Pro Medicus Limited (PME) 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.

Thanks. Good morning, everybody, and thanks for joining us. As most of you know, we are a healthcare IT company specializing in imaging and radiology information systems. We work in 3 jurisdictions, Melbourne, our corporate office and where we developed the RIS product; Berlin, which is our development center for Visage; and U.S., which is a key market. We have 2 product sets. I won't labor too long on this. The [ RIS ], which is largely Australian-focused, more around the business side of radiology; and Visage 7, which is a clinical product. It's the desktop [ radials ] which use [ to call up ] images, enhance them and make a diagnosis, and it's the product we sell -- product set that we sell in the U.S. In terms of the year, just a few highlights. It was a record year. Transaction revenue was up over 44%. We won 7 new contracts in North America. We had a material renewal with the University of Florida, which was a 7-year $15 million contract. We also were busy on the implementation front, having completed 8 cloud-based, fully cloud-based implementations. RSNA, the biggest trade show we attend was -- which was in November, December last year '22, was our busiest today, and we've made good progress with adjacencies in terms of other ologies and AR. In terms of the figures. I think it's fair to say they all moved materially in the right direction, in revenue, profit and a significant increase in cash reserves so that we now have over $120 million with no debt. And as a result, we've announced our largest dividend, which is $0.17 per share fully franked. In terms of the revenue split, many of you have seen this chart before, the salmon pink color is transaction recurring revenue, and it had a material jump year-to-year, particularly between FY '22 and '23. The blue section is also recurring. It's more service contracts from some of our older, more capital-based licenses. The green is professional services, and the yellow is more migration. So particularly pleasing was the recurring revenue in the pink, the transaction revenue, which we forecast, will increase year-on-year because the current year forms the base for the next year. in terms of some sales highlights, as I mentioned, there was a new Florida renewal. There was -- back in August '22, we announced 3 smaller clients from different areas just to show that we do address that market segment. One is a children's hospital, one is a small IDN, and one is a private practice. And then we had a number of sales, which 3 were for more regional IDNs, midsized regional IDNs and Luminis, Samaritan and Gundersen and UW, which is a Tier 1 academic based out of Seattle. So not only a good mix of opportunities, but a good mix of markets. The operational model we have used the vast majority of U.S. contracts, it has been very successful for us, particularly underpinned by minimums. Our forward revenue has now increased to $468 million over the 5 years. That's making an assumption that our renewals are renewed and renewed at the same dollar value as they currently are. But today, we've been able to do all the renewals at a higher dollar rate per transaction, but we don't factor that into this figure. And I think the message is it's pretty much an annuity-style revenue stream, therefore, greater predictability. Operating leverage. It is highly scalable. Our margins did go up again this time, which was pleasing, and I have made some commentary around margins in the open briefing and happy to take questions on that a bit later. But certainly, they are far more -- far greater than any of our competitors by multiples. And I think that's due to not only the efficiency of the team but also the quality of the software that allows us to be so efficient. The [ SIIM ] transaction revenue, as I mentioned, recurring in nature. We did expect growth in '23 because we had some new clients come onboard. A lot of these were 6 to 7 months of revenue and in Luminis case, even less. They will all contribute a full year of transaction revenue for '24. We have some new sets coming on that have been sold to Washington, Gundersen and others. And we are seeing, pretty much across the board, the organic growth in the client base, part of that is organic growth of the industry. Our clients are growing above industry levels, and we see further upside in transactions from ancillary products, such as Archive and Workflow. The top hospitals, an interesting change in how they rate them. They now do 22, I'm not sure why from 20, and they're rated in alphabetical order instead of where they actually rate. We still do 9, which is significantly more than any of our competitors. And so we think that sort of validates the quality of the software and how it translates particularly to the academic space with clinical leads, and that's probably at the highest. The other area we have talked about a fair bit in the past is the IDN space. Originally, we were -- a lot of people pigeonholed us into academics, but actually our footprint in IDNs is if anything is even bigger, it is a bigger segment of the market. We did have a number that were [ immaterial ] in the past in Mercy, Sutter, into MedStar. And we've added another 4 IDNs for the list, that's in this past year. So we think there's been an increasing network effect in this market segment. And certainly, it's an important one for us. [ Visage RIS ], the product that we originally founded the company on, that -- again, we have some material sites here in Australia with the 2 biggest radiology sites in [ I-MED ] and Luminis, previously known as Primary [ HeartCare ] Imaging Services. We did see good growth in the Australian business. And part of that is new practices starting, part of it's organic growth from existing customers. In terms of what makes our products, number one, we think it's the three things that are really key and -- showing to be more important as the industry changes, and I'll get to that in a minute, certainly speed; the functionality, where we're the only ones that can do 2D, 3D and 1 desktop; and the scalability because these organizations are becoming quite large, and it's important that they have one system, not multiple, which has been the case in the past. Things that are changing the industry, again, the data sets are getting bigger and bigger year-over-year, new types of modalities, those that are already existing, high resolutions. And as many of you would have heard me say, the gigabytes. The gigabyte is the new megabyte. So it's not uncommon for us to deal with data payloads of 8 to 10 gigabytes and upward for a single examination and comparisons. So why are we different? Fundamentally pretty much all of our other competitors take the file, they can press and then send it down the network, a highly configured workstation of the other end unpacks it and all the image manipulation is done locally. We don't do that. The files are just getting too big for that, particularly in the areas of breast imaging, PET scanning and functional MRI. So we have technology that is completely different. It is proprietary. It has been what we founded Visage on when we acquired it back in 2009. And so we take the images in near real-time. We do the rendering, the advanced visualization, 3D and actually just stream the pixels. So it's a totally different technology stack. And I think it is getting more and more differentiated over time as others are finding the data sets turning to choke existing systems. This diagram, I think, is a very good summary of the sort of ecosystem that we are looking to create. Clearly, there's cloud in the middle, which is all of our implementations over the last 2 years have been cloud-based. We are looking to have, well, obviously, the archive, the viewer at the top and hanging off the other ologies and also the research AI. So it is one core that can support multiple applications in and around what our clients do -- are looking to do. The contracts that we announced, again, this one, the first one was -- really just showed that we can address some of the smaller end of the market and still make that successful commercially. Three clients, very different. Montage, a regional IDN; Bay, a private group that actually were exposed to Visage right at the very get-go because they read for one of the larger IDNs that use us. And the Children's Hospital, which is the Children's Hospital of Philadelphia, is just an academic. University of Florida renewal, again, as I said, 7 years, $15.5 million, which is at a higher per transaction cost than previously, and it was for a full-term renewal. And then the sales, again, we've announced them all, but the important thing about them is that they're very good regional centers. They are full stack. They take all 3 products. They are cloud, and they increase our footprint in this midsized IDN market. UW, it's slightly different. It's an academic. It's got one of the best regarded radiology residency programs in the U.S. Again, it's fully stacked with Archive, and it increases our presence not only in the academic market, but in the Northwest, around Seattle, where this was our first major sale. Samaritan, Oregon, again, increases our footprint in the Northwest. Again, an IDN, again, full stack. And the last one that we announced is Gundersen. It's a $7 million -- a 7-year $20 million. It is a tri-state system, based around Wisconsin and Southern Iowa. Again, a similar pattern to the others, which is something we're seeing more and more of that is all 3 products, cloud. And again, it increases our footprint in this midsized IDN space. It's one thing to sell it, another things to put them in. We have, for many years now, talked about our fast-track implementation. If anything, it's getting even quicker. We are doing more -- we do some hybrid, on-site and remote, which has been incredibly efficient, not just for us but for the client. And it is a key differentiator because in the past, groups were worried about implementation risk and time to implementation of years, not weeks -- not months or in a lot of cases, in weeks. So it is equally as important to the application itself in terms of our offering and how we can get our clients [ live ] very quickly. Here are a list of the key implementations. We did 8 for the year. Here's 7 of them, so pretty busy. The important thing is we've been able to clear the decks to do right by the clients that we've now sold and contracted, yet to be implemented such as Samaritan and Gundersen. We are known as the most expensive application in the market, which is where we want to be because we believe we can support that by providing the greatest value or return on investment. We look at it through two prisms. One is financial, which these places of businesses, even the not-for-profits. And so therefore, it has to stack up financially. And we think we have a very compelling ROI in that area, but also clinically because we allow clinicians to do things that would either they couldn't do previously or would take so long that they wouldn't do it. So some segmentations could take 6 minutes. We did them in 2 mouse clicks in under 3 seconds. So we take away that barrier of not doing it. And therefore, we believe we get a better clinical outcome through our application than others. So we do move the needle. Two examples that I'll go through just quickly. One is that we've been working with quite a while. It's with Dr. Mariam Aboian at Yale. It is in an area where we are using AI to automatically segment gliomas in children, tumors in children, which has previously been incredibly difficult and incredibly time-consuming, taking up to hours where we can do it in 1 or 2 minutes. And the role AI has had in the accuracy of the segmentation, and we're now presenting a number of [ variants ], presenting a number, has presented and will present a number of papers as to how this has impacted their ability to track therapy over time and why it's so important. And then on a completely different tack, NYU Langone. We work with them to develop a thing called video reports. It's based on informing the patient of what is in their x-ray because as I said there, it is the radiologist, the most important doctor you've never met because most people don't -- haven't met the radiologist and don't really fully understand the results of their test, and this allows them to do it. And it's been incredibly successful not just with the radiologists, but also with the referring clinicians and the patients themselves. So the last clinical side that I'll talk about is turn out the new epidemic. Since we last mentioned this, I think the acute global shortage of radiologists has just -- keeps getting more and more acute almost by the day. There's not a country that doesn't have a shortage. And particularly in the U.S., we see massive shortages to the point that they're now calling it the new epidemic. So burnout, efficiency, call it what you want, the whole concept is there is a shortage of radiologists. One of the key theories was that intake into radiology residency programs went down significantly about 4, 5 years ago because everybody was worried AI would take over, and clearly it hasn't. The second thing is the data sets are getting larger, there are more images to look at. And then post-COVID, there's a very strong push towards a work-life balance, particularly work-from-home as part of the mix and most radiologists coming into the workforce either looking or insisting on that as part of their package. So effectively, we're now seeing, for the first time, many groups struggling to handle their current workload. And we actually know of groups that have started to cut back on some of their existing contracts, where they would agree for a third party simply because they don't have the manpower to service those contracts. So what's the solution? We think we have a fantastic solution. And I think our catchline platform for the future, powered by speed, encapsulates that all. We have seen unprecedented efficiency gains once a client moves from an existing system or legacy packs to Visage. Speed is a key part of that formula, just that much faster. But there are many other efficiency gains, having one desktop, not having to open multiple applications, if you're doing 2D 3D. It's throughout the actual application. So we routinely see very material gains usually north of 20%. In one case, a client had popped it up to 50%. But whichever way you put it, it is very material and, we believe, a key plank to solving this acute shortage of radiologists. And we've actually even heard recently that some of our large academic clients and actually, when they're advertising new positions for radiologists, mentioning Visage as a draw card for new residents and qualified radiologists to join the institution. Growth strategy. You've seen it before, we are enacting on all of it. Our footprint continues to expand. We've had increased transaction growth. We are bringing out new product offerings. We are looking to extend particularly our first blush into Europe. And we're leveraging our R&D, particularly around AI and cardiology, which I'll get to in a minute. The pipeline, we've made a comment on that, both in our announcement and at briefing. It's very strong. It's across multiple segments of the market and multiple-size opportunities. Pretty much all of them cloud-based, which is what we see and we think we have a strategic advantage in that area. Open Archive, as I said, this has become a very important product for us. it allows us to offer full stack, which we're seeing more of. And that helps us because there are few third parties to deal with. It's better for us, better for the clients, and it simplifies implementation and ongoing support. And it's a key component, not only of our cloud strategy, but also a way that would tweak and transition some of the on-premise clients over time into cloud so that we can take over the archive and also smooth that transition pathway for them. Workflow, the most recent component, it has been sold in 10 of the last 10 contracts. So clearly highly sought after and again, a very important part of that full-step philosophy. One Viewer, this is the entree into looking at more than just radiology. We are able to look at reflective light photo, videos. And again, we see this as one of the key areas where we can differentiate our offering as compared to others. So our first area of interest is cardiology. It shares a lot of commonality with radiology. It does have some additional functional requirements. We did show this a while back. This is now out in the field, the ejection fraction, and we are moving closer to our first commercial sites for a cardiology offering. Earlier in the year, we also won class -- award for the best viewer that does more than one ology. So clearly, we are making significant progress within our client base towards that. Cloud, finally, I'll quickly mention that. As most of you know, we are fully cloud-native or engineered. We have complete deployments in the cloud of large scale. And as I mentioned, all of our implementations in the last year and the previous year have been cloud deployed. So it certainly has been a game changer for the industry and for us. We do believe we have a strategic advantage and that others, our competitors, have not been able to offer that capability. And the other strategic strength we have is that we work well and have large-scale implementations with all 3 major cloud companies, AWS, Microsoft Azure and Google GCP. So we give clients flexibility if they have an existing contract with one of those three. Finally, on to AI. I've mentioned this before, we see multiple uses of AI in radiology. Diagnostic image is incredibly well suited to the AI applications. As FDA clearances in healthcare, the vast majority of them are in the imaging space. And we see all these use cases coming to be -- I think, the biggest one would be [ AIDS ] diagnosis or a secondary opinion. Fully automated diagnosis, I think, is a number of years off yet, but in certain areas, I think, will become a reality. We have our team, our Head of Research and multiple -- our CTO and Head of Development, the two co-founders of the Visage platform, they are PhDs in healthcare, imaging and informatics. And we have two others that are on the ground managing our research collaborations and our AI interfaces with some of the third parties, MingDe Lin and Raj Molly. Both PhDs, Raj and also MingDe. Finally, we have a product set, multiple irons in the fire. Many of you have seen this, so I won't go through in great detail. But when the inflection point comes for mainstream AI adoption, we think we're incredibly well positioned because we have multiple avenues, through which we'll be able to maximize our presence and commercialize that in the AI space. And then finally, we are getting much closer to the commercialization of that breast density. We've had some papers written. The clinical validation shows its accuracy is pretty much one of the best, if not the best, in the business. And so we think that it can become a material product for us, going forward. Finally, I'll just skip this one, mention the RSNA because it is the biggest conference. 2022 was huge. We're anticipating a big turnout in '23, in late November. And as I said, our investment in terms of footprint, real estate and people has been the biggest to date, and we are already starting to see returns on that investment in terms of inbound queries. So in summary, it's been the most successful year in the company's history. Our North American footprint continues to grow strongly. We expanded portfolio with full stack, has been incredibly positive for us. The ability to implement as a mixture of both remote and on-site has been huge. Cloud has been very big. We think that we are continuing to show the value proposition, both clinical and financial. We have a very strong pipeline, which continues to grow, and we think we're well positioned to take advantage of the adjacencies in AI and other ologies. I'll leave it there. Thank you, and open up the floor to questions.

[Operator Instructions] Your first question comes from Garry Sherriff from RBC.

A quick one on AI. In terms of market acceptance, do you think the European market or the U.S. market is perhaps more likely to adopt at a first port of call? And the reason I say this, I saw this month, there was a big study in Sweden, which had, what, 80,000-odd mammogram screenings and had some really positive results in terms of a massive reduction in reading workloads and also the clinical improvement was supposedly 20% better if you're using AI with human reading as opposed to just human reading by itself. So just checking, do you think -- it's come out of Sweden, do you think the European market is perhaps an early adopter ahead of the U.S. or vice versa? Any insights from that AI positioning would be helpful.

Look, I think they're equal. There's a lot of trials like this research trials going on in both continents. It's all over the U.S. Every single academic institution that may not be in breast imaging, they may have another specialty. But we see a lot of it. We know that some of the Nordic companies have been very -- on the front foot when it comes to areas around breast imaging. And -- so that's why this Swedish trial didn't surprise us. But as I said, a lot of it is in hospital trials. I don't know how much, whether in Europe, it's been more commercially accepted than the U.S. My gut feel is it's all still to happen.

Next question just on, again, the -- another organic revenue stream or future revenue stream, sales into new departments like cardiology, maybe just the latest update or timing around that, if you could.

Yes. Well, in my open briefing, I mentioned, we have hired or hired a while back someone that is specialized in that space. And that's enabled us to reach the feature function delta that we were looking at. So we are still on track, we believe, to have commercial contracts in place within the next 6 months, possibly earlier, just depending on what pans out. But we've put a lot of work into it. We're a lot closer, and we think that we will have a compelling offering.

Last question just for me on -- a question that often comes from the investor base is you've got these very long-term existing customers, which many of them have now renewed. And people are really interested or the market is really interested in on the rough sense of annual, both, volume growth that you see from these customers and also organic price growth. If you can give us just some high-level ranges, that might be very favorable.

Yes. I think the industry grows roughly at 3% to 4%. It's a bit hard to get an exact handle on it because the U.S. government -- I'm talking about in the U.S. and [ nothing ] that's global, don't produce one set of figures, that's organic. We think our clients, on average, are above that. Now they vary client to client. Some will open new hospitals and their volume will go up 8%, 9%, 10% as soon as that hospital comes on stream. Some that will be more organic and open smaller centers. But I think we're pretty clear that growth of our client base is definitely above the industry average. And as I said, it is all contributing to that transaction revenue increase. Clearly, new clients have come on stream for years. But also, there is this increased momentum with our clients because it's an enabler, that's the key thing. They're able to actually open new sites and manage them through the [ sites ], where they couldn't before, and pretty much every major client has experienced that.

And Garry, Clayton here. In terms of pricing per exam, that's clearly dependent on how many renewals we have in a particular year. So not all customers will change once they have a contract in place, that's the exam rate. When we do renew, we have been able to get an uplift, and that's somewhere between where the market is now and what we're selling to new customers and where they originally started. And we've said that, that has sometimes moved 60%, 70% upwards. It's fallen somewhere in between there. So for 1 or 2 clients that we renew, it could be 25%, 30% of all.

Your next question comes from Josh Kannourakis from Barrenjoey.

First question just around revenue. So extremely strong result, especially in the exam and license fee revenue into the second half. Can you help us just bridge that out? Is that a good sort of base level in terms of looking into the next year, as you mentioned, the organic growth? Is there any specific inorganic growth in terms of hospital acquisitions or anything that went in there? Maybe you can just give us a little bit more context around that and then just helping us bridge out into the new contracts and implementation timings into next year.

Yes, Josh. It's a bit of all of the above, so a little bit of organic growth. But clearly, we mentioned the implementations at Novant, Inova and Allina. So we did have some revenue in the first half, but we got a full 6 months' worth of revenue for all 3 of those customers, and they were large customers. So getting them on board, it gives us that exam volume growth in the second half as well as some additional sites at the UC. So we have finished all 5 campuses. So we had 1 or 2 that were done in the period and also a smaller one in the Children's Hospital of Philly. So that combined, there was 3 major ones where we got full 6 months, plus new implementations that sets us up for the new year. So to your first question about, does that set us for a base, yes, it does for the new financial year.

And then just within the actual portfolio, like obviously, there's a few other things going on Intermountain, acquired [ SCL Healthcare ], huge acquisition the other year. I mean, have you heard anything on that front? Or are there any other sort of inorganic sort of underlying hospital growth that we should be aware of that could impact you guys over the next few years?

Well, we don't any that would impact us negatively, they can only be positive. So as I said, so a good example was Northwestern, about 12, 18 months ago, told -- a bit longer that told us about a new hospital, and we put it in and then 10% of their volume. Again, with these really large mergers, it usually takes a few years before they're trying to consolidate our 2 platforms. It's not a thing that they do almost in the year, particularly if it's another whole system. But if anything, the Intermountain acquisition will either be neutral or positive for us, it won't be negative.

Yes, yes, yes. It's obviously a pretty chunky one, so I think it'd be a positive. Okay, that's great. Just -- so second question just around on the cost side. So we always criticize you guys maybe for not spending enough. Obviously, there's a little bit of a step-up in the first half. Can we just talk about how we should be looking at the cost base, maybe moving to '24 and some of the cost considerations in terms of investment and the like?

Yes. I think you can see it in the numbers, there was an increase in the cost base and the gross salaries. We've seen that across the board. We've done it in multiple areas, multiple departments, both in implementations but also technical support and development. So we have seen a step-up in hiring and therefore, our cost base. We expect that to continue into the new year, again, in all different areas and as we move into other departments and progress further with AI. So again, 1s and 2s, but now that we've got multiple departments that we're working in, that number may move to sort of 10 to 12 in a year rather than in previous -- a few years ago, 3s and 4s for the whole year. So the cost base is increasing, but we are obviously covering that with revenue at the moment.

But also, a lot of cost base increases, not only for supporting new clients but supporting some of the adjacencies. Like we mentioned, we've got someone on more specialized in cardiology and other bits and pieces and all the things I think we flagged to the market for them.

And final one really quickly, just on cardiology. Obviously, good news that, that's still on track and hoping across getting commercialization in the next 6 months. Just to give us some maybe a little bit of added context, is that planned on likely being with people that currently have the product in their hands at the moment or trialing the product? Or is that also talking about potentially new customers on top of that?

Potential new customers for the application, but existing Visage customers.

[Operator Instructions] Your next question comes from Melissa Benson from Wilsons.

I just had one. Firstly, Sam, it was on the -- on your prepared remarks, you talked about a renewed interest from the corporate market. And I guess what I was wondering is, what kind of customers are those? Is that kind of the private radiology clinics or the full-profit IDNs? And I guess the second part to that is, why had perhaps that engagement dropped away? Has there something kind of changed in that section of the market as to why they're reengaging?

I think, first of all, that section of the market, Well, it's a mix of full-profit IDN, plus private group, plus private equity-backed group that's sort of a blend across a large wave of the market. Well, a lot of that has gone, [ as Sean said ], into deepfreeze because there's a lot of private equity and few acquisitions. So groups basically didn't want to change their systems. And I think two things have happened. They've been consortia of groups get together that didn't want to sell out, and they realized they have to have a better toolkit because they've got to increase their efficiency. That's pretty much it. And some of the corporates, not all of them, it's -- as I said, it was something where that section of the market was largely dormant. And we're now starting to see some green shoots there. How materially that becomes for us and whether that gets swallowed up by some of the hospital market, I think all of that still is to play out.

And just my second question. You mentioned in the presentation around commercializing breast density, and that could be a material product. Should we think of that as just being integrated into your existing viewer, like it's an add-on kind of for all existing customers or they would explicitly purchase it as a separate product?

As an [ add-on ]. We're going to sell this as an add-on.

Your next question comes from Wei Sim from Jefferies.

Just one question for me. Just in regards to one of the callouts in the commentary on the German hospital capital contract, I'm just curious as to the renewal time frame for that. So is this something that we still have, and it's just that we -- the revenue is lumpy from it? Or it's something that they've decided to go with someone else? And then related to that, I was also having a look at some of the geographical revenue breakdowns in this year's annual report versus last year's. And it seems like there's some movement in terms of the numbers, if you could give some clarification around that.

In terms of the movement from last year, I'll maybe take that offline and go through that with you, if you need, Wei. But in terms of the German government sale, that was done in last year and taken -- the license revenue was taken in that year. As we mentioned, it wasn't replicated in terms of there wasn't another sale to them or an extension to that sales to the German government, but they're still a customer, and they still play support. Now, support for that is around 15% to 20% of that capital sale, but it's not as big. So that's why we talked about the decrease in the European operations.

Yes. And the reason for that is the German government can only buy through one mechanism, and it's more around the traditional capital sale mechanism. The [ Bobade ] charter, they can't, at this point, buy on a transaction-based basis. They have to buy and pay for it within the fiscal year, and then it's ongoing. So this was really a client we acquired a number of years ago. They've just kept extending the contract to new regions, and this was one region. So if anything, they're growing with us, not shrinking.

Your next question comes from Julian Mulcahy from E&P.

Just a couple for me. Firstly, has there been some reclassification of what's in that support baseline revenue line? Because if you -- on a sort of a half year basis, it was 11 in the first half, 6 in the second half, and it seems to have moved up to that [ exam ] line.

No, there wasn't. We looked at that. But no, there hasn't been a reclassification on our end.

So that support's baseline, and it's normally been a little bit higher in the second half to the first half. Why would it change so dramatically this year?

I'll have to look into that, Julian, but there wouldn't be a major reason apart from where we're getting more support revenue from customers like the German government and other customers like I-MED.

And just on the win rate, if you look at like the last 3 years in U.S. dollars, it was $104 million in FY '21. Then it was $73 million in FY '22 and then $60 million in this last year. Clearly, the share price is assuming an acceleration at some point. When do you think that starts to occur, given the commentary has consistently been at the pipeline is getting bigger and the breadth is much wider as well?

Yes. Look, the thing with all of this, as you know, these clients, some of them are 2 years in the pipeline, some in the past have been longer. So we may actually drop. It's just when it happens. So let's have a look. Since the full year we announced another very material contract in Memorial Sloan [ Kettering ], had that dropped 3 weeks earlier, it would have been in FY '23. It now gets us out of the gate at a fair clip in FY '24. So looking at it year by year, I think -- and I know you have to do that, it just really depends where they drop. I think our commentary around pipeline is the amount of opportunity we have in there. And as you know, that's where they're either in an RFP process or a known sales process, with they might do the trials and not an RFP, but they will be buying something that pipeline has increased.

Right. But is there any budgetary or just regulatory changes that are holding up the -- them signing the contracts?

No. In the past, it was -- like an example was NYU and Northwestern, we've been -- both of them looking at us for over 5 years, and they dropped within a month of each other. Why? No [ rhyme ] or reason. It just happened.

Your next question comes from Sarah Mann from MA Moelis Australia.

Just interested in, I guess, getting an update on the competitive landscape, if you're seeing any changes there, I guess, particularly in the context of what appears to be the transition to cloud that clearly is beneficial to you guys? I guess, just interested in what your competitors are trying to do to kind of close that gap.

Well, clearly, I think the pressure's on everybody to get into cloud. And some people will say they're in cloud, but the reality is they're not. They're just storing data in the cloud, is the word that they use, but the whole application doesn't sit in there and allow them to outsource all the hardware that they otherwise would have in their own data centers. So the first thing is one has to be careful of what people call cloud. Ours is full cloud, full deployment. But we hear what you did, plus a little bit from the industry that tells us we don't believe anyone is there yet. And in some cases, if they were to deploy cloud, the cloud costs would be multiples of what we do because you pay per CPU per second. And if they're just not efficient in using those resources, the actual total cost of ownership, which includes the power piece, could be very material. So I think there are a few areas that people need to get through. But as far as we know, no one, in terms of major competition, are fully cloud capable at this point. But even if they were, that doesn't give them all the other secret sauce we have in terms of 3D and stream. It just puts their legacy application in the cloud. So we think we have 2 assets, the most modern application streaming platform, plus it's cloud-based.

And then just a question on, I guess, broader geography. So clearly, there's still lots of growth in the U.S., but just interested in -- any thoughts around, I guess, going harder in Europe or anywhere else?

Yes. Look, we will be putting some more resources in. But I think the U.S. is -- everybody knows it's the biggest, but there's more to it than that because each opportunity is very big in Europe, you don't have opportunities the size of Northwestern or Mayo. But if you do, you only have 1 or 2. The second thing is, there's a whole layer of complexity in Europe, which is it's all government funded. And as you know, we have this thing about not responding to government RFPs here, it's not that dissimilar in Europe. There's a lot more overhead in trying to get a deal that's much smaller. But having said that, we're not ignoring it. It's just bang for buck, the U.S. is the best place. And in terms of our runway there, it's most probably the largest. So we will be putting some more resources, but nowhere near the amount of resource we put into North America.

Your next question comes from Peter Meichelboeck from Select Equities.

Just a couple. On renewals, if I'm looking sort of over the next 12 months, can you give us a bit of a feel for exactly which contracts are up for renewal and sort of a bit of an update on sort of timing? And on that, that would be great.

Yes. Over the next -- I think for this financial year, the one we're currently in, FY '24, we don't have any that are due. But towards the back end of that, we have Mayo Clinic, and then Mercy Health and [ Franciscan ], which we've done very close together. So there are 3 main ones, which will sort of be back end or the start of next financial year.

And I gather no sort of discussions have started yet on that or...

No. The only thing that's different was both those contracts and they're the only two, so I'll put [ Mayo ] and Mercy together because it was the same buying, is we negotiated a renewal window, but it was at a higher fee. And if they -- and the window is shorter. If they -- and this was done when we wrote the contracts. If they accept that, then there's no need for negotiation, and associates will accept that, that will roll forward a few years. And then, it's an open negotiation after that.

And just the second question. You mentioned several times about how busy you had been in terms of implementations, et cetera, and clearing the deck, et cetera, that you referred to. Can I just clarify, were any implementations delayed at all because you were so busy or from your side of things or...

No. The only we did, as Clayton said, we did 2 of the UCs, they were actually scheduled. When we announced UCs, we did mention it would be an 18-month implementation, and that was for logistics on their side, not ours. The last one, UCLA, went live in the March, April period, pretty much on time. I think they delayed it 2 weeks because they were waiting for something and -- but they're fully live. So all 5 UCs are on, and it was within the -- as I mentioned, it was always in the specified or planned time frames. We have not been responsible for any delays for implementations.

We will now address your webcast questions. Your first question comes from [ Curtis Larson ] from North Capital. Can you make an educated guess as to when you might see material AI revenue? Similarly for cardiology.

Yes. I think the key question is material. We're saying we're going to see our first revenue, we believe, within 6 months, maybe earlier. These things always take a little longer than one expects, but I think we're getting much closer. I think once we show a material client that is using it from the ROI, then I think that will take us to a different level in terms of being able to sell it to others. So I can't give you an exact date, but I think a very important step to getting material revenue, and material can mean material in its own right or material compared to our other revenue, the first step will be getting the key reference sites in place. And I think we -- as I said, we're hopeful to do that within the next few months and then, I think they show a shorter time frame before others. Look at the application.

Next question is from [ Stella Wang ], a private investor, who says, there has been fast development of blood test-based cancer detection, such as MCED that may detect breast cancer as well as mammogram. Do you see, in medium terms, blood tests disrupt radiology and screening programs and reduce imaging volume?

Look, it's possible. Again, at this point, we're seeing a rise in screening volumes. We're seeing a lack of radiologists that can read breast imaging because it's arguably one of the hardest. That's literally needle in the haystack stuff. So we don't see anything in the medium term. But clearly, this could be another indicator. And I've heard of it, but I don't know how 100% accurate it is. Will it pick up everything? And are women prepared to not have a mammogram and fall outside that square if it's not picked up? I mean there are the sorts of things that will play out over time. But at the moment, we see mammogram and screening mammography volumes increasing to the point that groups are finding it difficult just to handle the volume.

[ Nicolas Lim ] from [ Castle Street ] Capital Management asks, what do you estimate the market size is going to be for PACS and RIS in 10 years' time? And what share of each market do you expect to have? Do you plan on increasing head count anytime soon to reach the broader market?

Yes. Well, the last bit of things is that we are increasing headcount every year. And I think we have done so incrementally. We're not -- we haven't been like maybe some other start-up tech companies -- and even some of the established ones that have these massive headcount increases and then had retrenchments. We've been doing it steadily step-by-step, and we're going to continue. I think the RIS market is a good business here in Australia, but it's largely regionalized because each country has different billing insurer rules, interfaces whereas PACS is global. So I would say PACS, it is and will continue to be our biggest product. I think imaging will take a bigger and bigger proportion of the diagnostic record. They talk about an EHR, electronics health record. They now talk about a IHR, imaging health record, that imaging is going to be a bigger and bigger part of, and that's photos and videos as well, a bigger part of the health record. So I think if anything, that PACS market will increase materially over the next 3 to 5 years, maybe beyond.

[ Claude Walker ] from Rich Life asks, with 8 new implementations and a record number of wins in FY 2023, I am wondering if it is possible to keep up this rate of new customer implementations over the next few years? Or was FY 2023, a somewhat lucky year with large new contracts and implementations?

Look, we are always refining and thankful. We are always refining our implementation, the technology, the software, the methodology of training, how we do it, how we support, with the whole aim of being able to do things even quicker than we're currently doing it. We are also -- with that increasing headcount in terms of clinical implementation, usually, they're ex radiologist, technologists that teach the radiologist how to use it, take questions on application questions. How do I do this? How do I trace a vessel? We have been steadily increasing those numbers to support new client, new implementations. And we've also been increasing our technical support people who do the implementation. So increasing headcount, plus refining the process. I think -- and cloud. Cloud is a really big thing because you don't have a hardware purchase cycle. It's far more standardized environment. All those things mean we're actually implementing quicker for the same-size client than we did before. And again, it's like anything, the more you refine it, the more you can do. So it is a very key focus of ours because we don't want to be in a position where we win stuff and then there's a huge delay in putting it in. That doesn't work well for anybody.

Your next question from [ Sam Clark ] from CLSA. Just wondering if you could give a little more detail around the pipeline, noticing that usually we see a commentary suggesting pipeline is strongest it has ever been. Is this a function of winning a lot of work recently that is therefore pulled from the pipeline and hasn't been refreshed yet? Or are you sensing a bit of a slowdown in the RFPs, given you have had such a good run as of late?

No, it's true. Once they come from pipeline to contract, they can had a pipeline. But we are telling the market that there have been new opportunities that refresh that. So no, the pipeline, it's not that we've had a good patch and now it's worse than before. I get -- our message is it's getting replenished. And if anything, the number inbound opportunities over the last maybe 12, 18 months, has increased. So -- and it's increased across multiple segments of the market. And also, we can show that we can address areas of the market that maybe people previously thought we couldn't, move that midsized IDN where we can actually do full-stack cloud, and it makes a lot of sense for us commercially. That's quite a broad market, and we're showing good success in that. So we're getting more interest in that part of the market as well. And as I mentioned earlier, green shoots out of the private corporate market. So where that leads, no one's quite sure yet, but that wasn't there maybe 2 years ago.

[ Lindsay Sherman ] from [ Sunland ] PTY Ltd. asks, you mentioned that profit margins have increased. Can you disclose the actual margin percentages from [ M2 ]?

Yes. So the margins having increased. They were 40 -- were at 66, that was EBIT margins. They've moved to 67 and a touch over 67. That includes an increase in headcount. So we have been able to cover that, like I said, with revenue from customer contracts.

Your next question is from [ Claude Walker ] from A Rich Life. Traditional question. Were any contracts lost out of the pipeline to competition since I last asked in February? And if so, why?

No. None that we've -- there have been a lot, but within the pipeline, you do the sponsors and clearly, you're waiting to see what happens. But nothing material, nothing I can -- I know of, and I know most of the opportunities have been lost from the pipeline.

There are no further questions at this time. I'll now hand back to Dr. Hupert for closing remarks.

Well, I just wanted to say thank you, everybody. It's almost perfect just finishing on the hour. Thanks for all your questions and your involvement, and we appreciate the interest. Thank you.

That does conclude our conference for today. Thank you for participating. You may now disconnect.