Wednesday, July 11, 2007

Vital Images (NASDAQ:VTAL): Color on warning

Couple of firms comments on Vital Images (NASDAQ:VTAL) after the co issued terrible guidance for Q2 and 2007. Shares of the company, which develops 3-D medical visualization and analysis software, fell more than 24% in late electronic trade:

- Jefferies is taking their rating down to Hold from Buy with price tgt cut to $20 from $39 noting that after two quarters of strong Toshiba license revenue, Toshiba license revenue declined YOY from $3.9MM to $3.4MM in 2Q07. For the year, they gain comfort knowing that VTAL's agreement with Toshiba has minimums in place. This disappointing CY2Q coincides with Toshiba's seasonally weak FY1Q; however, such a decline is discouraging.

For over a year, mgmt has downplayed the impact of DRA onbusiness, even at Jeffco's late May NY investor breakfast, but they now admit that DRA does negatively affect their business more than they had originally thought.

Going forward, they have concerns about the delayedrelease of Vitrea 4.0 and Vital Connect 4.1, the apparent increasedcompetition from GE, Philips and Terarecon, and a longer sales cycle caused by morecomplex enterprise deals. While they recommend a HOLD at this time, mgmt needs to re-establish credibility, since they just shared most of these issues to the Street for the first time. The ~$10 cash per share does provide some downward safet.

- Deutsche Bank is somewhat more supportive keeping their Buy rating albeit taking their price tgt to $30 from $48. On the heels of this disappointing announcement, they have lowered FY07 EPS from $0.65 to $0.25, FY08 EPS from $1.00 to $0.60, and FY09 EPS from $1.35 to $0.95. The firm still believes that VTAL is favorably positioned long-term, but there could be some bumpiness in customer adoption.

Notablecalls: I guess this is what you get when you compete with the likes of GE and Philips. While VTAL's offering continues to be among the best on the market, it's hard to be a midget in the land of giants. The weakness at Toshiba is surprising (a large 40%+ customer) but my gut tells me it may be just a bump in the road.

With the stock down 7+ bucks on open, the valuation does not look too absurd given the opportunity ahead. Even if VTAL can manage only $0.60 in EPS next year, substracting the 10 bucks per share on its balance from $19-20 (that's where it's likely going to open for trading), you have the stock trading at 15x forward EPS.

I think VTAL will stumble below $20 level after open but will become buyable soon after.

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