DHTI conf call 5/7/98
This is not a word for word transcript of the call. While the objective is to keep the intent correct, there are probably mistakes as well as lapses in it. In other words, these are my notes. You should verify everything found here for yourself.
Art
Opening by operator:
Mitch Laskey (CEO) DHTI
Morning, thanks for joining. Have Paul Glover CFO, and Scott Waldrup our COO
Standard disclaimer about forward looking stuff.
Agenda: Talk to results, current and future strategies, then to Paul for numbers, then Q/A.
1Q98 results are bad. We stank up the place. Significant miss of analyst expectations. We are unhappy with them.
Revs this Q 6m decrease 4.7 million over 1Q97. Rather significant.
1Q97 we put 2.8m of Sunquest deal in as well as 2.3m for pathology contract to DOD.
1Q98 we only saw 75k from Sunquest, and 277K for DOD. Difference of 4.7 million.
Thus, our base business was flat. We thought we would have significant growth. We staffed to provide for same growth we saw in 1Q97. But because the deals didn't come, our staff to costs were out of whack.
We have a good pipeline though. And we have not lost contracts to others. We find ourselves competing with Cerner or ADAC. Of the lost contracts, we lost because they decided to do nothing, because of budget restraints or changes. Although through April we have not closed a bunch of sales. We figure it will happen during late May and June.
I am optimistic that these sales will happen.
We expect to meet sales forecast for this quarter. Primarily because I am working with them on strategy and focus for each account. I find our sales team is very focused. We have solutions that
We expect to meet expect to meet 2Q expectations.
Scott Waldrup (new COO) came on in Jan. He saw that we were fractured. Too many management methods (as we integrated separate companies). He liked the way we were selling it (as a single focused unit). We are looking to cross train and make more effective use of our people.
Specific actions:
Plan in place to drop costs by 20%. We want to streamline without cutting into company muscle. We are combining two offices in MN. Close Apple Valley. Significant savings. Will drop staff by 40 FTE (full time employees). 15 are already gone. We see the rest going in next couple of weeks. Will save 2.5 m annually. If you go back to budget of 20%, these positions are 10%, or half of the stated goal.
As we move closer to the end of the Q and see where we are in the sales, we will be able to work the next budget cuts. We need to be careful not to cut the muscle. There is a fine balance between sales closes and support costs.
Additional Cash:
Company's plan for additional cash. We are looking at 3.5m new equity offering. Officers and directors have indicated interest in putting 1.5m or so into the deal. The revolving line will be for one year, at prime, secured by ALL assets of company. Based on advances on receivables.
The combination of proposed equity and line of credit will allow us to meet needs for growth.
In summary, reiterate that we are disappointed with results. We continue to believe that the delay in signing agreements is temporary. We are committed to the budget cuts, getting the financing plan in place, and returning the company to profitability. We are committed to returning to
Paul Glover (CFO)
Goes over finances.
Rev 6.034m, decrease 4.714m over revs for same period 97
Sunquest dropped 2.77 to 77K
Federal dropped 2.286 to 277K
All others aggrigated decreased 3K
New Product Releases:
CS versions of CoPath Pathology Information Sys. 3/97
Maxifile Radiology IS (CS version) 12/97
New version of Dynamic Vision 10/97
New version of Pax++ 10/97
We are currently coming through the initial sales cycles for these products.
1Q98 results clearly reflect the "elongated sales cycle."
Example:
Company has been working under a team agreement with a Prime Contractor.
In April 1998 this contractor was awarded a multi-year contract for services to offices of Assistant Secretary of Defense for Health Affairs. The award date was originally set for September 97. As of today the Prime Contractor has not awarded any firm subcontract to the company (though the original contract clearly called for a sizeable award to come to us). We expect that to happen in the near future.
Lab software Rev fell 246K due to 5/97 addition of Dynacore.
Services and Implementation fell 531K (DOD was completed in 97, nothing in 98)
Cost of Products sold:
3rd Party Software cost (included in cost of product sold) decreased to 52K vs 160K in 1Q97, immaterial in most respects, it reflects the decrease software license revenue in this Q, it is worth noting that the costs have been reduced as a result of moving from MUMPS based software to CS base. Comparing initial sales, indicates a 40% reduction in cost of operating systems software as result of technology shift.
Client Services expenses increased 174K (modest) compared to 2.765m for 1Q97. Company previously reported increase staffing because of 96 buy of DMI and CoMed and intro of Dynamic Vision in 11/96 and the new product releases in 1997. The unanticipated longer sales cycles for these new products saw us fat in client services compared to total sales.
Software Development Costs increased to 28.8% of total revenues (vs 12.6% in 1Q97). Development is part of growth strategy. We capitalized 941K (41.6% of total software development costs) compared to 759K (43.5%) of total software development costs for same period in 97. The intensified development effort resulted in image enabling DHTI's CS releases for radiology and pathology. Gave more uniformity to total product line.
Sales and Marketing costs increased to 44.7% vs. 16.2 in 1Q97. We trained an army to launch our products. And it cost us 953K vs. similar costs for 1997.
G&A decreased 240K.
Reduction
Interest income down 81K, we spent the money.
We have cash of 3.47m
Working Capital of 3.821
Working Capital Ratio of .39 to 1
We work on enhancing Dynamic Vision and Pax++
We bought a new tradeshow booth to show our stuff.
We gave sales force new laptops to show our stuff off,
Got new software for pipeline management
Got a new sales database.
Company is putting together a 401k (pending shareholder approval,) expect it to eat 52K shares.
We continue look for additional opportunities and growth by acquisition.
Turn it back over to Mitch:
Q/A session
Q: Oppenheimer: Can you give us more color on size of delayed contracts? Can you break out backlog by imaging ,radiology and lab?
A: In terms of sales forecast, they range from 2.2 million, for which we have signed letter of intent (should sign on May 14), to other systems deals that range down to 110K each. We have about 20 contracts we expect to close. Price ranging all over the map between those numbers.
As of 3/31/98 new systems (not including multiple year maint contracts)
We don't 7.6 million total.
Radiology 2.4m
Imaging 1.4m
Pathology 2.5m
Lab Info 1.2m
HIS and other was 0.1m
Q: Pipeline?
125.2 million in the pipe.
Radiology 43.9
Imaging 27.5
Pathology 40.1
Lab 13
HIS and other 0.07
Q: Decline of about 10 to 12 million?
A: Yes, but since Mike Carly joined us, we have different focus on detailed components of pipeline. Has to do with more managed approach to figuring pipe.
Q: Receivables and DSOs (days sales outstanding)?
A: We were cash positive in previous 3 fiscal years. We hate this quarter. But with regard to DSO, have always been in good shape. Based on annualizing current sales levels, our current AR is 75.01 days out, unbilled receivables make up about 45.79 days. So even with reduced Q sales we still show about 120 days outstanding. If you compute it on trailing 12 months, comes down to about 90 days. And if you look at aging, we are in good shape.
Q: Software Rev by product line?
A: Aggregate rev 978K
Imaging 141K
Lab 219K
Rad 181
Path 435K
HIS etc 1K
Q: Talk to us about migration of systems from current clients. What issues are you seeing? What kind of delays are you seeing? Same as with new prospects?
A: Scott Walter, we have several that are working on migration. They have to work through the budget.
The product is well received. It fits their strategy.
Q: Can you quantify over next Q or two:
A: We don't have it broken out, but I think we could get that off-line. In 97, in pathology, 97 there were about 24 deals. 11 or 12 were migrations. In Radiology, a number of them on the board. I don't have the detail. But most people are looking at moving from older to newer technology. It will be a process. Some will do it this year. Some in next three years.
Q: You are reviewing partnership type agreements. where are things there? You were looking at getting rid of less productive deals enhancing the good ones.
A: Ongoing process. No definitive action. We have not recognized costs or revenues from partnerships, except Sunquest. We continue to review.
Q: Any that are really working?
A: Autocyte. IBM is working. Relationship w/ PennRAd for Mammography. A number of them.
Q: Is that sort of backend loaded for this years situation?
A: A lot of current energy is going into looking at who we should be spending time and energy on both to increase distribution and get new products.
Q: Sales, you said you were going to be firing people if things didn't happen?
A: We did talk about corp. restructuring. Out of 26 people who were not let go prior to April 30th, there are quite a few of sales and marketing people included in the next wave. So we are doing what we said we would do.
Q: Said that company can't go it alone. We might shop the company around? When?
A: I am not sure that I said that. We are at key part of growth and development. Although I personally have a high confidence level that we can deliver on this Qs sales forecasts, I think we need to keep over all shareholder value at the board level. I think that as we get into deals with next board meeting in June.
Q: Where is 2.76m infusion coming from in order to get 5m credit line? Will it be purchased shares from the insiders?
A: Equity financing. management (including self and certain boardmembers) are interested. Board has authorized us to seek out
Q: Will you be buying at $2 a share?
A: No terms delineated.
Q: How much will management do of 1.5 to 2 million?
A: No firm number, we have interest in 250 to 300K total.
Q: Categories of pipeline
A: Type 1, vender of choice, 8.2 million
Type 2 best of few, 5.6m
Type 3 Qualified Buyer and seller, 91.7m
Type 4 Budgetary Quotes: 19.7 m
125.2 million aggregate..
Q: Scott: Give us a little more color on operating steps you have taken since coming on board. Can you tell us what to expect for the rest of the year? Streamlining: How? After that, Mitch can you tell us what to expect regarding earnings for the rest of the year?
A: We plan to streamline management pathways, using same methods, process and systems throughout the systems. Support groups, all under same mgt group, same with QA people and document services. The cross training has already begun. It will provide us the launch pad to move to next level. So that we can drop people and still have every facet of the company covered. We have come down by a net of 14 people as of April 30th. We are closing down Apple Valley ops center and move them to Minnietonka center. Number of people reduced by the end of this month will be 26 people. Annual savings about 2.5 million.
Q: Estimates for 98, are you comfortable with them?
A: Based on where we are in the Q, the next 45 days will tell us where we really are on backlog and visibility looking forward to. Also looking at forecast into 3Q allowing us to revise forecasts internally.
We expect that like in any other organization when you make changes, there will be some measure of unrest and probably some attrition that will add to some of our planned reductions.
Q: Competition? Has your win/loss rate changed in past couple of Qs?
A: I think I have to take this product by product. In Lab we have seen no change. If they are AS400 we are the only game in town. We have stopped competing in Lab where we can't win. So our win record is very good there. In Path, about the same. Some loss if competing against Cerner when they gave the AP away as part of their clinical suite, otherwise we are not losing anything in Path. In imaging area, competition is AMS filenet and Med+ and ImNet. We don't see any other changes there. We are working on a couple where we hope to be the best fit and will win. In terms of Radiology, we have what appears to be the best and most competitive product. We just got a letter of intent (were fighting ADAC and others and won)
Q: Dynamic Vision has five sites?
A: Could be six, but five is what I'd rather call it five (according to Scott).
We will be live with image enabling Cerner's product at U of Ill., where they have "powershart" in hands of over 1000 doctors. Customer and Cerner are both excited. Are imaging enabling the clinical repository.
End of call. thanks. Sorry we didn't deliver. We are working on hard on all fronts to regain profitability.
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