ro Medicus Limited (OTCPK:PMCUF) Q2 2022 Earnings Conference Call February 15, 2022 7:00 PM ET
Company Participants
Sam Hupert – Chief Executive Officer and Managing Director
Clayton Hatch – Chief Financial Officer
Conference Call Participants
Bosco Feng – Goldman Sachs
Josh Kannourakis – Barrenjoey
Garry Sherriff – RBC
Sarah Mann – Moelis
Mathieu Chevrier – Citi
Julian Mulcahy – E&P
Operator
Thank you for standing by. And welcome to the Pro Medicus PME Half Year Results Briefing. All participants are in listen-only mode. There will be a presentation, followed by a question-and-answer session. [Operator Instructions]
I would now like to hand the conference over to Dr. Sam Hupert, CEO. Please go ahead.
Sam Hupert
Thanks very much and good morning. Thanks everybody for joining us. For those that are new to us we’re a medical IT company that specializes in enterprise imaging and radiology information systems. We work in three jurisdictions, Melbourne, our home office Berlin our largest R&D center and San Diego the U.S. our largest market. We’re very heavily engineering and R&D-focused and the majority or the bulk of our staff work in the engineering and technology part of our business.
In terms of our product set, we have two core products, Visage RIS which was the product we originally developed here in Australia. It does more the commercial side of radiology, the billing scheduling interface to Medicare and payers. And Visage 7 which is the clinical product which is the desktop that radiologists use to call up enhanced images and make their diagnosis. And it’s the product we sell globally with the key markets being the U.S. or North America.
In terms of our results, we released them this morning. We thought they were solid results. All of our key financial metrics are headed in the right direction. Obviously underlying revenue went up with result in underlying profit going up 52.7%.
Part of that was not just due to the increase in revenue, but also an incremental increase in our EBIT margins, which we’ll talk about a little later. I think we’re also very pleased that we’re able to continue to accrue cash. And as a result had a material increase in our dividend payout of $0.10 a share fully franked.
In terms of the highlights, we had a busy half at the beginning. We renewed one of our earlier contracts with Allegheny Health, one of the large health care systems in Pittsburgh. The renewal was for another five years which we think shows their confidence in our product.
We also implemented one of our biggest sites to date in Intermountain Healthcare in the September/October time frame. That is fully deployed in Google’s GCP cloud. In October we announced equal biggest deal to date with Intermountain in dollar terms which was Novant Health. And we’re in the planning phase of implementing that in this calendar year.
And towards December we had an extension of the German government contract where we originally had our first contract with them. This is the fourth extension into a new region in Germany. So a $1.3 million capital sale, I’ll talk about a little further on.
And then we also started our major deployment for the University of California’s where previously we had won all five academic campuses. And UCSF the first of the campuses was fully deployed in December, and we’ll talk about a little later. Our pipeline continued to grow strongly during the half, so busy on all fronts.
In terms of the Novant deal, it’s a $40 million 7 year deal. It is a cloud-based implementation. We are replacing a number of legacy systems that they have throughout their network with one single platform. Pleasingly it’s two of our products, the cornerstone product being the Visage 7 Viewer. And in addition they’re taking our workflow product, which we find encouraging and a trend that we see growing.
And it certainly extends our rapidly growing footprint in what we call the IDN or the sort of non-academic hospital market space because we are known for our penetration of the Tier 1 academics. But you know, sites like Intermountain, Novant and previously Mercy and Sutter give us quite a large and material footprint in this IDN market. And it is our standard model being transaction based. So as they grow we grow with them. So there is upside in that contract.
The German government contract as I mentioned earlier, it’s the fourth extension. The government thereby on a capital basis they have budget and it needs to be spent in one period. It’s AUD1.3 million net of hardware because they buy it as a bundle. There will be annual support that follows that in a separate contract. And it increases our footprint particularly in Germany where it’s in a whole new region that we previously were not represented in before.
In terms of the Allegheny renewal, as I mentioned five years, same term as the original contract. There is an increased cost per transaction which we’ve been able to negotiate. So the – our price per transaction has risen materially over the ensuing five years and we’ve struck it as a fair balance in between what they used to pay and what they now pay which we think is fair for both parties. And we think the fact that they’ve gone for a complete five year renewal, confirms their confidence not only in our product but the ROI that it delivers.
In terms of the revenue split for those that follow us would be familiar with this graph. The salmon color at the bottom shows transaction revenue which as you see grow – grew very strongly, period-on-period, half-to-half. And a number of that was because of implementations large ones that we had completed at the end of the previous half.
But then again even those areas in blue which are recurring as well but more support contract base in the older more capital-based model that continued to grow strongly and we represent the one-off sale in the bright orange. But all in all, I think a significant jump in transaction volumes which sets up the base for future halves going forward because anything new that we implement or sell will sit on top of this.
Again those familiar know the operational model. It’s used in the vast majority of our contracts. We now use it for the RIS in Australia. And we base a forward revenue which is based on a five year window which has now increased about $382 million. So a material increase from the last time we reported that figure. And we see the transactions as they grow provide us with greater predictability and very much in effect an annuity type revenue stream.
So as I mentioned before, it was a material increase somewhere around the 37% period-on-period. We do believe that it will continue to grow in the second half as we get a full six months from those that we implemented in the first, namely Intermountain which is very large and UCSF. And we have some new sites coming on in the second half. Of which we’ve already done UC Irvine and U Vermont and UCSD goes live in March. So they will all contribute to the second half. And we see as other products come in to the mix further upside, particularly with Workflow and Archive which are also transaction-based products that we sell.
In terms of professional services, again, we do spread these over the life of the contract. The amount in the half was relatively as planned. And again a lot of that has to do with when we actually implement the various sites, but we see that continuing in a very consistent manner.
And based on the results, we believe we have you know, strong operating leverage. It’s a highly scalable offering. We have a contained cost base and our margin continues to grow as our footprint increases. And it has increased from 62% to 65%. So even though we’ve had increased cost base which was all projected and planned, the revenue is outstripped there.
In terms of COVID, we are still largely work-from-home particularly in Australia a bit less so in the U.S. and 50-50 in Germany. But we are operating at 100% capacity. We’ve had very strong sales and marketing efforts. And I think the thinness of our technology, the ability to demonstrate and implement it remotely has been key to some of that.
We have had continuing increase in new inbound opportunities. So people were concerned that with COVID some of the health systems would step back, but we’ve seen the opposite. And I think one of the key reasons is we do allow radiologists and other clinicians to actually work seamlessly from home or in the office and we’re seeing more and more where there’s a split and in some cases a bigger increase in the working week from at-home depending on the situation with COVID in the various jurisdictions. So we have seen the American – particularly in America exam volumes back or in a number of cases above pre-COVID levels.
In terms of the RIS, as I mentioned this is our practice management system. Our main market for that is here in Australia where we have long-term contracts with Primary Health Care or Healius or Lumis [indiscernible] and I-MED. The HIS rollout is now complete. And we see – still see some organic growth opportunities particularly as these businesses get a bit bigger and more and more smaller to mid-sized breakaways that sort of become independent tend to use our platform.
In terms of Visage 7, we still believe we have a significant technology advantage over our competitors. We have said in the past 18 to 24 months, you know, again it may have even extended a little further particularly with all the activity we have and capability around cloud.
But three things still keep us at number one. They are the speed of the system. In other words it’s completely on demand, regardless of the size of the data sets, the functionality where in one desktop we’re able to do anything from a simple 2D chest X-ray through to the most complicated and sophisticated 3D/4D which is moving 3D and fusions such as PET scanning and breast imaging. And the product is incredibly scalable which is important as the clients get bigger and the data sets to get bigger to have one system that can cater for the entire organization.
What’s driving adoption? Well, the data sets continue to get bigger even since we last spoke. There are new tests new modalities that are producing bigger and bigger files. So the standard method of handling these large files no longer is coping. We call it compress and send. They -the clients would – the images would come out, they would compress them as much as they can without losing any fidelity and the workstation that was heavily configured at the radiologist end would uncompress that image and all the manipulation would be done locally.
The problem with that is the files are just getting too big and can no longer be done on demand. Whereas with us we use totally different and proprietary technology or methodology where we actually take the files in near real time, do all the sophisticated 3D rendering and then we just stream the pixels on demand to the clinician.
So regardless of file size, we’re able to provide full diagnostic quality anywhere on demand and on demand being around a second or less. And some of these files are six to eight gigabytes and sometimes there are multiples of them particularly if there are prior exams that they compare the current examination.
So the other strength we have over and above the technology but related to it is the fast track implementation, I think that has been a key factor for us. We deliver and I say in under quarter of the time, sometimes in under tenth of some of our competitors. It’s a huge cost savings for the client and it’s much better for us because it frees up staff to go from one implementation to the other.
And the other key thing we found is one of the biggest barriers to change previously was the concern around implementation risk. And we have never missed a date or never had a failed implementation, regardless of size or complexity. So for instance Intermountain, which is across multiple states, many hundreds of radiologists I think well over 400, many hospitals and clinics. There were two, 1-week segments of go-live one in the end of September, one in October and the organization went from multiple systems to one cloud-based system across the whole organization. So that’s how quickly we’re able to do it once we start the go-live process.
And we’ve noticed, particularly with COVID we have a now highly optimized hybrid model that works very, very well, a mixture of remote and on site. And we see this ability to rapidly implement and remove the risk of implementation as a key differentiator for us.
As most of you know, we are a premium product. We do charge a premium price, but we believe we provide the highest value or the best most proven ROI. And that’s both financial, which is very important things like infrastructure savings, radiologist efficiency, dollars and cents. But we also – clearly we are a clinical or medical product and clinical ROI is very, very important, particularly for the types of clients that we have.
So we believe that we very much move the needle when it comes to clinical outcomes. We enable our clients to either do things they could otherwise not do or it would take them too long if they could do it. So certain things that they may need to do could take 15, 20 minutes to do on another system, we can do it in two to three seconds with one or two mouse clicks.
So we take away that disincentive for them to do the things that they need to do. So we have – and for those that saw our AGM presentation we did two things. So some of the clinical ROI can be something as simple as it makes it very, very quick. So in this particular instance what they’re talking about is there’s a blocked ureter which is the tube that comes from the kidney to the bladder. And they’re saying you need to have a look at it in a particular way, what they call it curved planar reformat. In other systems it could take minutes in Visage it’s two mouse clicks. So they always do it and therefore gives them that extra certainty in the diagnosis. And we have literally hundreds of examples like this where we make a tangible difference to a radiologist day – all day every day.
And then we also had another example where the thinness of our application was able to help. Where in Boston they realize that certain ethnicities were not getting the diagnosis of mammograms immediately simply because of where they were, where they were in the community. And so they set up an ability to read all the mammograms centrally pretty much in real time, so that they then found that those patients got the same level of care, the same immediacy of care, regardless of where they were. Now all of that is based on our Visage technology. And actually the picture of the mammograms that are there on this – in this picture actually all displayed on Visage.
So again where they were able to use the technology to change what they were doing. And as the last sentence says, it removes the racial and ethnic disparities that they were seeing particularly in certain parts of their community and catchment area.
And the last one was, we’re working very closely with top pediatric neuroradiologist at Yale. This has all to do with child tumors, brain tumors. And the way that we are able to measure them and actually determine the consistency of the tumor, again it used to take somewhere around 45 minutes to multiple hours to do per examination, we’re able to do it in under three minutes and more accurately.
So it’s something that we’re looking to develop not only for this purpose but for other purposes and other tumors because working out whether medication of treatments are working usually has got to do with you know, anatomical comparison, in other words has the tumor shrunk or not. And tumors are not 2D and they’re not regular. So being able to use these tools certainly makes a very significant difference.
In terms of our growth strategy, clearly it’s multifactorial. We are looking to expand our footprint with new clients and we’ve done that. We are seeing strong transaction growth from existing clients. So the more they grow the more we grow and the beauty of the model is it’s very fine grained. If they do 100 more tests, we get 100 more transaction clicks. If they do a million more, we get a million more. And we are seeing some of our clients not only grow organically, but through M&A and that certainly is benefiting us in the long term.
The new product offerings, we have – we had a cornerstone product which is our Visage 7 Viewer which is our most expensive product. But we have over the last few years supplemented that with both Archive and Worklist. And we are seeing a number of opportunities where they’re taking more than one product. So recently MedStar, a big IDN around the Washington, Baltimore area, took all 3.
Intermountain took the Archive and the Viewer. Novant took the Viewer and Workflow. And clearly, that has a positive impact in terms of the total contract value and our ability to provide a more integrated service. And we are leveraging our R&D into other products, which we’ll talk about in just a second.
In terms of pipeline, it has grown. We are very pleased with it, not just in terms of the number of opportunities, but the spread, so a mixture of academic and IDN or non-academic. And we’re also seeing a return to the market of some of the commercial opportunities, the full profits and for the first time, some of the private imaging center market opportunities, which really went into effectively deep freeze with COVID because these practices were very hard hit, usually partnerships, but we are seeing them come back nowadays. So that has turned out to be – turned out to work well.
In terms of the additional products. Open Archive, this is the software that manages the storage of the images. It’s not hardware. It’s storage and retrieval. We have seen it in some additional sites that we’re now doing. And we’ve – where it started to go very well.
So examples where the first one was from Mercy back in 2016, ’17, we now have sold it to people like MedStar, Intermountain, and it was part of the German government sale. So it has been – we are seeing it more and more in our sales. We see opportunities for it in the pipeline. And pleasingly, we are getting inquiries from existing clients that had third-party archive and now looking to see whether they can replace what they have, which is aging with some of our technology.
The second product was the Workflow, this is the most recent. We released it in 2020. As I said, it’s already paid good dividends for us. And I think the important part of having the multiple products is it does allow us to – incredible flexibility because clients will need obviously, the Viewer, but they may need Workflow because they don’t have a solution for that or they may need all three and want a single vendor solution, as was the case with MedStar. And we’re able to provide all three options, just purely Viewer, Viewer and Workflow, Viewer and Archive and certainly there’s the force of all three together.
We have continued to make progress on our One Viewer that is looking at departments outside radiology. We have an RSNA, which is a big conference in November, December of 2021, which was in person. We did show some new cardiac specific functionality to do with ejection fractions.
So we are moving towards greater presence outside pure radiology within the hospital, we’re not there yet. But I think we’re closer than any of the other competitors. It is using the same technology, same platform. So we have made some progress in that area.
And then one of the most exciting things that has happened is really public cloud. Years ago, people talked about it, but no one ever really did it. But in the last 18 months, we’ve seen this massive momentum shift towards cloud.
We believe we’re one of the few, if not the only companies, that can provide a fully cloud-based offering you know, that can scale, and we’ve already proven that. So five of the last sales have been cloud-based. Groups such as MedStar, Intermountain, UCs, they’ve already been implemented, they’re in and working. So it is a proven option.
And interestingly, people were concerned about performance in cloud. If anything, it’s even quicker than on-premise. So there’s no downside to it. It’s incredibly scalable, and it is opening up a lot of opportunities for us. And we are seeing increased interest in RFPs, where cloud is mandated as part of the RFP response.
And this is a diagram that shows it all. It has massive elasticity. You dial up what you need when you need it. We’re able to do incredible parallel arrays in streaming so that the actual speed that clients witness is, as I said, in many, many cases, not all actually quicker than on-premise.
And the beauty is, it is incredibly secure simply because the cloud providers spend tens of billions a year on securing their cloud environment, more so than you could do on-premise.
So we think scalability and security, plus the ability to offload management to a third-party, are key attractions of cloud, and we see that this particular momentum shift, if anything, increasing, not decreasing.
Finally, I’ll finish in just a second, but obviously, the area of AI that we’ve talked about before. We do have a product set called AI Accelerator, and it is a unique end-to-end solution.
It is a highly optimized sandbox version of Production Visage and it enables organizations to do research based on Visage and then translate that research seamlessly into production, which they’ve never been able to do before.
We’ve used it ourselves. And to prove the concept, we did a breast density algorithm from scratch using radiologists at Yale. And we were able to cut the time from the original concept to FDA approval down by a third or a quarter of what would normally be the case.
We also see it as a platform by which we can work with other third parties, be they either academic clients that we’re associated with or other VC-funded start-ups that will have algorithms that could sort of fit in and integrate to our AI ecosystem.
Important thing is it’s led by Malte Westerhoff and Detlev Stalling, two PhDs. They actually developed the Visage platform, Malte is our Global CTO. Detlev is the Head of Development. And we have two PhDs that work in this, not only with ourselves and our research partners, but also with some of the industry, and that’s MingDe Lin and Raj Molly that so round out the team, and Ming and Raj are based on the East Coast of the U.S.
And finally, the research collaboration agreements, they are all going very well. Some of you may remember that we were looking to set up an R&D center at NYU Langone, which we did despite some of the difficulties around COVID and visas. That center started in August and is already starting to deliver product.
We highlighted a new product that allows radiologists to show a patient a video of their pathology. In other words, they show a normal MRI of the shoulder and then show the tears [ph] and indicate where the issues are. And we already have some research collaborations around AI, both with NYU and Mayo that are currently ongoing.
So again, our breast density, you may remember, got FDA-cleared in February 2009. It’s in production in one site, and we believe we’ll be looking to commercialize that in this half and make it available to other clients. The beauty is all of our Visage systems are the same technology. So it’s very simple to implement on any Visage client that wants to have it.
And finally, I think this picture looks – it’s quite complex, but I think it shows our entire ecosystem. It does show the Visage Viewer that extends to all radiologists and clinicians.
The concept of One Viewer for all the other ologies and that is all interfaced to things such as the Visage research server and AI Accelerator, the cloud and the third – and our Archive and other products. So how they all fit into one seamless product offering that you can buy in modules, I think, is going to be very important in terms of our future in the market.
So thank you. And I’ll hand it over for questions.
Question-and-Answer Session
Operator
Thank you [Operator Instructions] Your first question comes from Bosco Feng from Goldman Sachs. Please go ahead.
Bosco Feng
Hi, Sam. Can you hear me?
Sam Hupert
Yes, yes.
Bosco Feng
Thanks for taking the questions. Just two questions on our end. One, could you give us an update on where the Sutter and WellStar [ph] renewal processes and where those currently stand?
Sam Hupert
We – the only renewal we have currently under negotiation is, as you mentioned, Sutter, that’s progressing. It is a closed negotiation. It’s not an open RFP. So we’re hopeful to have something relatively in the near future. But like with all negotiations, they have their own timing, but it’s still ongoing.
Bosco Feng
Yeah, got you. So would it be fair though to say that we can expect this sometime maybe this year? Or would that still be a…
Sam Hupert
This calendar year, yes. Yes, this calendar year.
Bosco Feng
Great. And then the other question I had was just on competition. So we’ve been hearing a few new platforms being discussed over the year or so. And our channel checks would suggest that they don’t stack up to Visage technologically. But there’s still a slightly higher cadence of competitor activity more recently.
Would you say that, that categorization is fair? Or – and is that impacting your conversations with any of your customers at all?
Sam Hupert
Look, there’s always going to be competition. And if some leave the market, new ones come, but that’s normal, it’s a big market. We have not felt any impact from the start-up community. I think it’s easy to say things, it’s far harder to do. And then there are certain stages along the way.
So there’s a regulatory cycle with FDA that’s quite – it’s material. It’s not like having a drug trial by any means. But it is still quite material, and it can’t be used diagnostically until you get through that.
And then you’ve got what I call a commercial hardening cycle, how you put it in, how it scales. Just because it’s cloud-based doesn’t mean it scales at all. The software has to be optimized.
So look, whilst I don’t know the exact group you’re talking about, certainly, in terms of our market opportunities across the scale, we haven’t noticed those competitors. Now they may start at the beginning of an RFP because we don’t know who’s on the starting line. We only get to know who we compete against pretty much towards the pointy end. And I can’t remember any of these newer ones that we’ve heard about.
So like I said, I’m sure they exist, but we haven’t seen any impact from them. And there’s more to it than just announcing a product.
Bosco Feng
Got you. Okay. Thanks for taking all that questions. I’ll hand it over.
Operator
Your next question comes from Josh Kannourakis with Barrenjoey. Please go ahead.
Josh Kannourakis
Hi, Sam and Clayton. Thank you for taking our call and questions. First question for me, just around the cloud implementation, obviously, that’s been a big tailwind for the business. In terms of the speed of implementation, is it also impacting the speed of which you’re getting back – getting up to 100% of their potential volumes?
And I’m just interested if you could give some context around that in terms of some of the recent implementations in the first half?
Sam Hupert
I think the answer is yes. So compare it to an on-premise, there are twp parts before you actually quite go live. Part of it is a hardware purchase cycle. And now they could take nine months, six to nine months. So even though we can specify it upfront, it could take a client six to nine months to what they call rack and stack it and get it ready for us to put our software on cloud. We can do in under a week, two days. So that’s one cycle.
But then the organization has to get themselves ready, they have to make sure radiologists are around for training and do all those sorts of things. And then the third part is, particularly if there’s an archive, moving the data and normalizing and then putting it into the cloud. And we found that, that’s actually quicker than doing it on-premise simply because the pipes and bandwidth are quicker.
So cloud is quicker for us, but there’s still always a period that the organization itself needs to do things outside the technology to become ready and that’s most probably standard, whether it’s cloud or on-prem.
But no, we have found with Intermountain, we were able to do it very quickly. And not only that, we had two, one-week go-live periods. We basically did about 25% of the organization in a one-week window mid-September. And then early October, we did the other 75% as a big bang. And I think whilst you can do that with on-prem, it’s most probably easier cloud.
Josh Kannourakis
Okay. Okay, great. Just in terms of commercialization of some of the newer products. Can we just talk about, I know cardiology, some of that product is on trial with some of your existing customers.
Just where that product’s at the journey, how far progressed it is versus where you’d like it to be and the outlook for cardiology stand-alone or cardiology or broader enterprise deals in that regard?
Sam Hupert
Yeah. Look, as we’ve mentioned before, we already do a fair bit of cardiology because there’s a big intersect. There’s MRI and cardiac CT and of course, cardiology uses a lot of ultrasound. But they do have certain specialized requirements, and we’ve already started to close that gap. So what we’ve released at RSNA just a few months ago was a key part to filling out the product speak of what would be a complete cardiology replacement packs.
So I think we are making good progress. Would I want it quicker? I want everything quicker. But it takes time to not only do but get validated by clinicians. So look, I think we’re on the way. We’re not quite there yet, but I think we’re progressing where we were maybe three to four months ago.
Operator
Your next question comes from Garry Sherriff with RBC. Please go ahead.
Garry Sherriff
Morning, Sam and Clayton. Thank you. A few questions. Firstly, in relation to consolidation, have you seen any client consolidation over the last six months that benefit you?
Sam Hupert
Yes, so we’ve seen a few. So when you say consolidation, there is consolidation and announced consolidation. So two things, I’ll give you an example that’s in the public space.
Novant has bought another health system. And that actually has got regulatory clearance and will go ahead at some stage within the next, I don’t know, six to 18 months because it takes a while to start integrating. So all things being equal, we will see – we believe we’ll see some benefit from that.
Intermountain has also announced a large acquisition. Now that’s still going through the process. So assuming it gets cleared and they look at extending the platform, that could be very material for us.
And then we always see smaller things where community hospitals are emerging with one of our clients. We saw that with Mass General Brigham, and we see it with others. So there’s smaller stuff that’s good but business as usual, and there have been a few large ones. So that’s the hospital space.
Clearly, there’s been a lot of private equity funded consolidation of the private market, and they’re starting to look at what do they do with the technology. And bigger is better for us simply because we can cater for it.
So whilst it’s early days, yes, I think consolidation is occurring in the hospital space, and it’s our clients tend to do a lot of the buying or the larger guys. And there’s consolidation in the private market, which may or may not be beneficial for us, but certainly would put those groups into our sweet spot.
Garry Sherriff
And with Novant, just following on with that regulatory clearance, have you got a sense on just the size of incremental volume you may well see just given, I guess, the rough size of that acquisition that they’ve been cleared for?
Sam Hupert
Look, I don’t have an exact handle on it, but it’s material, so it’s over 20%. And again, we are yet to implement Novant. We’re in the process. So I think we’ll get a better idea once we actually get in there.
But we do know that it is material and that they were looking, at least in their discussions with us, they were looking to extend the platform once they have it into their current organization.
Garry Sherriff
Yeah, perfect. Next two questions in relation to cost, it may well be for Clayton. Looking at wages, they’re up about just over $1 million on PCP. The question I have is, have you seen any wage cost escalation or is that really just pure new headcount being annualized? And how should we think about the wage cost base for FY ’23?
Clayton Hatch
Thanks, Garry. Yes, it’s a little bit of both. There are additional headcount. So in the U.S. and in Berlin, we have new staff members, new implementation staff, new technical staff, new development staff. So it’s a little bit.
I think going into the second half and into FY ’23, we’ll see some of that wage increase across the board from this industry, and we’re not – the loan ranges in that regard in terms of where wages are going. But there will be some of that going into FY ’23 more so than any other year probably.
Garry Sherriff
Okay. And then the second question is in relation to the investing costs. So the development costs were up about 700k. I guess a similar question, how should we think about that growth into FY ’23 would be great.
Clayton Hatch
Yeah. In terms of development costs, we talked about the R&D hub in New York and building that out. We’ve started that process. It will continue into the New Year. Some of that is additional developers. But again, some of that wage expected to go up in the New Year. So we will grow that out in both the New York hub and the Berlin office.
Operator
Your next question comes from Sarah Mann with Moelis. Please go ahead.
Sarah Mann
Morning, Sam. Morning, Clayton. First question for me is just a bit of a follow-on. So you’ve mentioned that the size of the pipeline is growing and that the spread across, I guess, the different parts of the market is also growing. And one of the ones that you called out is clearly the private market starting to come back.
Can you give us a feel for the approximate size of some of those potential customers versus some of the larger IDNs or academic teaching hospitals at all?
Sam Hupert
Yeah. So the private market, I suppose, you could divide into two. You could look at groups, you know, the groups that were and some of those are banding together in sort of associations that they’re not partners, but they’re part of a group.
And there’s been a lot of private equity backed consolidation, massive amounts. RadPartners, U.S. radiology, where they buy controlling stake in a private practice. So those two are sort of moving to two slightly different agendas. But that whole market is consolidating. So seeing small private practice groups where they do exist, they’re becoming fewer and fewer. So they’re going into one of the other camp.
And I think we’re starting to see those larger ones starting to look at technology a bit more actively because they bought the practices, and they’ve got bits and pieces of everything.
And I think they realized to really get some synergies out of what they’re doing on scale, they would need a – most probably a cloud-based platform. But that’s all emerging. But both groups are becoming quite sizable rather than a whole lot of smaller single private practices.
Sarah Mann
Got it. And so some of the bigger ones could be, from a volume perspective, like at larger, some of your big academic teaching hospitals. Is that fair?
Sam Hupert
Yes, they did all of it larger. So it depends whether they’re looking to do things like just sharing across the network or whether they want to put the day-to-day production of all their practices on the network. And I think all of that within the industry is evolving.
But yes, they’re very, very – they’ve become very, very large. Now that’s assuming they stay their size and don’t break up. I mean roll-ups have had various sort of end points in the past. But at this point, some of them are very, very large if they put it all on or like I said, they may only put part of it on that’s yet to be determined.
Sarah Mann
Excellent. That makes sense. And so then just the question on AI, you mentioned that you’re close to commercializing your breast – or at least to connect it outside of [indiscernible] with your breast density algorithm. Can you talk a bit about how we should think about the monetization around that?
And are you going to go beyond implementing it in your existing customers, like would you look to potentially offer it to people who are using different platforms that want access to your algorithm?
Sam Hupert
Yes. Well, at this stage, look, I think, crawl before you walk, or walk before you run rather. So we would most probably put it out to existing clients because it would not be easy for us to integrate. Like I said, once we’ve integrated at one site, it would be pretty much the same at the others.
And then like most AI at the moment, there is no fixed pricing model or revenue model where think it will be transaction-based, I think that makes the most sense. But clearly, we haven’t tested the market with that yet.
So I think there are a few steps to go through, but they’re all sort of discovery steps rather than any great R&D or regulatory or – so I think we’ll put it out or offer it to a limited number to begin with, make sure it sort of does what it’s meant to do the way it’s meant to do and then look to sort of package and price it from there.
Now is there anything that stops us taking it to a non-Visage client? Fundamentally not. But I think that would be a second step, certainly not in the initial phase.
Operator
Your next question comes from Mathieu Chevrier with Citi. Please go ahead.
Mathieu Chevrier
Hi, good morning, Sam. Good morning, Clayton. Thank you for taking my question. My first one is just on the contract renewal. In the release, you said they’re a bit like new contracts. But I had to look at the Allegheny renewal. So that used to be $11 million over 5 years, and it’s now $12 million.
Sam Hupert
Yeah.
Mathieu Chevrier
Could you just walk us through what’s behind the increase in the value of the contract?
Sam Hupert
Yes. The increased value of the contract was actually more than it seems, but currency can impact it over 5 years. But effectively, the main – we’ve kept minimums at the same number, right, even though they’re doing more. So their minimum commit is the same as it was 5 years ago. But the actual dollar value per transaction is higher.
So it was actually higher than – in U.S. dollars, it’s actually higher than $1 million, but the currency difference over the 5 years in AUD is roughly $1 million. Now clearly, if they continue to do more and they’ve grown, the value of that contract will actually be more in the second 5 years than the first, more than $1 million delta. But effectively, it’s like it’s the whole term again. It’s not an extension, it’s a complete 5 years again.
Mathieu Chevrier
Yeah, okay. Thanks. Thanks for that. And just in terms of your footprint in that network. Are you – have you used across the entire radiology practice or have you expanded your footprint within the radiology?
Sam Hupert
No. Allegheny at the moment is diagnostic imaging. And they – from when we originally saw them, they’ve increased their footprint but by merging some hospitals. And so as I said, the delta between the minimums and what they actually do is bigger now than it was 5 years ago.
I think that acquisition occurred maybe three or four years ago, I can’t remember. But we’ve already done that. So yes, pretty much all the radiology assets.
Mathieu Chevrier
And in terms of the EBIT margin, I mean, obviously, it’s – costs are not following the revenue line, which is a good thing. And obviously, your EBIT margin keeps expanding. Where do you think that would land because it seems to keep moving upwards and upwards.
And I was just wondering in terms of areas where you think you could eventually spend more money, what could – what cost could actually go up over time and into what areas? Is, for example, pathology, an area of interest for you?
Sam Hupert
Look, as I mentioned in my commentary, I think EBIT margins are important, but a secondary metric for us. So if we saw an opportunity, let’s say, not even pathology, but if we need to spend more money and pathology could be longer term. But here and now more money on some of our AI activities or some of our cardiology activities, then we would, and we’ve done that, like we’ve got the New York hub. We’ve established that. We are going to put some more resources into it. But as we sit here today, the revenue outstripped even that.
So we don’t think – we think it’s possible that the margins could go up and down in increments just depending on when we do the spend. But do we expect it to go to 90? No. Do we expect it to drop to 50? No.
It will oscillate around these sort of areas, give or take, depending on just what opportunities come up and how much we invest in them, and clearly, how quickly we can get some of our clients up.
So if you look at things like Novant, one of our biggest deals at the moment, we’re not receiving any revenue for it because it’s still in that pre-implementation phase. But when that kicks in, that will have a material impact on revenue. So even if we spend more efforts, not as much as the revenue, the margins will still go up.
Mathieu Chevrier
Got it. And just one final one on the pipeline following the RSNA late last year, how would you qualify it relative to what it was in terms of mix of different types of clients?
Sam Hupert
Yeah. Look, RSNA was a really interesting one because they forewarned us that registrations would be down. It was an in-person conference, but it had restrictions in terms of you have to wear face masks all day. There was you have to be double vaxxed [ph]
So numbers were down, they say, 50%, some people think as much as 60%. But our booth was as busy as it’s ever been, and I think we were relatively unique in that regard.
And the other thing that we noticed is that if you looked at the people that came, a higher percentage were new opportunities because we always have a mix of new opportunities, existing clients coming to see us, et cetera. But for some reason, and I think it’s got to do with the people that were there were there for a reason because you could do the clinical side and the academic side and all the lectures remotely. So if you’re just coming for that, most people didn’t come. It was really if they came for a purpose, to look at systems or buy equipment.
So yes, it turned out exceptionally well for us. It was as busy as we could remember. The team were hammered all day every day. Yet when you went out into the foyer where normally there’d be a zoo of people and take you 45 minutes to get a cab, there were cabs waiting, just go in one. So it sort of looked like a conference of two halves.
The other thing is the mix of people that came to see us were across all sectors of the industry. Some of the corporates, I mentioned, some of the for-profits, not-for-profits. So it wasn’t just that we were busy, but it was busy across the spectrum.
So pleasingly, it was – turned out far better than we would have thought maybe four or five weeks before the conference where numbers were looking down, but that really didn’t impact us and it was a successful conference as we’ve ever had.
Operator
[Operator Instructions] Your next question comes from Julian Mulcahy with E&P. Please go ahead.
Julian Mulcahy
Sam, I’ve got two questions. I’ll fire them both off first as it will moderate or cut me off. The first one in relation to the breast density algo. I’m just interested in your kind of read on the radiology standards. Because certainly, there’s lots of development, like nearly 200 now approved.
But from the radiologist point of view, are they going to kind of see it as maybe creating more work for them because they still have to spend more time looking at scans that they may have missed? That’s the first question. And the second one, have you missed out on any contracts, say, in the last six months?
Sam Hupert
On breast density, no, they’ll actually make it quicker, but not so much just that it’s quicker, it makes it more objective. Because if you have five different radiologists look at it, it is a very subjective thing, density. It’s something that you estimate you can’t measure.
And so it makes it a lot more objective using the algorithm, and it also means that it takes them less time because the algorithm, it basically gives you the results as you open up the study.
The other thing is it also helps even before it gets to the radiologist because you have to do it for every patient. Now yes, if the patients had a mammogram or a tomosynthesis before and they had dense breasts, they’re going to have them again. The question is, has the density changed? So that’s a big one.
And if it’s someone new to the center, what is the density. And like I said, it does that on the fly. So I think it actually speeds them. I’m sure, it speeds things up, not slow it down. So – but look, again, until we put it out to a more spread user base, we won’t know the full potential that it has, only what we know and see of where it is at the moment.
So in terms of losing opportunity. For the ones that we’ve competed against, no, we haven’t lost anything that I know of in the pipeline. Now there will always be things where there’s a renewal that never comes to market or where there’s a usually small RFP that we just don’t get on the starting line of. But thankfully, they’re rare and few between, but I can’t remember a recent major one that we’ve actually lost, not in six months.
Julian Mulcahy
Okay. And not since last announcement?
Sam Hupert
No.
Operator
Unidentified Analyst
Your next question is online from Scott Williams. He asked, do contracts have any provision for price increases in line with CPI movement?
Sam Hupert
We, particularly in the U.S. with a transaction-based model, we bake that in. So we fix the price for the length of the contract, knowing that it will be fixed, and they’re usually between five or seven years. So we bake that in rather than ratchet it up every year or two. So I suppose the answer to that is no, it’s a baked in amount and fixed for the life of the contract.
Operator
Unidentified Analyst
Michael Porter asks, what overseas bid opportunities are there?
Sam Hupert
Michael, if you are listening, I don’t quite follow the question. But we – 85% or about 80% of our revenue comes out of North America, so that’s overseas. And then I suppose, outside the U.S., we did win that German government contract. So I suppose the key growth area for us is Germany because we’re there and also because it’s most probably one of the best funded health systems.
But having said that, the system will work anyway. And anywhere in the East, China, Japan, et cetera, it’s just a matter of understanding the local market and having representation there. So clearly, longer term, we would look outside even Europe. But given that everything is busy for us in the U.S., that’s our main focus.
Operator
Unidentified Analyst
G. Chan says, you refer to thinness and software-only nature of Visage 7 from the point of view of Pro Medicus. But for new and prospective clients that wish to implement the system, presumably there is also a hardware acquisition issue.
Do the recent supply chain constraints for GPUs, et cetera, cause delays in decision-making, acquisition or implementation for clients?
Sam Hupert
We haven’t noticed any. And I think part of that is because our last five big deals are cloud-based, so they don’t buy anything at all. They rent public infrastructure in either Google GCP, Microsoft Azure or Amazon AWS.
For those that are on-premise, I’m just trying to think back, I don’t think there’s been a huge impact, but the last big one was back in September in 2021. So we haven’t noticed any, but I think part of that may be because the majority of the new work is cloud-based.
Operator
Unidentified Analyst
Ian Lee asked, how does Archive revenue compared to Viewer? What’s the decision process on archiving in the hospital?
Clayton Hatch
Maybe I can answer the first part, Sam, and you can do the decision-making. In terms of Archive revenue, there are two components to it. There’s a data migration process where we have to migrate data from their existing archive to our system, and that’s like a professional service job.
So similar to the – when we do the Viewer or the Worklist, the amount of professional services, with the Archive, it’s a bigger piece of our time in the data migration process. So it’s roughly around 20% of the total contract value. That Archive revenue is able to be brought into the current year. So it doesn’t have to be deferred over the length of the contract.
But in terms of the rest of the Archive revenue that we receive, it’s on a per transaction per exam basis. So similar to the Viewer in terms of a client comes to see us, and we judge per exam. When we archive that exam, it also has an exam fee. So it’s spread – the rest of the revenue is spread across the length of the contract.
Sam Hupert
In terms of the decision process, a number of the health organizations had invested in what they call a vendor-neutral archive, which ours is. What that means is the data that’s stored in a – is in a standard format and can be migrated from archive to archive or any standard viewing technology can view those images.
So the decision processes, there were a few. One is how old their existing archive is and who the vendor is or was, simply because some of the stand-alone vendors have – you know, their market share is diminished.
One – the second biggest one was called TeraMedica, got bought by Fuji three years ago. So people outside buying Fuji tend not to use it. So if they have TeraMedica, they may look at something else. And I think the other big thing is cloud. So if they go to cloud, they say, well, does it make sense to have the archive in the data center when we’re going everything else to cloud.
So they’re the two pivot points, and also what they had. So in the case of Intermountain, they had multiple systems because of acquisitions in the past. And the opportunity was, if we put everything in the cloud with Visage, then we clean up all of that, including the archive, and that’s exactly what we did. So it just depends on the client, and it depends on who the technology is and how old it is.
Operator
Unidentified Analyst
Ellen Rack says, hi Sam another great period. Well done. I think some of the long-term investors listening to this call will now get dividends in excess of the purchase price on their shares.
On that, the war chest is great to see, as I think it adds optionality, especially with uncertainty around tech valuations globally. On M&A, can you speak to the types of opportunities that may be of interest to you? Cheers. Owen Rack.
Sam Hupert
Yeah, and thanks for that question. Look, prima facie, we – our preference is to buy a capability that we can bolt on or a development team. In other words, we’re not looking to buy a competitor for market share because usually that’s very problematic. And I think some of the areas would be in the adjacencies that we talk about.
So could it be something where they do things in cardiology or more likely somewhere in the AI space where – they have some good technology. We could put it onto our platform and we could build out that product because a lot of the AI at the moment is very organ and disease specific. So it’ll only do one or two things rather than the whole mapping of what you need for that particular modality. So they’re the ones we’re looking at.
And yes, valuations are important, and there has been a little bit of a re-rating in the last three to four months. And if that continues, then clearly, that benefits us simply because we have the retained earnings that we would use if we saw something that we could add value to.
So we’re on the lookout. We haven’t found anything just at this point. But the trend at the moment seems to be working in our favor in terms of valuation.
Operator
Unidentified Analyst
Claude Walker says, thanks very much to the entire Pro Medicus team for these results. Now that Pro Medicus is getting larger, are there an increasing number of contracts that are too small to announce to market individually? The company has been a standout with winning the biggest and best hospital networks.
But are you also winning smaller contracts with small and medium-sized customers? If so, does this segment have much potential? If not, why not? Thanks for taking my question.”
Sam Hupert
Thanks, Claude. Look, we always get clients – new clients that are smaller, and we don’t announce them because of materiality, but that doesn’t make them any less attractive to us as a business. I think a few things.
There are fewer of them overseas. As I mentioned, there’s been massive industry consolidation. And there have been a few private equity-backed aggregators that have been quite aggressive in the market. So they’re mopping up a lot of these opportunities.
But having said that, there’s still some out there. And I think a cloud-based offering is a lot more attractive because they don’t have the wherewithal anymore to stand up. Computers in data centers, security, cyber security is front and center and you need very specialized people and capability.
So I think cloud keeps those people in our mix and we’re seeing some of that. But as I said, a lot of these groups are sort of amalgamating into bigger consortiums, either sort of like a cooperative type thing or they’re getting bought out by private equity, but there still are some.
Operator
Unidentified Analyst
Chin Wang says, historically group revenue has been seasonally weighted approximately 50% to 50% between 1H, 2H. Are you expecting this again this year? Or do you expect it to be more 2H weighted?
Clayton Hatch
I think in the past, it has been weighted second half compared to first half, and that’s just purely to do with implementation. So I’m not sure if it’s completely 50-50 in the past. It’s probably, again, it’s more weighted to the second half. We do expect that trend to continue, although we have to make up the $1.35 million for the German government contract that we announced.
In saying that and things like Intermountain having an additional three months, so it was only three months’ worth of implementation. Within this half, we’ll have a full six months. As Sam mentioned, U Vermont, U California, some of the new sites and Novant and any of the other sort of deals that we may get along the line.
So we do expect really weighted second half, although it does have to make up for the shortfall in the capital sale in the first half.
Operator
Unidentified Analyst
John Hester says, Sam, are there any significant macro factors on the horizon concerning you, either regulatory, economics or otherwise factors that may affect hospital funding?
Sam Hupert
Not that we know of, John. We did put out some commentary because people ask us about interest rates and things. And look, we tend to be – the industry is, to a large degree, insulated from the shearing forces simply because health care spending is largely non-discretionary. I mean if you need to spend and you have a child that’s sick, you spend or you’re sick, you need treatment.
The second thing is, clearly, a lot of our clients, particularly the bigger hospital sites, et cetera, are incredibly well funded. And interest rates per se don’t impact us because we don’t have debt. So the key macroeconomic one about inflation and debt, sure, there will be – may be some peripheral effect, but we don’t see that as being major.
In terms of regulatory, we don’t see any material change. Clearly, everything we do goes through a regulatory cycle both in the U.S., Europe and here, and we’re geared for that. So we don’t see too much.
So nothing other than the usual competition, scale, et cetera, that any business has, but nothing – certainly none of the storm clouds [ph] that could impact some more discretionary spending, particularly around consumers and things that we don’t see that, that will impact us.
Operator
John also asked.
Unidentified Analyst
Outside of Australia and Germany, is there a compelling business case to enter any markets? U.K., for example.
Sam Hupert
Look, I think there will be. Those markets are changing. In the past, the problem with them is they’ve all been government, government-funded, government-run and decision-making processes were usually done by non-clinicians, believe it or not.
Now I think that will change. And I think the presence of public cloud and the American model will become more prevalent. It’s not quite there yet. I think it’s closer in the U.K. It will take a few more years in Europe.
But look, I think those key things will work in our favor because those markets look at the U.S. and what they’ve done in the past, not vice versa. And I think we’ve had pretty strong success in the U.S. that would set us up pretty well in terms of referenceability. So not quite there yet, but I think it’s moving towards our sweet spot longer term.
Operator
Unidentified Analyst
Claude Walker says, has Pro Medicus lost any of its long-serving German-based Visage technical team since the last report?
Clayton Hatch
No.
Sam Hupert
Matter of fact, we have – the vast majority of the people that came on board when we acquired Visage in 2009 are still with us. There were one or two that transitioned because we acquired a product in 2009 that we sold off, and they went with that product. But in terms of key technical people, no, we’ve had terrific retention rates.
Operator
Unidentified Analyst
Peching Lang says, did European sales revenues of $3.4 million during the half includes some or all of the $1.35 million German contract renewal?
Clayton Hatch
Yes, we received all of that contract extension to the German government, was all in those European sales for the first half.
Operator
Thank you. There are no further questions at this time. I’ll hand the conference back to Dr. Sam Hupert, CEO.
Sam Hupert
Thanks very much. Well, thank you, everybody, for joining us and for those that asked questions, appreciate the interest. And if there are any further questions that anyone can think of later in the piece, please feel free to e-mail them to either Clayton or myself. And thanks once again for joining us.
Clayton Hatch
Thank you, everyone.
Operator
That does conclude our conference for today. Thank you for participating. You may now disconnect.
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