacing in a lot of places. Then there's cardiac MRI and cardiac nuclear. So with all of those together, we think depending on the organization that they took all 4 could be between 15% and 20% of radiology. There are far fewer tests done. But each test is more expensive in terms of the -- what you can charge the industry charges more for cardiology because they're more involved. So if you get all of them between 15% and 20% in new Colorado, what we did was the key piece of ultrasound, and that was north of 10%. So it is material. We do think we will be able to sell it back to existing clients and we are putting it out in conjunction with full stack is something that new clients can take from the headcount.

Any reason we should think that the uptake would be different to the experience is radiology? I mean, is the opportunity that the starting period is I guess, gradual you add 1 or 2 customers and then we see a speed up in the growth rates? I mean, is cardiology likely to be different than what you've experienced so far?

Not really. You have a slightly different audience, as I mentioned, with ultrasound because we're dealing with cardiologists where image and acquiring and diagnostic image is part of their day, whereas the radiologist, it's 100% of their day. But having said that, once you build the base of referenceability then clearly, the ability to sell after that gets easier. So we think the first step was getting it out, the next step getting our first client. We think we've taken another step with this new sale. And again, we think that, yes, it should have a similar dynamic to what we did with radiology.

And just to clarify, when you say 15% to 20% of radiology, you mean by value or by volume?

Value, double value.

Your next question comes from Mathieu Chevrier with Citi.

I was just wondering about the shape of the revenue stream for an open archive upgrade compared to a new customer that goes with full stack. For example, we had this NYU add on $24 million over 5 years. Is that evenly distributed over time? Or is that more front loaded?

Yes. Mathieu, it's Clayton here. Because of the data migration that they need to go through, we can take a lot of that -- we take that revenue upfront. So as we build it on milestones. So we normally bill on a quarterly basis, but we take a percentage of completion of the data migration. That revenue is taken as we do it. And then the exam revenue is spread pretty evenly over the rest of the period. So for NYU's sake, that would be about because it was announced separately 10% to 15% of that total contract value for full stack lines, it will be a smaller percentage because there's more revenue in the mix, more exam revenue from all 3 components.

Yes. But the charging model is the same whether they take it upfront or whether they take it as an additional module like NYU and Duke.

Yes. Yes. I was just more asking from a modeling point of view. And then I was just curious to get your views on -- I don't know if you've seen this, but RadNet has come up with a solution called Tech Live that received FDA approval just a few days ago for remote scan. I was just wondering what kind of opportunities and challenges that you think those kind of solutions could bring to Pro Medicus?

Well, it's not the area we work in. That's the acquisition area. So from what I understand in red, it means that a technologist can supervise a scanner that they're not next to. We don't see that as any threat whatsoever, and it's something more on the client side. So it would impact the number of scans that we would see or do or charge for. So it's not here nor there. But it enables groups, and I would assume it enables groups and to some our clients as well if they use similar technology because a lot of the equipment manufacturers are trying to bring that out so that you have seen and scanners you don't need 10 technologies. That really is more client side and really doesn't impact us at all.

Do you think it could be a tailwind though to volume growth over time?

Well, it could mean that you need fewer people to do more scans, which could be good for us.

Your next question comes from Andrew Paine with CLSA.

Look, just one that we get all the time just in terms of the older legacy systems. Just be good to know how one you think these can continue to serve with radiology and what perfect market you think remains on these auto systems?

Yes, that's a same question. I think that in certain areas, that sort of technology is corrected. And the canary in the coal mine is always in breast imaging because that was always where the files were large and now become just exponentially larger. So some routes just struggling under the loan. And the other thing that's created a much bigger load is press imaging mammography used to be 2D with the advent of breast [indiscernible] synthesis. The files can be up to 10x what they used to be in 2D because it looked like a 3D. It's like a scan, like a CT [indiscernible] means a scan at a certain -- through a certain level, open anatomy. And the interesting thing is in the U.S., in particular, and the rest of the world will follow. Tomosynthesis 3D. It has overtaken 2D in spring. So it's more than 50%. So you've seen a new technology become mainstream and those farms become huge. Now having said that, it's the same everything in the old days, a CT scan had a few hundred slices now can be 5,000, 10,000 slices. So we've seen the data sets getting bigger and bigger and bigger. And particularly when you start looking at remarks, a lot of these systems are starting to, what I call, crack. And we think we're going to see more and more of it where they just don't really keep up. So breast imaging, canary in the coal mine, in reality, we've seen this, particularly with remark reading with other modalities as well. .

Okay. That's great. And just the size of the market, so as legacy systems is probably pretty hard to estimate, but have you got any idea of that?

Sorry, we didn't...

[indiscernible] background, Andrew?

Sorry just in terms of the size of the market for these legacy systems, like what percentage of market share you think they still have?

90% because we have 10 -- that's probably the most [indiscernible]. And bear in mind, some of them have over the years developed more sophistication around how they push the images around. But again, that's coming to its high watermark as well. So we really don't believe anybody else has been able to do this on demand regardless to push the bar in the far there in red someone second. We don't believe anybody else has been able to crack that nut except for us.

Yes. That's great. And then just as a follow-up to that. probably the second last question that we get is just around any steps by these systems to update? Or why aren't they updating and trying to remain in the market given it's quite a turning market still?

Yes. So to do it. And people have tried in the past that have stopped. You have to go right back to the beginning. You can't upgrade and you have to bring on a totally new platform and that's a multiyear job. Then you have to get it FDA approved. So is it possible? Absolutely. Is it a simple 12-month process? Now -- and then the last thing is our practice proprietary. So visit was built from the ground up [indiscernible] in Berlin, and it was built without using an existing toolkit. They can't get a sort of Microsoft toolkit and get to 70% out of the box and then refine the rest. So -- so those that have got existing systems, it's a really, really, really big job to bring out a new system and then not only that, get it FDA approved get it hard and get it scaled and then transition clients to it. But as far as we know, and I think we have a pretty good view over the market, no one's been able to do that.

Next question comes from Josh Kannourakis with Barrenjoey.

Just a couple of questions from me. First, just on pathology. Do you have a bit of a read-through of how many players in the market are using specific cardiology pathology solutions versus those that are sort of built to broader enterprise agreements that would be using radiology plus pathology, et cetera?

Yes. So pathology is actually just starting to come of age. It's a very small percentage that have adopted it. And in the past, the reason was around -- it's a small part of the enterprise, but a very data-intensive part. And if you did it on prem, the cost of data storage, which is bit too far. There are a number of pathology only players that have tried to get into the market. Most pathology is sold by our radiology competitors where they package someone else's or package or do that a separate platform and sell it as part of that like Philips or Fuji, et cetera. But in those cases, they're all separate platforms. It's not part of their name radiology platform. It's a totally different one. It's the same badge 2 platforms. But I think there's only been a small number of pure pathology players, particularly in the U.S., there's been more in Europe, and that's where a lot of them come from 1 or 2 have just got FDA. But the thing with pathology selling it in its own right, a bit like cardiology, there's a high cost of sale and the actual dollar value of the sale is nowhere near as big as radiology, certainly not at this stage. So the competitors are to the sort of standard ones that we deal with on the Diagnostic Imaging side. and we are seeing a small number of independent pathology plays. But a lot of them are hitching they're wearing not so much to the platform, but more to AI around it.

Got it. No, that makes sense. And so just to round out, like we talked about cardiology being 15% to 20% of radiology in total. How are you sort of thinking today about pathology?

Yes. Sort of one of the questions we got asked at the beginning. We haven't really sized it. It's very hard. We thought we needed to do it to get a complete single platform across everything. So that was one incentive. And we think that market will continue to grow. I don't think it will be as big as radiology, certainly not from what we're seeing, but it could be material if it goes from the 5% or 7% adoption to a more generalized adoption.

Got it. And just a second question, just around the funding environment. Obviously, the big beautiful bills come out is underlying there a bit of a crunch on funding, but also I think if you sort of look into the detail, there's quite a bit of a shift in reimbursement to the sort of outpatient clinics, which has been happening for a while in the U.S. anyway. How are your clients reacting to that? And if you could give any sort of context around how you think you guys would be impacted from a positive or negative perspective in terms of demand for the platform?

Yes. I think more earlier than that, I think the Cogen Crunch like a lot of industries, a lot of hospitals bulked up and then now they're standing something we -- our profitability was impacted, we need to sort of optimize. And so you can look at optimization, particularly in the area through 2 persons. One is just cut cost by something cheaper. The other, which I think makes more sense is by the most efficient product because actually you'll get the most benefit from that. So obviously, there are times, as you know, that we don't win every single opportunity, pretty much 100% of the time is because of the perceived cost. I think that's actually the wrong way to go because you spend the money, you don't get the full result. But clearly, we seem to be winning those arguments more than we're losing them and hence, the reason for the additional sales. But yes, there is a feeling and maybe this big beautiful bill will sort of heighten that. We haven't seen that, but there has been a feeling that hospitals, particularly post COVID became unprofitable, and now they're sort of tightening their belts and optimizing and is one of them. And if they use us, then we believe we give them in the result.

Your next question comes from Annabel Li with Goldman Sachs.

I also just have 2 questions, please, and I might ask them one by one. So first one, just on a follow-up on pathology. Are you able to comment on the uplift in R&D or sales head count that might be required and potentially any forward indications from customers that might -- you might have already received so far?

Yes. So the actual product is in our current R&D budget. So the R&D figures for the year included pathology. I think as the product evolves, we -- it's probably not so much in R&D, but we'll get more domain knowledge through a product specialist, someone that's lived in brief pathology. And it's similar to radiology that's not exactly the same. So I don't think you should expect significant cost increases around that opportunity. So it's all pretty much what we are releasing has been already incorporated in the existing R&D budget.

Yes, it's the huge advantage of obviously using the same code base. for both cardiology and our digital pathology or within the Visage 7 platform, the development team is already in play, as Sam mentioned, as we get people on board similar to what we've done in cardiology, we'll have product specialists, but the core development team stays relatively the same.

Yes. And all the other things we've built around radiology, we look at saying, how can they apply to pathology? And an interesting thing is vision prior. Now this is incredibly early days. And so it's a concept. But the difference between the radiologists and the pathologists looking at an image is the radiologist has an image and they move their head to see the whole image because it's on a big screen in front of them. In pathology, pathologist looks down a microscope. So they actually moved the slide under the microscope. They never moved their field of vision. So the thing you can actually do with mentioned pros exactly that, that the gobbles can sort of almost be like this immersive microscope here with your hands, you move the image in front of your eyes. So we're trying to see what other assets we have in terms of not just the core platform, but Visages, Visages Pro that will make the pathology offering even more differentiated. Now that won't require R&D because we already have those technological assets as part of the core stack. So as Clayton said, being able to do it as the one platform not only has huge implications for us in terms of development. It also has massive implications for the clients because currently, sometimes they have to manage 50, 60 difference back in to get what we do in one. So again, it's part of the R&D, but we're also looking to see what other assets we have that will make applicable to pathology.

Perfect. And just on contract renewals. I appreciate you won't have anything come up until next year. But just wondering if you started these conversations and maybe what the initial response has been in your expectations that they will stay envisage?

Yes. We have started a conversation and fair to say that pretty much in the same format as we had all the previous ones. So you would expect, particularly with the bigger ones, some of the bigger ones where they want to have the conversation a little earlier. But sometimes it's quicker, sometimes it's something that they talk about, put on the back burner and then this tongue gets closer, it comes to the front. They each have their different cadence. But yes, we've sort of started with some of the ones more towards the front of the year approaching that conversation, but it's pretty much what we've had similar sort of conversations to what we've had in the past.