Pro Medicus Limited (PME) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Pro Medicus Limited Full Year Results Briefing presentations. [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 full year results presentation. As most of you know, we are a health care IT company specializing in enterprise imaging and radiology informatics systems. We work in 3 jurisdictions, Melbourne, Australia, our corporate office and where we do the development and sales for our RIS product Berlin, which is our R&D center and 1 support center for the Visage product and U.S., which is our main market. We are heavily technically focused, nearly half our staff are either programmers or technical support. The second biggest staff are clinical support because, as you know, ours is a clinical product. So very much client-focused staff mix. In terms of our results, we believe all of our key metrics moved in the right direction. Obviously, revenue was up 29.3% and profit after tax 36.5%. I think underlying EBIT was also up and as were our margins. And I think, pleasingly, we continue to accrue cash even after paying dividends and making an investment in Elucid, which we made earlier this year as well as the buyback. So the Board decided as final dividend, which was a record $0.22 fully franked. In terms of the year, it was a record year and really all metrics, not just revenue and profit but also in terms of new sales and the number of implementations we successfully completed. There were 9 new contract wins in North America. All of them were cloud-based. We completed 9 implementations also cloud-based. RSNA, which is in the November, December time frame 2023 last year was our busiest to date. We continue to make good progress with other ologies and AI certainly, the increased sales from a very strong base for growth in FY '25 and beyond. In terms of the highlights, pleased this year, there are so many of them. I've got them on 2 pages. Our first contract out of the gate was Memorial Sloan Kettering, a Tier 1 academic, one of the top cancer treatment centers or groups in the world. They're in the upper east side of Manhattan. That was followed in September by our biggest contract to date with Baylor Scott & White in Texas. They are a mixture of academic with the Baylor School of Medicine, a highly regarded as well as an IDN because of their large spread across the state of Texas. In October, we signed South Shore Health, which is in Southern Massachusetts, a regional IDN. And then another academic later in the year in November, which is Oregon Health & Science, which was a $20 million hedging contract. That was followed early in the new calendar year with CRL, which is a private radiology reading group that were reading and are reading for one of our clients in Allina Health, obviously had exposure to the contract with the Children's Hospital. As you know, we've won some in the past and seeming to have a good run through the -- with Children's Hospitals, which are very highly specialized in Nationwide in April 2024. And then followed by Nicklaus, which is again a specialist pediatric hospital in Florida, followed by Moffitt Specialist Cancer Center. And then US Radiology, which are a private group and amalgamation of groups, a consortium of groups, to do all of their mammography reading, which they do remotely for not only their sites but many hospitals. The other highlights as mentioned, RSNA, our biggest and busiest to date both in terms of existing client visits plus new opportunities. We had the most we've seen across a huge range of market segments, which was good and huge range of -- size of opportunities. As I mentioned, we completed 9 implementations in the year, which was a record for us, and our pipeline going forward continues to grow strongly. So all in all, we felt the combination of all these factors, financial and new sales and implementations, have set us up for a strong FY 2025. In terms of the revenue split, many of you have seen this chart before. But for those that haven't been, salmon color or light pink color at the bottom are transaction revenues, which grew strongly in the year. The blue color is also recurring revenue but is more focused around our support contracts. Some existing clients before we use the transaction-based model. The green is professional services where we do all the implementation and training and charge for that at consultant rates. That amount is split across the life of the contract, again, largely recurring throughout the years of the contract. And the yellow section at the top is for archive migration, which is where we take the data from their old systems migrated and scrubbed and put it into our Visage 7 Open Archive, and that is more one-off. It has grown year-to-year, and that's a result of doing or selling more full stack, which includes the archive and therefore migrations associated with it. So all in all, strong growth in transaction revenue and in the blue, the support section, recurring revenue with the green. So most of our revenue is recurring and all of the group in the last financial year. In terms of operating leverage, we've always told we had a highly scalable offering. As we mentioned, training and installation charged as professional services. We had managed to contain our cost base. So margins have grown further from last year as our footprint increases. The operational model, as we mentioned, is used in the majority of our U.S. contracts. It's delivered as Software as a Service. We -- all of our contracts have the same structure with transaction minimums. The forward revenue has now increased with recent contracts to $624 million over 5 years. There is upside in all of that because these are contract minimums, and we grow it as client exam numbers grow. And all of our clients are currently growing on average, well above the industry average. So it provides us with annuity style revenue stream, so far great predictability as all the new contracts layer on top of the existing base. In terms of our client base, every year a magazine in the U.S., it does a very extensive poll of all the hospitals department by department. They've decided in the last few years to list the hospitals in alphabetical order rather than write them as they did in the past. But, I think, it's telling that we now do 11 of the top 20, far greater number than any of our competitors. And, I think, it's a testament to the depth and breadth of the system that we offer. In terms of markets, we've talked quite a bit about the IDN space, which is really the largest segment of the market. It's nonacademic but hospitals, high-quality usually. And we've had an increased presence in that space. Original clients like Mercy and Sutter have been supplemented by Intermountain, MedStar, the likes of Novant, Inova, Allina and many of the others. So it has been a very good area for us. Most recent sales for more than 1 product, many full stack, they have all been Cloud and Cloud deployed, which I think is important because that is the new paradigm, and we are getting an increasing network effect in this market segment. So we've not only been successful in the academic medical centers, the Tier 1 academics, but also in the nonacademic space or IDN space. Visage RIS, we -- that business grew last year. Again, our main focus is around Australia, but we do have some implementations of the RIS in Canada. We still service the 2 largest groups in I-MED and health care imaging services or Lumus. With our increased market share, we believe, is the undisputed market leader, certainly in the private segment of RIS Australia. Visage 7, which is the clinical product we sell in the U.S. and globally. I think we reassess it every few months to see where it sits vis-a-vis the market and our competitors. And we're still highly confident that we are the #1 in the 3 key areas that count the speed, functionality. So again, we believe we're the only ones with the 1 product set can cater for all 2D, 3D 4D, which is moving 3D and adding the advanced imaging requirements that are becoming more and more requested within the radiology area and scalability because these organizations are very large. We often deal with petabytes of data for each client a year so that the systems have to be able to handle that. And the amount of data going through the systems is increasing year-on-year. So we do think there's been a massive data explosion that continues. The cameras in our industry, the CT scanners, the MRIs, the 3D breast machines are all producing bigger and bigger files, and we believe we're uniquely positioned to handle those large data sets as compared to legacy systems, which were never designed for data sets of this size. So legacy technology. The standard is the scanner producers a file. The file is compressed, as much as possible without losing fidelity, sent down the network to a heavily -- a highly configured workstation, which then unpacks that file and does all the image enhancement manipulation locally on that workstation. The problem with that is, as I mentioned, the files are getting too big, and it takes too long to open and do all the manipulation locally. So our model, which is proprietary allows the file to come to the single back end server. All of the sophisticated enhancements, 2D to 3D, et cetera are all done in the real time as models. And then the pixels are just streamed to the radiologist, clinicians. So the two huge advantages of that are it's instant. So it's on demand and even the largest data set 1 second or less in terms of being able to visualize them clinically. But the other big advantage is that the radiologist workstation doesn't have to be highly configured. And when you've got literally hundreds, if not thousands, of these screens. That's a huge cost saving in infrastructure for the organization. The other thing we pride ourselves on not just that technology, but obviously, dependent on the technology is our ability to fast track implementations. In the past, a lot of these organizations used to do a 2-, 3-year implementation. We've been able to cut that by a 1/4, sometimes 1/5 and sometimes even more and have been able to show that at the scale of the operation, we've been able to do that quickly and seamlessly. So it delivers huge benefit to the client because the cost, the time and the effort in switching systems used to be a huge barrier to entry, and I think we've removed that. And it also allows us to use small dedicated teams. They can come in, do the job, come back and then be -- get ready for the next one. So we tend to use far less and get better result. And we think it's a key differentiator to our offering. And as mentioned last year was incredibly busy. We did 9 implementations. So definitely keeping on top of what we sell. We are the most expensive product. We believe we also have the most proven ROI, not only in significant infrastructure and savings, and that's amplified as they go to cloud, but I think the key areas of radiologist efficiency and greater clinical accuracy. So it's one thing to get someone to be quicker, but they have to be equally, if not more accurate. So we think there is a very compelling ROI in our product, both from a financial and, equally if not more importantly, from a clinical perspective because we allow radiologists to do what they otherwise couldn't do or if they could, would previously take too long to do. So there is -- what is the impact of this? There's obviously been a lot of conversation around the industry -- the medical industry in general, but radiology in particular about burnout. There is an acute worldwide shortage of radiologists. There was an article published in the radiology presses recently as the last few days where groups -- I'm not taking on any new work. So teleradiology groups that used to fight for clients and now at freeze on new work. The shortage has become that acute, and some groups are even giving bad contracts where they feel they're just not able to service them to a certain level. So there's a massive shortage. It's one of those things it takes years to work out because you need inbound new trainees and radiologists training is 3 to 5 years before they come out. So the burnout is real. It's not just in private practice, it's in academic practice. And what we are seeing as most industries work from home is part of the mix. And again, we're ideally suited to that because of our streaming technology. So we think burnout is real, and we think we have a very real solution for it, simply because we can increase efficiencies, 25% plus with the same radiologist pool. In terms of clinical outcomes, again, I will give some more examples at our AGM of some of the work we're doing. But we are regularly being told by our clients that we are moving the needle on what's possible, not only with -- in terms of making sure that there's no burnout, but also clinical capability makes it just so quick and so much accessible for the radiologists. And we think that's a key part to our future offerings. In terms of our growth strategy, clearly, one of the key drivers to expand footprint through new clients. And as we mentioned, FY '24 was our biggest year of sales. We sold $245 million at a minimum contract value. So there's a fair bit of upside growth in that. It was the biggest we've sold in a year. We are seeing transaction growth from existing clients at around 2 to 3x the industry average. One, because we enable them to do more. And then the second thing is a lot of them are making bolt-on acquisitions and other bits and pieces. So all of that has added to the existing base just in transaction volumes growing. And then the other growth is new products. So we're not only looking to offer them as full stack or part of new sales, but we are looking to offer them and have been successful and starting to see some more traction, offering these additional modules back to the existing clients. We are looking at some new geographic markets. But I think our main focus is currently the U.S. simply because we have so much runway there, and we are making very significant inroads, and we are leveraging our R&D capability into the other ologies in AI. So all of these growth strategies work in tandem with the big one being the footprint expand that gives us the market to sell product back to as we move forward. The North American TAM, I think the industry now believes is about 650 million exams performed per year, growing roughly around 3.5% organically. We believe, we are able to address the vast majority of the market from a product perspective. We look at our client base. We have a [ 2-man ] radiologist practice here in Melbourne, near the airport all the way through to some of the largest, most sophisticated organizations in the U.S. And I think the key thing there is, one, Visage 7 product. We don't have different versions for different markets. So our ability to continue to develop it, to distribute it is highly enhanced being the one product, and we think we are unique in that regard. In terms of commerciality, when it's a deal too small because you still have to go through a certain process in contracting, we believe that, that bar has been lowered, simply because we sell full stacks to sell 3 products and because of cloud. And with that, the entry point has been lowered. So we estimate around 85% of the $650 million is addressable from a commercial's perspective. Our current penetration is just a touch above 7% and growing. So we do believe that we have a very large addressable runway in the U.S. Pipeline. We often get asked about that. I'm sure we'll get some more questions today. I think it's fair to say that we're very pleased with the state of the pipeline. We have had increasing number of inbound RFPs. We've mentioned that for the last 18 to 24 months, but we see that cadence increasing further. We think we're well positioned. A lot of the opportunities are mandating cloud, and we believe that we are one of the few, if not, any companies can really provide a true cloud-based implementation and scale in this market. The other products. The original product was Visage 7 Viewer. We did a number of years ago, bringing to the U.S. the Open Archive. It has become a significant product for us. A lot of our new clients taking it as part of the initial sale, either as a second product to the Viewer or as full stack where they take our Worklist and Open Archive and it's a very key component. I think the important thing is we have highly optimized how we store these massive images in cloud, so that our cloud costs compared to any competitor based on storage are far, far less. And it's, again, another key driver for people looking at our solution, including Archive. The last product, the most recent are Workflow Manager and Worklist. Again, has been highly successful, particularly as we sell full stack. We have started selling it back to a number of existing clients who originally took the Viewer because Worklist wasn't available. And so we've been able to replace third-party product. And the beauty of the full stack solution is not only do we increase the total contract value, but importantly, it makes it easier for us because we don't have a third party that we need to rely on to complete their bid of the work for us to complete ours. So we're really only dealing and interfacing with ourselves, which clearly is a lot quicker and a lot easier. I think the biggest pivot we've seen in the industry in the last few years has been cloud. As mentioned, we have been able to not only provide all the same feature function in cloud, it's actually even quicker than on-premise, which is counterintuitive. So we do offer the security and scale of cloud. And I think security is a huge issue in the U.S. There have been a lot of cyber incidents, some are of massive proportion. And so I think this is front of mind with a lot of the large groups. We are vendor agnostic, so we do have large scale implementations in all 3 major clouds, AWS, Azure and Google GCP. So if the client has a preference or an existing contract with 1 of the 3 that does not preclude us from providing that solution. So we do believe it's a very significant advantage over our competitors that many talk cloud, but we don't believe they're able to actually fully implement. Or if they do, they require on-site hardware, which is a backward step that compared to cloud and it sort of counters the whole idea of going for scale and security. We are making progress with our move outside radiology into cardiology. We do have the product in more test sites. We have added feature function. So we have made good progress after showing it at RSNA. And then, of course, AI, which is -- which the words many are people's in all industries. But interestingly enough, medicine was one of the first or health care was one of the first to embrace AI. AI and health care are well suited to each other. And interestingly, the vast majority, over 80% of FDA-cleared algorithms in health care are in diagnostic imaging. So there are -- we envisage many use cases. This is all emerging. The market is not mature. It's just starting on its journey. But we have seen AI embedded in imaging equipment, which is where most of the FDA-cleared algorithms are currently. So if someone moves during a CT or an MRI, AI may be able to improve that image or if not at least warn the technologists that they need to take another exam. We see it often in emergency situations where AI read through images and highlight those where there's an abnormality, so they can be read first. I think the next 2 areas, screening in breast cancer detection, lung nodule detection. People are talking about AI for coronary artery screening with cardiac CT. I think that aids in the diagnosis or a second set of eyes, will lead the key drivers of growth in the industry and will be the main use of AI going forward. And then there's always the concept or sort of automated diagnosis, but I don't believe we're at that point at this point in time. In terms of our team, clearly, our heads of development and the developers of the platform; Malte Westerhoff, Detlev Stalling, Head of our AI, PhDs and health care imaging. And so they're ideally suited and understand that. So again, we have some resources on the ground working with our clients and looking at the market to decide our direction, which algorithms, whether we build them or partner with someone and how we fill out that matrix going forward. Breast density, that's the first one we've had FDA cleared. We have had a number of papers provided and given recently about the use of it in clinical practice and the effectiveness of it. So we're very confident that it's highly accurate and will give a more consistent result than humans reading the same mammograms and DTS. So where do we see ourselves? This is our sort of master map with Visage in the cloud being central to everything, including all the clinicians, radiologists. And off the same data set, and I think that's important, being able to do research AI and without having to replicate your data, which, as I mentioned, was -- can be many, many petabytes for each organization. So we are filling the matrix on this and are very pleased, particularly with the way the Visage 7 Open Archive has been so central for that data in the cloud. Finally, the last thing in February, many of you would have heard we became the launch partner for Apple Vision Pro, the immersive goggles. One client called it from he Flinstones to the Jetsons and it's probably the most apt description. We've had a lot of very positive feedback about it. As I mentioned, it was a launch product. It allows you to effectively walk through 3D models of an animation based on CT and MR. It's very high resolution because each eye has a 4K resolution. We think it will be a go-forward platform for immersive AI integration. In other words, you segment a tumor or highlight it with AI and then you can actually see it as you walk through it and then immersive 3D. UC San Diego was our launch partner and other key Visage clients are now piloting this software to determine use cases forward. So just wrapping up the summary, I think it's been our most successful year in the company's history from all fronts. Our North American footprint continues to grow strongly. The full stack solution has gaining even further momentum. Cloud has been a huge strategic advantage for us. We feel that if anything, our ROI, both clinical and financial, is increasing. Our pipeline continues to grow in -- particularly in North America, where there's a very large TAM. We are looking to leverage AI as it becomes more mainstream. And as I mentioned, we launched the Visage [ Ease VP ] for Apple Vision Pro. So that's it for my presentation. We can open it up to questions now.

[Operator Instructions] Your first question is a phone question from Garry Sherriff with RBC.

And again, we took our hats to the habit you have of delivering impressive numbers. Two questions from me. Firstly, on your emerging organic revenue streams. And the second one on that [ Lucid ] children's contract for this financial year. If I start with the first question on -- the core is performing so well and the runway, as you've said, is materially large. So circa 90% of the market is still up for grabs in terms of share in the U.S. If I switch to those new or emerging organic revenue streams, if we look at sales into new hospital departments outside radiology and also the AI algorithm sales, what are the obstacles that you're finding to, I guess, securing these sales? Or what can you do, I guess, to accelerate the traction in those 2 new organic revenue streams so that they can be a material contributor over time?

Yes. So that's a good question. They're slightly different, but have some similarities. With cardiology, clearly, it's a brand-new offering from us. And it's a bit like Visage was maybe 10 years ago. So it's all about product function, product feature, same platform, same software. And cardiology has a lot of moving bits because you've got the statutory requirements to report the output to a central body, and it's -- there's some nuances around it over and above the actual imaging. And you need that bit for it to be useful. So I think we're moving a lot closer. We have it in more sites. We're getting very close to version 1.0. AI, on the other hand, that's an emerging market altogether. So in cardiology, we're going to look to replace existing systems. AI will be supplementary to new and emerging. So again, we're making sure of a few things that the projects we're working on have enough clinical validation sort of when we do put them out, we know they really are going to do the job and really move the needle. Statements are a touch longer than we think, but I think the important thing is, in the meantime, we are developing those options, and we are also developing the footprint where we will sell those options back to -- because it's a tandem that doing the two.

Okay. That's clear. That makes sense. The second question, Sam, is just really, you mentioned that Lucy (sic) [ Lurie ] Children's Hospital contract in Chicago already won this financial year. Maybe if you could just give us a bit more detail, it sounds like it's not a material contract, but any detail you can provide? And I guess, going forward, will you do what you typically did back in May, where if they're not material, you'll club them together and announce multiple won contracts over a period. Is that the plan going forward?

Yes. So it's Lurie Children's. If you go through Central Chicago, you hit Northwest and you hit Lurie Children's and they look like one and the same, but they're actually not. Although at Lurie Children's read all the pediatric cases from Northwestern plus their own. They're premium specialist children's hospital. It was a totally separate deal. We announced just to say, look, there are sales that we make that we don't announce, and they're business as usual. This one was a little bit more strategic because, as I said, there's an association with Northwestern. And even though they made a completely independent decision, we're glad that both organizations use us. And really, it's to say that there is a business as usual cadence and particularly now materiality has changed a bit as we get bigger. But it also shows the breadth of the market that we deal with because if we're saying we gain for a large part of the TAM that's out there, you've got to go up and down the scale, you've got to go into specialist areas like pediatrics. And I think this is our fourth pediatric hospital, so it shows that -- obviously, it resonates with them as it does with the adult mainstream. So I think to tick the number of boxes seems the reason I mentioned it.

Your next question comes from Annabel Li with Goldman Sachs.

I've just got two. So firstly, just a follow-up from Gary's question. The Lurie's Children's contract noticed this follows the 2 children's hospitals in May, is this an increasing area of focus for you? And is this where you might be seeing more of your RFPs currently?

It's a subspecialized area. And children's hospitals speak to each other. It's not -- when I say it's not a focus, it's just when you get one and you're able to deliver on that like we did with [ CHOP ] and then it -- then others pay attention. So I think it really is just a slice of the pie that we're showing we can address. Now usually, there, in terms of the exam numbers and revenue, usually, they're more boutique because they only do children. But there's a plus, obviously, trying to increase the capability of clinicians in pediatric health care is obviously something that we think is very positive as well. So look, it's 1 out of 4. There could be more, but there's plenty of opportunities of pediatrics because pediatrics is subspecialized.

And sometimes you get the clinicians that move between the pediatrics and the adult hospitals. So it is a good -- I mean, they're already part of like Northwest. And then Lurie, they're already part of using the same system, that's great. But if they're not, it does give us the opportunity to get in front of groups that are not using our system, but they might use it in the Children's Hospital. So these are positive. As Sam mentioned, they do look at each other, and it's a good reference site for other pediatric hospitals.

And the second one was just how do you think about the scope of price increases from here just for both the existing and new client base because you've talked about consistent tech upgrades throughout. But are there any new particular features, AI, for example, that you intend on or have added that's worth calling out?

Look, it depends on numbers. So we spend most of the dollar back on the call stack. And so we're always putting a new feature functions and AI is part of that. So can we make it quicker to do measurements for the radiologists about measurements? Can we automate that radiologists don't have to click and do things? The answer is yes. Is there a value in all of that to clinicians? And the answer is yes. So we are seeing price accretion in what we are quoting and what we're writing the contracts at. So we are seeing the price go up. But obviously, there's a balance. And it's a fine line, but we always treat, and we've been successful with it today. But is there any one feature? No, because it's always a combination of the number of features that we put out. We put out 2 major releases through the year. And most of that is -- 90% plus of that is feature function.

Your next question comes from David Low with JPMorgan.

Just wanted to talk about the pipeline. I mean, I can see that there is -- if I look at the largest hospital groups in the U.S., Visage is not seemingly in any of the very large groups there. Can maybe just talk a little bit about the pipeline and whether you think that you're likely to be able to announce contracts amongst, say, the top 10 U.S. hospitals, please?

That's an interesting question. I think the best way of answering is, we do have examples of very boutique, small numbers, smallish dollars all the way through to some very large ones. We do get the question was Baylor Scott & White an outlier. And my answer to that is, no. I think there are a number of others that are out there now. Some of them, they have mandates with [indiscernible] to a certain level of technology. At this point, some are more open to looking at what's the benefit. So we do have opportunities across all segments of the market. And I've tried to be upfront about that without giving any specifics because we can't. So whether we get Lurie's or we get something more like the Baylor or anything in between, I mean it's all good business from us. And I think we're expecting a mix.

That's helpful. Just could I understand a little bit or could you explain a little bit more about some will only buy up to a certain level of technology? What do you mean by that?

Well, some will mandate or have in the past that they won't buy 1 vendor, they'll buy multiples. Again, I don't know if that's a terrific strategy, but that's their decision. Some will only say, look, we don't want the best in the market, we need something that's a bit more utilitarian. Again, I think that may be a false sense of economy, but that's been the management today. And look, some shifting, some -- we've had a number of opportunities in the past where they've gone further downstream and thought it would do the job, and they haven't come back to us. So nothing is hard and fast, but the -- some of the really, really big ones. They're big, but they're very difficult and oftentimes difficult to get a deal and they often don't just settle on one.

Your next question comes from Josh Kannourakis with Barrenjoey.

Just first one, just with regard to the pipeline, maybe want a little more specific. We've talked before around some of the opportunity around the veterans and defense the government's effort, obviously, to move that to the cloud. Is there any sort of updates you can give us on that process? And also, any updates, I guess, on some of your existing clients and their conversion to the cloud?

Yes. So I think where we last left off the VA and the Department of Defense put out a very, very high level RFI. It was not really overly specific. That's still in the market. That's still progressing. But as you would imagine, it's relatively slow because it's such a big thing. It has a bit of a nurture about it, but it is progressing. We'll know a lot more because the financial year from other than VA start -- finishes in September, October and that's when they get budget for next year, and that's when you get a better view of what may be happening. It's not necessarily going to give you a view, but it may. So I think we're still tracking on the same path. We are FedRAMP approved. We're sort of in the slide. There is move towards cloud by the government. That's -- they're pretty much mandated that. But like everything, they tend to move slowly, and we'll know a bit more in the next few months.

That's super helpful. Just second question, just with regard to exam volumes. Can you give us maybe a bit of extra color just around within this financial year, what the sort of broad exam growth volume numbers were? And, I guess, how we should sort of think about some of the opportunity for exam growth in your existing customer base over the next few years, whether it be through just pure growth or M&A consolidation, et cetera?

Yes. So we spoke about industry standard being around 2% or 3%, which just comes through again. So that's roughly most years, that's the level of growth rates that you see. We've seen like-for-like with our new customers coming on board around 7% to 8%. So again, another solid year on the back of a previous year where we were above industry standards. As Sam mentioned, that's 2 or 3x more than the industry standard. So that's a good position to be in. Some of that is, we think our customers can do more by using our products, so that's a positive. And some is through opening new hospital sites and adding in radiology and again, some through acquisition. So hospitals getting acquired within the customer base, therefore, increasing exam volume. Pleasingly, as you see from the graph, exam revenue went up 30% from last year to this year, but we've got our biggest implementation going on as we speak, so that will add to that as well. So it will be another step change into '25 with Baylor Scott White coming on board. So exam volumes heading in the right direction. We think that will continue, and as we implement new work, that will help as well.

Your next question comes from Andrew Paine with CLSA.

Just looking at the EBIT margins, obviously, they're continuing to grow. And just trying to marry up your kind of statement around not anticipating much deviation from this. But you've got a high contained cost base, and it's kind of difficult to see if you're growing top line, let's say, 20%, 25%, how there wouldn't be some opportunity from -- for some leverage there in '25?

Yes. Look, we always look at it as what does the business need, what do we need to spend on. So we're not looking at our margins to try to increase them all the time, but it's a byproduct of, as you said, brining on new revenue. And as I mentioned, with Baylor Scott White coming on board, there will be more revenue to come. We do look at what does the business need, where do we need to build into the business either through development, implementations, adding an additional product outside of our main core product. But you're right, it is a highly scalable business. So margins could grow. We don't expect that they'll go down. So yes, we think they're in good spot.

Yes. Okay. No, that makes sense. And then just on the, obviously, the Baylor Scott & White, the sort deployment of that or being live in September '24. So if that's right, first half -- half benefit in first half '25 and full benefit in 2 half '25, the decent contracts you expect that would provide a margin uplift given that you're probably deploying the costs at the moment?

Look, it may well, and we just want to sort of be realistic around margins. We're 2x to 3x and there's competitors. So we are in rarefied atmosphere, which is where we want to be. But yes, we think there's a possibility. But really, as we see it now, we don't expect really major shifts in other direction.

Your next question comes from Melissa Benson with Wilsons Advisory.

Just a quick one for me. Just a reminder, on the renewal pipeline and if there are any key contributions in '25 that we expect?

Yes. So 2 will be due for renewal that we're in discussion with. There are only direct discussions between the 2 parties, not gone out RFP and we're obviously progressing those. And the renewals, as you know, are around 2 things, normally, one is the price because price has moved and we have a view that we try and get them somewhere in between where they were and where the market price for our product is now and often term because most of the clients, in fact all of them are very comfortable with our technology and how they're using it. And we've seen a number of them that have actually taken longer terms on renewals than they did on their original contract. So it's around those 2 issues. And those -- we're having those conversations as we speak.

That's helpful. And then just perhaps to follow on to Andrew's question around the margins. I mean on the other side of the coin, are there cost pressures that you're seeing that you're kind of factoring into the business where developers are costing more. Anything that really has changed in the past 12 months? Or it's really kind of BAU?

Pretty much BAU, but we do -- there's wage increases, and you can see with our employee benefits, it has gone up, is up 26% on the previous year. So we are hiring and we are -- if we need to pay people more that's obviously at market rates. So if those market rates go up. But as you know, that's across 120 staff, not 2,000 staff. So the pressures of inflation and salary increases are limited to the number that we have, but we're mindful of obviously paying people the right amount and also making sure we have enough staff to deal with the implementations and the work we have ahead of us.

Your next question comes from David Bailey with Macquarie.

Just following on from an earlier question around other ologies. So in the annual report, you're talking to the extension of AI -- into AI and used to be on radiology. Can you maybe talk to other ologies in focus or where you might see some development ongoing in the background at the moment, as well as can we try and pin down some potential timing for cardiology in AI, initial contributions from those?

Yes. The second question first, it's very hard to tell because how long is a piece of strength. As I said, it's very different to the situation with the Visage spectrum of products. We know that we've already gone through version 1, 2, 3, 4. So our decision is version 1.0 certainly in cardiology. And then most of the other ologies are around [ visual light ]. So they've become less x-ray, it's what we call DICOM focus. So the only one that has a lot of DICOM is cardiology with ultrasound MR, CT, but the others are more photo, video, not exclusively, but largely. So again, it's -- they're all in scope. We think cardiology is our main focus at this moment. But if something came up in ophthalmology or dermatology, there's no reason we couldn't do it. And then -- obviously, then the last piece of that puzzle is digital pathology, which is small at the moment, large data sets, but small in volume, but again, we look at that as part of the overall spectrum. So I can't give you an exact date. What I can say is we're doing a lot of work on multiple options inside the other ologies and AI. But as we get a commercial product, all that work will be well worth it.

And in terms of development, is this all going to be organic or you look to potentially license or acquire in order to move into those other ologies?

A mix of all of the above. So some of it has been organic. Some of it has been with our research partners, which we've talked about in the past, and I think that base will get bigger. And as you saw with Elucid where we made an investment there will be a commercial agreement for that. Now you don't have to invest to get a commercial agreement and the others where we see that could fill in the matrix, particularly if they have a rebate, which helps the financial equation that we're speaking to. So we're looking at who's best in breed, who fills the slots that we're looking at, and it will either be build kind of with our academics or license and possibly both depending.

Your next question comes from Peter Meichelboeck with Select Equities.

Just had a question in relation to your existing customers. I think you mentioned on the call that you had some further success or progress in selling to your existing customers the additional modules. Just wanted to find out how much of an opportunity there still remains in that space?

Yes. Look, it's pretty material because the first -- if you look at our last 10 years, got first 5, roughly 6. We didn't offer archive. So everybody used an existing third-party archive. So an archive in particular, a lot of those third parties are either not there anymore and not there in the form they were in 5, 6 years ago. They're heavily reduced and a lot aren't cloud capable. So we think there's an opportunity in that. I work with the same thing. A lot of the independent Worklist [ vendors ] have been bought, and one was bought, and it's no longer been sort of supported. So we think there's good opportunity in that. So it is a good market for us. It's not as big, clearly going forward as a new footprint market, but it is material. And it may be the pivot point, that and cloud together. So go off and on-premise archive to Visage Open 7 in the cloud makes a whole lot of sense. So we we're going through those processes in terms of ROI and the way that you actually do it. It's actually far more transparent to the end users, than initially meets the eye. And that's another big thing because they've got something that works with us on premise, so I don't want to disrupt it. But I think it's material opportunity, and I think we'll see more of it as we go forward.

Your next question comes from Sarah Mann with Moelis Australia.

First question for me is just on the private radiology market. So you kind of mentioned the radiologist shortages is impacting the teleradiology groups taking on new work or handing back contracts. And historically, like that's been the hardest part of the market for you guys to penetrate given price sensitivity. Given this new bottleneck that you're seeing, like how does this change the conversations that you're having with them, given the premium pricing? And is that kind of flowing through to kind of new opportunities in the pipeline?

Yes, it has. So I mean the bottleneck radiologists availability or shortage is global, and t covers all markets. Covers the academic markets, the IDNs everywhere. But what we've started to see is we've seen some of the reading groups, the groups who may have their own bricks and mortar, but actually read for hospitals. In the case of CRL, they read for a line. And so when they read for a line, they use Visage PACS. And because they've been using it for a number of years now, the minute the contract of the existing vendor win, they started to look at us. So we will see more and more. We will see there's groups that are banding together as consortium to U.S. radiology as a case in point. They're looking at us because they've had a massive problem with breast imaging, and they do a lot of it. So we are seeing more and more in the private space. I think we saw the herald of that at 12, 18 months ago. And I think that they have as much as an ROI as a large hospital. So it is opening up markets for us and shortage of radiologists and our efficiencies. We really do help solve that problem here and now. It's not a future you can put it in and you'll get that efficiency out of the gate. So whilst it's not our biggest market at the moment, it is evolving.

Great. And then just any comments on the competitive landscape that you could provide, like I mean clearly, you've continued to win your contracts. Are you seeing any reaction from the incumbents, perhaps around pricing, or even product development? And then just can ) expand a little bit on the commentary that you had around some of the cloud native products, but new competitors that have kind of market and some of the challenges we're seeing?

Well, the two things we see are, cloud and marketing. So I think you've heard me say before that when you go to RSNA, absolutely, everybody has cloud and AI all over their stand, but the reality is, what does that actually mean, particularly around cloud. And we've now seen, as we see more and more go out to the market that are the people on this, they talk about a journey to cloud, which means they're not there yet. They may or may not get there. And so some have been speaking about it for a number of years. Look, I could get there. But at this point, they're not. And then a lot of the ones, if not all of them, say they're in cloud. We're now seeing that they actually have to put a system on-premise. When you think about it, it makes even less sense because you've got 2 systems now. And when you have on-premise and cloud, the sort of, one of the main reasons -- two main reasons for cloud is security. So cloud has a very narrow what we call attack surface. In other words, it only 1 or 2 ports that are open. The rest is completely shielded. By having 2 systems, you completely fill away with all of that, and you have a much bigger attack surface. So we're seeing that we don't see a full cloud deployment like we do anywhere else. We don't have any hardware, PACS hardware on-site at all. That's the whole idea. You just plug into it and it works. So if anything, we do see the landscape shifting more. Now some people may not realize the difference when they buy, but they certainly would realize the difference once they implement. So look, we are seeing that sort of -- that delta becoming bigger, certainly as we sit here today.

Your next question is a webcast question, which asks, have you lost any contracts from the pipeline to a competitor in the last year? If so, why? Are the new contracts that were announced as a bundle, consulting, radiology, nationwide, Nicklaus, Moffitt and U.S. radiology specialists just the Viewer, or do they also include Worklist and Archive or some mixture?

Yes. So the answer to the first one is, no, we haven't lost anybody. So our retention rate is 100%. The contracts, most of them were full stack. I believe the only ones, the main one was on was consulting radiology now. They would never use full stack because they're not the archive of record. So they read the exam, they give the result, but they don't store the image. So they would never need the archive. But those groups, hospitals, the ones you mentioned, yes, the majority of those were full stack or multiproduct.

Your next question asks, how is adoption working of new Apple Vision Pro tech Ease VP?

Yes, look, I think a lot of people are using it. We can switch it on for them with just a setting in the database on their existing system. It was -- the main limitation at the beginning was actually getting the Vision Pro themselves. I think we're getting quite interesting feedback of use cases. And we think this will morph into something material for end users, but it's still very early days, and they're still finding the way in which they feel they can and want to use it. But yes, look, it's still looking promising.

Your next question asks, when did AU IRS contracts switch to transactional model? And what has/would be the uplift from this?

I think it was only the one customer that uses transactional model or exam-based reporting, and that's health care imaging services. That's always been the case over the last 5 or 6 years. So it hasn't switched to a transactional model. Clearly, as they grow their exam volumes, the uplift would be their exam growth rates. So we have seen that come through for health care imaging services or the rest of the Australian risk contracts or the majority of the Australian risk contracts are still under the up-front license and support revenue model. So it hasn't switched it was just one. I think Sam commented on health care imaging being in transaction.

Yes, and some smaller ones, new ones are transaction-based because they take recent packs. But yes.

Your next question asks, good to see continued margin improvement. Is it as simple as an increase in transaction volume dropping straight into the bottom line to increase margins? Where do you see a limit to margin expansion?

I wish everything was simple. It has largely increased revenue and obviously more revenue than associated costs purely because of the scalability and the solution, which is something we pride ourselves on. As we mentioned, look, we can't crystal ball guide about margins. But our guidance is don't expect massive delta in either direction from where they are now. And again, just reiterating there, about 3x that of our nearest competitor. So they are in a unique space.

Your next question asks, how far off are AI and other ologies from adding nontrivially to results? What indicators should we look forward to confirm they are gaining traction?

I think first steps first. Obviously, putting it in a material implementation would be the first and biggest step. I think we've told the market not to expect material revenues from that. We'll report them and they will build, but will they build this to as large as our footprint, clearly that would take some time. So the main thing for us is, once we start then we'll get a better road map of how big they are. We've always said that cardiology could be between 25% and 35% of radiology, fewer exams, higher dollar value. Clearly, that all needs to play out as we put in our first [ shoe ] systems.

Your next question asks, what is the TAM percentage split by customer type, IDN, academic and outpatient clinic?

Yes, it's a little bit hard to work out because it's not sufficient data in the market around those. We do know the total examination numbers and our percentage of that. So as Sam mentioned, a bit over 7%. It would be more highly concentrated in the IDN and academic space compared to outpatient. So we probably have a higher number in those 2 segments of the market, but it's very hard to work out what that is, maybe 10% and lower in the outpatient. But there isn't a specific number that we can point to, to say what is the segments of the market.

And the only other thing is sometimes the client can be in multiple segments. So Baylor Scott & White is an academic with the Baylor School of Medicine and there's also a large IDN. So I think we have good representation across those large segments, academic and IDN. And we're now starting to see some in the private space, as we mentioned before.

Your next question asks, is PME constrained in any way due to the chip shortage we are seeing, particularly NVIDIA chips?

No. We haven't noticed any restraint on -- or constraint rather in implementation in any of the 3 cloud vendors. So we haven't felt any of that. And obviously, with forward orders where some of the opportunities are with the cloud vendor together, there's been no mention of any shortage that would impact our delivery.

Your next question asks, the archive data migration revenue over the last 4 years has been volatile with a big step-up in 2024. How should we be looking at that going forward?

Yes. We think it will continue even though it's a one-off, and we take it at the start of the contract. It should continue to increase as we sell more full stack opportunities, which we have done in the market. One of the biggest ones, again, Baylor Scott & White, part of that was done before they go live. That will continue into FY '25. So we do think there will be -- we know that there will be additional revenue from that customer and other customers as they have Archive or Full Stack within the contracts.

Your next question asked, are there existing contracts where the FedRAMP approval was prerequisite, or is that for the future? Can you give us some more information about the FedRAMP approval, is it an approval that allows you to use a specific FedRAMP certified surface such as AWS GovCloud? Or is it something else?

Yes. It's -- answering the last question first, it is specific to AWS GovCloud. There are only 2 that we know of. I believe there are only 2. One is in Azure, one is in AWS. We've been certified for AWS. It is something that most organizations would take years and years to do. We've been able to do it in a relatively short period of time. It gives you an accreditation, so the -- any of the government agencies can't use your solution and unless you're FedRAMP certified, but it doesn't guarantee work, just guarantees that if you don't have it, you won't get the work. So clearly, our focus would be on some of the military, particularly the Veterans Affairs or his network. But as I mentioned in the answer to the question before, it's relatively slow moving, and we'll see more clarity as they come towards the end of the fiscal year and what plans are for next year.

Your next question asks, of the 2 renewals ongoing now, is there opportunity for either to take additional products?

Yes, one in particular. One already has multiple products already has Viewer and Archive. The second one, so we're talking to them about that as we were with any of the renewals. In the past, most people have looked to just renew and then look at additional products separately, but we are seeing a slight shift in that, particularly if they're looking to go to cloud as well.

Your next question asked, were there any delays to implementing the Baylor contract? Early announcement was guiding Q1 2024.

There was a delay in the initial phase of it going out, but not the end date. So it was originally going to go live in the first phase around March, April when we made the announcement. Again, sometimes after the announcement, we have kickoff meetings and project calls where that can be changed. But it was going to go from sort of March, April through the end of September. It started in June and will still end in September. So the ending of it will still be the same, but it was a slight delay to the first phase.

The delay was not on us. It was more around Baylor getting their ducks in a row. They just felt because of the size of it all that as Clayton said, we've just compressed the window of implementation and it will finish in early September.

Your next question asks what kind of price increase would be assumed as base of negotiation in each contract renewal? What levers could be pulled if there's pushback?

I think -- look, no one wants to pay more, let me start by that. But I think they feel they've got good value from us. And as we mentioned before, we're always working on the core products. So when they renew, what they're getting is exactly the same as if they just bought the system new, and I think they understand that. And at the end of the day, I think they feel we're being fair. We were not trying to bring them to the current market price. We're just trying to put it somewhere in between because there should be a benefit for them being the early adopters. So it's somewhere around just a bit over half of what we would -- the delta what we would normally charge where the majority is at.

Your next question asks, how much do you spend on R&D as a percentage of revenue? Is that the percentage you're comfortable with going forward?

We spent about 7% on R&D as a percentage of revenue, which has come down from previous years but not as an absolute number. Obviously, the amount we spend on developers and effort we put in as a whole number has gone up. But as our revenue increases, that percentage goes down. As I mentioned before with the margins, we look at what we need for the business. So if that's an area that, going forward, we want to spend more on it. We think we're missing out on opportunities because we don't have feature function, then we will look to add in more people. As we sit here today, we don't think we're missing out on opportunities because of feature functions, so we're comfortable with it, but we're also mindful of it. We take a lot of time where we look at that and work out are we spending enough on R&D. So it's something that we look at all the time.

Your next question asks what percentage of total sales do the top 10 customers contribute?

They contribute about 25% of our overall sales. Clearly, as we win more customers over the journey, Baylor Scott & White still to come on board and others that we've won but still to put in, that will get lower and lower as a percentage. So the risk -- or the customer risk will keep decreasing.

There are no further phone or webcast questions at this time. I'll now hand the conference back to Dr. Sam Hupert, CEO.

Just wanted to say to all those on the call, thanks very much. I appreciate you being on the call. And if there are any further questions, particularly from analysts and others, we'll catch up with you guys in due course. And thanks, everybody, for attending.

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