Pro Medicus Ltd

ASX:PME

Earnings Call Transcript 2022-Q4

[Operator]

Thank you for standing by, and welcome to the Pro Medicus Full Year Results Briefing. [Operator Instructions]

I would now like to hand the conference over to Dr. Sam Hupert, CEO. Please go ahead.

[Sam Hupert, executive]

Thanks. Good morning, everybody. Thanks for joining us. As most of you know, we are a health care IT company specializing in enterprise imaging and radiology information systems. We worked through 3 jurisdictions: Melbourne, which is our head office; Berlin, which is our R&D center for the Visage product set; and U.S., which is our main market. We have 2 product sets: the Visage RIS, which is practice management, does the billing and business side of radiology, largely Australian-based with some clients in Canada; and the Visage 7 product suite, which is our -- the main product or the key product set that we sell into globally, but mainly into the U.S.

In terms of our results, we were extremely pleased. We thought all of our key metrics headed differently in the right direction. I think a significant boost in revenue. Our profit after tax increased by 44%. We -- our EBIT margins, which were most probably industry-leading for the last few years, have increased a few additional percentage points. Pleasingly, our cash balance increased by 46.5%. And as a result, our full year dividend was up by 47% and is $0.22 fully franked.

In terms of the highlights of the year. We won a number of material contracts, certainly very large not only for us, but for the industry in general. In October 2021, Novant, which is a large integrated delivery network. It was a $40 million 7-year contract. It was followed by an extension of the German government contract we signed in 2015. It's the fourth extension and brings our software to a new region in Hamburg in Germany. Another large IDN in Inova, which was $32 million in 8 years, and Allina, which we announced in June, which was $28 million in 7 years. And I think it's important to reinforce that these are the minimum contract commitments. Usually, we receive a material amount of revenue over and above that.

The other pleasing thing that happened in the year were 2 major renewals, both for long contract terms, one for 5 years, one for 7 years, with a combined minimum value of $47 million. And throughout the year, we continue to get a lot of inbound interest and our pipeline grew accordingly. In terms of where we sit, clearly in the Tier 1 academic space. We have doubled the number of clients over our nearest competitor. The top 20, they change each year. Mayo always remains #1, but we're pleased to say that we still are incredibly well represented in that space with a growing presence in the nonacademic or IDN space.

Again, most of you will know, our model is transaction-based. We use virtually all of our U.S. contracts and now for our risk contracts in Australia. The forward revenue, which is the revenue we know we're going to get, has a minimum from the contracts we have, assuming that renewals renew at the same rate as they were originally, even though now we are renewing at higher rates, has increased significantly to about $420 million over the next 5 years. So we see a bigger annuity stream with greater predictability.

In terms of the exam revenue from year-to-year, it did have a very -- our biggest increase of 65%, 61% on a constant currency basis. And we did foreshadow this to the market, I think. We did say that we knew that we had a number of material implementations towards the end of '21: Northwestern, NYU, MedStar. And then we also had Intermountain and the UCs in the first half of '22. And then we see that we believe that will increase. So Intermountain, UCs and others will give a full 12 months, which clearly will -- is material given their size. And we have 3 very large contracts coming online in the first half in Novant, Inova, Allina and some others which are a bit smaller. So we also expect growth from existing clients, which we've seen throughout the period, and further upside as we get adoption from some of the other Visage 7 products, namely archive and worklist.

Professional services, I think not much has changed here other than the roughly 10%. They were recurring in nature because we spread them over the life of the contract. And you'll see when we do the split of revenue that they are -- they do go up and down a little each year, but within a relatively narrow band, but are continuing to grow. So we do believe we have very high operating leverage. We have contained our cost base. Our margin grows as our footprint increases, and I think the next slide clearly shows that, that from 2018 to '22, we've gone from low to mid-40% EBIT margins to now 67% were again, we think we're multiples of our nearest competitor. And obviously, we're very pleased with that.

In terms of -- we often get asked about COVID, and it has been more prevalent in the news of late, particularly here in Australia. It has not impacted us negatively. We are globally working as a mix of in-office and work-from-home. We are operating at a full 100% capacity. Sales and marketing efforts continue unabated, and clearly as witnessed by the sales and renewals. We think the thing is about technology is it has enabled us to do a lot more remote demonstrations, particularly from cloud, which is important. And we have seen an increased number of new opportunities coming to the pipeline over the past 12 to 18 months, despite COVID restrictions in various jurisdictions around the world.

Part of that would be because we enable radiologists to work seamlessly from home. And even in those areas no longer locked down because of COVID, we are seeing more work from home than we saw in pre-COVID levels, maybe 2 days a week, but it's still material. And exam volumes are back at or above pre-COVID levels. So pretty much 0 impact from us, if anything, COVID has been a bit of a tailwind in terms of proving our remote capability and inbound RFPs.

Visage RIS, we had another good year with that. There was some incremental growth. We're still rolling out some of the larger contracts we had. I-MED and Helios is now complete. We are seeing some organic growth via M&A. So some of our clients are expanding their territories, and that all just feeds into the original master contracts. So we are clear we're the undisputed market leader in this segment.

In terms of the core Visage product set. Every year or every half year, we review where our technology stack stands compared to competitors in the market. We have previously said that it was roughly 18 months ahead. We think it could even be more because we don't know of anyone at this point that has come to the point we were a number of years ago. And obviously, we've continued to invest in our technology moving forward. So I think we can fairly lay claim to the fact that we're #1 in terms of speed, functionality and scalability, which are the key factors that clients look for when looking to get a new system.

The things that are driving market adoption, as we said, we've seen more inbound RFPs. There seem to be more health care institutions, particularly in the U.S., looking to change or update their systems, their imaging systems. And we think that the drivers, which we've talked about many times before, remain the same. Clearly, the data set explosion, it continues relentlessly. And legacy technology just wasn't designed for those SaaS files. We call it compress and send, basically, a system would take a file from a CT scanner or MRI scanner, compress it as much as they could without losing fidelity, send it down the network, where the workstation where the radiologist was sitting would have to unpack that, have 2 gigabytes of software in order to manipulate the images and then make the diagnosis.

And the trouble with this model is simply the files are just getting too big even if you're on a local high-speed gigabit network. So we do it very differently. It is proprietary technology. As I mentioned, we don't believe anybody has been able to replicate this in production as we sit here today. We actually stream the pixels rather than moving the file. And someone asked me recently, and that's a good point. There is a huge cost saving in hardware not only in the number of servers you need, et cetera, but also the radiologists because we don't need a heavily configured workstation with a lot of memory and disk at the radiologist's end. We can use anything because all of the processing is done centrally. So anything that can display the necessary number of pixels is fair for us. So the actual cost in these large organizations of refreshing radiologist workstations every 3 to 5 years is very material. And clearly, with us, I don't need to do it. So another major advantage.

In terms of the contracts. Novant, as we said, was a $40 million 7-year contract. With Intermountain, it's our biggest to date. It is fully -- it will be fully cloud deployed and it is for multiple products, in as much as it's for our Visage 7 viewer and workflow. I think it certainly helped extend our rapidly growing footprint in the IDN market. We were already well represented there with large clients like Sutter, Mercy, Wellspan and MedStar and others. But this has certainly increased our presence. And like all of our U.S.-based contracts, it's transaction-based with potential upside. We did announce the fourth extension of the original contract signed in 2015. It is a capital license, simply because the government has to buy that way. But the $1.3 million doesn't include a material annual support contract that we get every year to support that growing user base for this client.

Inova was another IDN, again on the East Coast, again, cloud-based. It is a combination of Inova's hospitals and their joint private practice venture in Fairfax Radiological Consultants. So it's a mix between inpatient and outpatient. We replaced 2 key competitors. Our current competitors are active in the market, one at Fairfax, one at Inova's hospitals. And again, it's a transaction-based model with upside. Allina the last of the 3 contracts in the Minneapolis region close to where Mayo operates. It's, again, a $28 million 7-year contract. It does include workflow. Again, it is cloud-based, and it is a transaction-based model. So 3 relatively similar but slightly different contracts, all of them material.

And the other thing was the renewals. We have a combined minimum value of $47 million. Sutter's for 7 years, which the original contract was for 6, in which the first year was a phase-in year to do the implementation. Wellspan is for another 5. Both of them were at an increase per transaction fee, and we feel that the commitment we are getting from our clients when they renew is more than industry standard. Usually the industry renews for 2 or 3 years, whereas here, they're showing long-term commitment, and we think that is an endorsement of our offering and our technology.

In terms of the -- one thing is to sell it, the other thing is to put it in. Many of you have seen this slide, but we do think it is a material advantage we have in that we can fast-track and continue to deliver these systems in large scale last year when we did Intermountain, which is one of the larger IDNs in the U.S. landscape. The changeover occurred over two 1-week periods where they thought originally it would take over 2 years. It was across 3 states and many hundreds of radiologists and thousands of technologists. So it is very much a strength of ours. It is dependent on our technology, and how we are able to deploy it optimally. And as we've said previously, with COVID, we now have a highly optimized model that is a hybrid between on-site and remote, which we think works incredibly well.

The key implementations, we did talk about MedStar last year. It was sort of on the border of the financial year crossing. So the bulk of it went live in early July. We mentioned just before Intermountain in October, and we have done 3 out of the 5 UC campuses. They're all done on time, and that was UCSF in December, UCI in January and UCSP in March. And in between, we did the bulk of University of Vermont. So active. These are only the main implementations and background. We're always doing a number of other implementations for existing clients where they open other new greenfield sites or make bolt-on acquisitions.

One of the things that we've always talked about is our price point, where we're at the value end of the market. We think we charge the most, but return the most to our clients. As I mentioned, there's significant IT and infrastructure savings, radiologist's efficiency that no one has been able to match. And I think importantly, we also provide a clinical ROI, that is, we have enabled the doctors to do things they otherwise couldn't do or if they could, it would take so long that they normally don't do it. And I think that has been, again, a key feature of the application.

This is an example of it. It's where if you're looking for a study in the uterus, you need to do this -- plan a reformat and it could take quite a while with the standard systems. It's literally just a few clicks and less than a few seconds with Visage. So good clinical practices, you should do it. And again, we find that most of that -- our clients do it because it's so quick and simple.

The growth strategy, again, we are executing on that. It's to expand our footprint to new clients, which clearly we did in the past year and continue -- plan to continue to do this coming year. We have had transaction growth pretty much from all of our existing customers, well above their 100%. They told us they did when they first came on the contract. Some of it is quite material in terms of bolt-on acquisitions. Some is opening new greenfield sites, but we're able to garner all of that upside because of the fine-grain nature of how we build, which is [ pretty ]. We are bringing out new product offerings. So we have -- we now have in our core stack, the viewer, the archive and the worklist, which we've now sold to a number of clients, and I'll get to that. We are looking at extending further into Europe, and we are leveraging our capability to introduce some new next-generation products such as the video reports that we've released with NYU that I'll get to in a minute.

In terms of the pipeline, again, we think it's very robust. It's not just in terms of quantity, but it's in terms of quality and market spread. For the last 6 to 12 months, we have been noticing renewed interest from the for-profit sector, which was the hardest hit by COVID and a sector that really went into its shell a bit. And we are seeing renewed interest as well as in the academic space, the IDN space and across clients, both mid and large size. So it's about as big a spread as you can get. And we have seen increased inbound in RFPs, particularly over the last 12 to 18 months.

The archive, as we mentioned, this is the ability to store the images electronically. We've had 3 recent sales where they're both viewer and archive. And there can be material uplifts. So MedStar and Intermountain were 2 cases in point. And we are seeing more interest in our archive product. It is charged on a per transaction basis. So again, as the client grows, the fees from archive and viewer grow with it.

Our newest product, which we released in RSNA 2019 is the workflow. It is based on over 30 years' experience with workflow that we've had here in Australia. It does allow us to offer a single vendor solution. It is transaction based. And again, as I said, we've had it. It has been bought by 3 recent clients in MedStar, Novant and Allina as they contracted with us. So they've contracted for multiple products, which we think is a trend we'll see increasing and clearly advantages us. And we are seeing strong interest from our existing clients in our worklist product as a possible add-on to their Visage implementations.

The One Viewer, this was the ability to extend outside radiology. As many of you know, certain departments take what we call dark room images or radiology-type images that our subspecialized cardiology being the main case in point, and we have progressed our efforts in that area. In -- at the RSNA 2001, we showed work in progress that we're in the process of commercializing into our product stack. It is injection fraction, which basically is how much of the volume of blood in the left ventricle is emptied with each hopping. It's a very important function in assessing viability of ventricle and cardiac failure. It's very specialized to really the cardiac area, and it's filled a functionality gap that brings us much closer to a full cardiology offering that is based on exactly the same viewer technology as the Visage 7 product.

CloudPACS, we've trademarked that name, again, huge momentum swing towards cloud, particularly over the last 2 years. We are cloud native. We believe we're the only product that is, and we've been able to prove it with very large-scale implementations, MedStar, Intermountain, UC, University of Vermont, to name few. And I think proof of the pudding is 7 of our -- last 7 of our major implemental sales are all CloudPACS, and we are seeing pretty much that theme in most, if not all, of the RFPs that we're getting.

So the last few things with the accelerator. This is our platform for AI that we use in some of our research collaborations and use for ourselves. Again, that we have been active on a number of fronts with some of our collaboration partners and internally, and are building out not only the capability of the platform, but it's used in some of the joint collaborations and joint research projects that we have undertaken, which have increased -- a number of them have increased over the last 6 months, which is what we anticipated.

In terms of who leads it, Malte Westerhoff, our CTO, and Detlev, our Head of Development, they are ideally suited to this function because they come from -- they are both PhDs in health care imaging processing and manipulation. That's what they've trained in and we have 2 people based in the East Coast of the U.S., Ming, who is a PhD that sort of interfaces with on our research projects, and Raj, who is an MD and PhD that assists Ming and assesses not only the research side of the project, but how we could potentially commercialize those going forward.

We have announced previously the research collaboration agreements with NYU Langone, Mayo and [ Go ]. We have established our New York research hub. It was a little more difficult than we expected because of COVID restrictions. We couldn't get our people from Germany in till August last year. But since then, we -- that hub is going well. We have an additional staff member that's joined us a few months ago based in New York, and we are working on a number of interesting projects, of which one was announced at RSNA last year, which is the video reports where by radiologists can create a 1-minute report with a video showing the patient the pathology and their particular test, and the patient can download it and look at it on [ their own time ], et cetera. And it's proved to be incredibly popular and has now been released in our standard product stack.

Some great things to the AI. Many of you know, we did have an FDA clearly in February 2021. We have been using the accuracy of it over the period that's been there is it agrees with consensus of 5 radiologists even more so than any 1 individual radiologist. So the accuracy is exceptional, and we're now in the process of deploying it to a second existing site, which will be our next step towards commercialization.

Finally, we have been very busy. The world is slowly returning post COVID to normal. RSNA was the first in-person conference in '21, first in-person conference since 2019. We had a large presence, U.S. and European teams. And despite there being conference attendance down over 50%, we were fully booked. The whole time we were as busy if not busier than 2019, which was very pleasing. And interestingly, there's a higher percentage of new opportunities as compared to a split between new opportunities and existing clients, and the opportunities were across a broad range of market segments, for-profit, non-profit, IDNs and academics. So a really good mix.

We've also attended these other major conferences plus others. HIMSS and SIIM are the 2 others besides RSNA, not as big, but still important. And then some of the subspecialty conferences where we're well represented with our technology, such as the breast imaging conference, neuroradiology conference and one of the key conferences in Berlin or in Germany.

So in summing up. It has been easily the most successful year in our company's history. I'm very pleased with the transaction volume increase because FY '22 forms the basin which we built FY '23. We did have strong contract wins and renewals. We -- the expanded product portfolio is paying dividends. Cloud is incredibly strategic for us. And as I said, we were able to establish our office in New York, and that is growing. And importantly, our pipeline continues to grow. And hopefully puts us in a very strong position going forward, both this year and into the future. Thank you, and happy to hand it over to questions.

[Operator]

[Operator Instructions] Your first question comes from Chris Cooper with Goldman Sachs.

[Chris Cooper, analyst]

Firstly, you commented that you said that you've seen increased inbound from RFPs over the last 12 months. Can I confirm whether that comment applies across all customer segments? Or is that a reflection of the -- the other comment you made, the renewed interest you're seeing in the for-profit sector? That's my first question. And if I'm limited to 2, I will ask you, please, just on the renewal profile. So obviously, very good to see Sutter and Wellspan get done on what looks like pretty favorable terms. What is the sort of forward profile for further renewals over the next year or 2 at this point? And is there any reason at all we shouldn't be thinking about those being achieved on some of the terms?

[Sam Hupert, executive]

Well, the first one, look, the inbound has been across all segments and not only the segments, but various sizes, so midsize and large. It's not just large ones, but just small ones. It's a mixture. So it's not just the for-profit, but across all the segments we deal in. And as you know, some of the segments, they're not black and white. I know there's a good case in point. It's hospital plus imaging centers. And so yes, it's been across all segments. I think the next major renewal will be University of Florida, which is coming up. And then after that, I don't think we have anything material for 12 months or longer. So far, we've been able to renew all of those that have come up. So clearly, we're very pleased with that. And we don't have any indication that we won't be able to renew the one that is coming. So still ahead of us, but we don't have any sort of gray clouds over it that would indicate that they won't renew. Thank you.

[Operator]

Your next question comes from Josh Kannourakis with Barrenjoey.

[Josh Kannourakis, analyst]

A couple of questions from me. Firstly, just on the pipeline and outlook. I noticed in the rem component of the annual report you had an annual contract value measure in terms of payment, which despite it being a very strong year, I think you noted was slightly below the top of the target, but below the threshold. Is there any way you can give us a little bit of context as just to help us give a bit of a guide of how that looks to FY '23 and what you guys are sort of thinking in that respect for ACV?

[Sam Hupert, executive]

Yes. Look, when you do ACV, you're looking minimum of 12 months into the future. And you're also -- it's very dependent on timing. And as you know, even if you are selected as a vendor of choice, it can take 5, 6 months in contracting alone. So opportunities can flip by the side of 30th of June quite easily. And so I think what we're saying is the ACV target, we make sure it's not a given, that we're not just going to get it by default. So it has a stretched component in it. I can't comment on FY '23 because we haven't announced that to the market. But obviously, we take into account that we've had more inbound RFPs when we look at that whole component going forward.

[Josh Kannourakis, analyst]

Okay. Got it. And just in terms of the new products, I guess it's a question that fits into the cost base a little bit, but also a couple of your comments around new products and geographic expansion. In the context of both of those things, new products and greater expansion into Europe and other regions? How should we be thinking about the cost base into the future, obviously, extremely high margins in the second half of the year?

[Sam Hupert, executive]

Well, look, a lot of the R&D -- so our newest product is our worklist. It is -- has some of the DNA of what we do for worklist here in Australia with the rest, but on the same technology stack as the Visage 7 product. So a lot of R&D has gone into that. And obviously, that's all been in FY '21 and FY '22 figures. And clearly, every time you have an additional product, it's not a set and forget you're always looking to enhance it. But we don't think that having the multiple products will materially change our cost base, any more than having more clients because you need to service them. So we've been able to develop and implement those products very efficiently and any increase in cost base in doing that has been more than matched by the increased revenue.

[Josh Kannourakis, analyst]

And Sam, just on that question. So same question in that respect of the new products on cardiology, you obviously mentioned that that's progressed on the ejection fraction side. How far do you think you are from, I guess, having the ideal product that you believe is a stand-alone cardiology product to bring to market?

[Sam Hupert, executive]

Yes. Look, I think we're very close, but I'll just define ideal because what is a more than adequate feature function set for one organization may not be for another. It's not that there's a hard line and if you get there that's it. So I think -- look, I think people understand where we're heading, our clients, and I think they're very pleased with that. I think they understand the benefits of having the one platform that then because in cardiology, the immune sizes are going, just like their radiology because the simple modality. So look, I think we're getting -- this gets us a lot closer and obviously shows that we have the smarts to be able to do a cardiology-specific type applications within our own platform. And I think there are 2 key things.

[Operator]

Your next question comes from Garry Sherriff with Royal Bank of Canada.

[Garry Sherriff, analyst]

First question on the expected timing of revenue contribution, particularly for those big 3 contracts, Novant, Inova and Allina. I know in the past, you'd mentioned that Novant, I guess, had been held up a little bit again on the client side due to data migration issues. But love to get a view, firstly, on that revenue contribution expectation for FY '23 for those contracts, if possible?

[Sam Hupert, executive]

Yes. Look, they'll all be implemented in the first half. You're right, Novant was held up. We had hoped to do it a bit earlier. It was held up at their end, because of the large data migration project that we're not doing. It was -- they're doing internally, and it's taken a little longer and they wanted to have that complete before we get in. But at this stage, we believe all 3 are very keen and have internal requirements at their end that need these things to be done before calendar year-end. So all things being equal, all 3 will be implemented in the next few months.

[Garry Sherriff, analyst]

Perfect. And the next one on an update on timing around -- again, Josh, just started to talk about it, around cardiology or sales into new hospital departments outside of radiology. Just an update on timing there and also the sales of the AI imaging platform.

[Sam Hupert, executive]

Look, AI imaging, as I said, we're already moving it to a second site, and that's in anticipation of them being able to use it and being happy with it in commercialization. So there has been a material move there. In cardiology, look, we have some things in trial of various organizations. And clearly, this particular ejection fraction piece, I think will bring us closer to that point. How long is it? A lot of it also depends on them, how quickly they can test it, use it and they need to test it in preproduction. Being a clinical product and a new one, it's not something you can just drag and drop in. So I can't give you an exact date other than this closed -- there's a big piece of functionality that I think just significantly improved our prospects in that space.

[Operator]

Your next question comes from Melissa Benson with Wilsons.

[Melissa Benson, analyst]

The first line is just touching again on that One Viewer product that you've shown. I guess this is more of a hypothetical question in the -- when you're in a cardiology space. Is there more kind of pricing power? And do you expect that to be kind of a higher-priced product in that market?

[Sam Hupert, executive]

I do because cardiology is not as big by volume, but it is as sophisticated. So within the market, then cardiology-specific products tend to be priced a little higher. And bear in mind, when we price in the general radiology market, we price across all modalities. And so it's a blended average price. So for chest X-ray, most probably is deemed as a percentage a lot, whereas for an MRI, it's not whereas in cardiology, you don't have that variation as much. But yes, it would be at, I believe, a higher price than what we can charge for radiology.

[Melissa Benson, analyst]

Understood. And the second question is actually around the risk performance. That was kind of -- the growth was ahead of what was perhaps expected. So you mentioned there's been some kind of consolidation, particularly in the Australian market with Helios and I-MED. Is that kind of a tailwind that you expect to kind of continue impacting that business in a positive way? And more generally, I guess, in the U.S., are you still seeing quite strong consolidation tailwind?

[Sam Hupert, executive]

Yes. Look, in Australia, the clients you mentioned, namely I-MED and Helios, they're big fish in a small pond. They are expanding, and wherever they're going to new sites, we pick those up. Clearly, we're not -- we don't control how and when. But whatever business they pick up, the way we actually -- the way we charge our pricing model is fine-grain and picks it up. So that's all been good. And we don't see any evidence of contraction, quite the opposite. But again, the pond in Australia is relatively limited. U.S. on the other hand, I think uniformly, we've seen an uptick in volumes in pretty much all of our clients, particularly in the last 6 months, Clayton?

[Clayton Hatch, executive]

Yes.

[Sam Hupert, executive]

Now why that is? It's a mixture of organic, it's a mixture of bolt-on acquisitions, it's a mixture of new sites. And we are seeing more consolidation. And most of it is being driven in the private space, with private equity-backed buyers. But we're also seeing our clients. They're all looking at new sites, new departments, buying regional hospitals that got hit hard with COVID. So they're expanding as well. And as you know, the way the contracts are structured, we just pick up that work as soon as they put it in. And maybe just in general, they're doing more radiology. It seems to be back on an organic growth path, but maybe it's bigger than we've seen over the last 4 or 5 years.

[Clayton Hatch, executive]

And just touching on Australia. Melissa, Helios contract is also on a transaction basis. And the prior year, we were still sort of implementing the last few sites. So they didn't get a full 12-month revenue as we got this year. So that's also incrementally increased. And as Sam mentioned, as I-MED or others go into new sites, there's additional license revenue there.

[Operator]

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

[Julian Mulcahy, analyst]

Firstly, you mentioned that exam transaction volumes were up 65%. What was the sort of changes for support and professional services?

[Sam Hupert, executive]

In terms of volume or...

[Julian Mulcahy, analyst]

In terms of health revenue...

[Sam Hupert, executive]

Our professional services were in line slightly ahead of growth -- ahead of last year. Sorry. And the license revenue was up around 10%, 15%, which was mainly driven through the additional contract with the German government and the support contract through Munich University in Germany as well.

[Julian Mulcahy, analyst]

And with -- you previously mentioned, Sam, that a lot of your clients had archive contracts that were due to expire over the next sort of year or so. What's your progress on potentially selling Pro Medicus archive to them?

[Sam Hupert, executive]

The more archive and worklist we put out either with new clients or existing clients, the bigger the reference space. And so yes, look, there's been a lot of interest in both archive and worklist. Our worklist is -- archive is almost transparent to radiologists. They never see it. There aren't any feelers if it doesn't work. Whereas worklist is a bit like the viewer, it sort of dictates their desktop. And so we are -- as we put in more and more in the product, it gets disseminated more and more, we are having a lot of interest in worklist. And I think one of the other factors is there used to be 3 independent worklist providers. Medicalis that got sold to Siemens a number of years ago. There was Clario that Intelerad bought a number of years ago. And then about 2 years ago, Nuance bought Primordial, which is one of the bigger ones. And now, as you know, Nuance has been bought by Microsoft. So small and nimble, more independent worklist, the vendors are disappearing, and that's creating a vacuum that we're looking to fill.

[Operator]

Your next question comes from Sarah Mann with Moelis Australia.

[Sarah Mann, analyst]

Just a question on pricing. So obviously, you've had a couple of contracts that you've renewed at higher price points. Just wondering with inflation in the U.S., does this impact kind of the renegotiation process, i.e., is it potentially maybe even easier for you guys to get through bigger price increases going forward in the current environment?

[Sam Hupert, executive]

I wish, but no. Effectively, what we're saying, and I think there are a few points. First of all, they wouldn't renegotiate anything with us if they weren't happy, if we hadn't done our job. And part of that is making sure that they're on the latest version. So when they come to renew, they don't go, oh, it's like an old car, it's 4 years old. And so they're on the latest versions, and they feel we've done what we said we'd do. And the other thing that they feel is that we keep giving ongoing benefits. And clearly, that's important to them in terms of any of the financials because we are more expensive than the rest of the market and intentionally. So look, there's always a negotiation. Everybody wants to pay less, our clients included. But we have been able in all of our renegotiations to land on a midpoint that we felt was fair particularly since some of these people were early adopters, and we believe they should have an ongoing benefit. And so the fact that they've renewed for effectively contract lengths in some cases, even longer, I think, sort of validates that or underpins it.

[Sarah Mann, analyst]

Right. Okay. And then in terms of expansion offshore. So I think, you've been in Germany for a while. What is your strategy around going more broadly into Europe? And I guess what needs to happen in the U.S. before you start going a bit harder in Europe?

[Sam Hupert, executive]

Look, I think the U.S. is the biggest market, but it's also the most active. There's a lot going on there. There are a lot of groups looking to buy systems, as we've mentioned, in terms of pipeline, and there's leasing patents. Whereas once you go to Europe and even -- here in Australia, you're dealing with government. And once you deal with government, there are layers upon layers you have to navigate through. And it just makes it much harder. And the opportunities, each one is actually smaller, but that doesn't mean we shouldn't be doing it. And we think there are a few things that have happened, particularly recently that will help us a lot. So Europe doesn't have health care and cloud, pretty much more on-premise. But like the U.S. and like Australia, the advantages of cloud are so compelling that they'll need to go. But in the past, there's been an issue with the large cloud providers in Europe, simply because if the U.S. government passed AWS or Microsoft or Google, they would have to provide data, which contravene some of the data privacy laws in the EU.

And there is now a new treaty being -- literally being negotiated to enable the Big 3 to work an incumbent within Europe. And we think that will help us simply because we're already capable, we were already there and what makes a product good in America makes it good in Europe. So that's certainly -- that will facilitate a lot of things. And the big cloud providers have to deal with government. They're -- they've got teams dealing with it, and maybe could help navigate through some of the bureaucracy that otherwise is incredibly time-consuming.

[Operator]

Your next question comes from Mathieu Chevrier with Citi.

[Mathieu Chevrier, analyst]

The first question I had was just with regards to the competitive environment and what you've been seeing since we last spoke 6 months ago.

[Sam Hupert, executive]

Look, I think -- as I said, we feel our technologies, if anything, has gotten even further ahead. And whilst we will always have competitors, and you can't win every single deal, some people have long-held preferences from the must-buy product A or B. We've noticed some of the competitors when we started years ago sort diminished in their presence. I'd say some of those that came from the film days, Agfa, Fuji days, we seem to be successful against them. And so really, we haven't seen any new competition come on board. There have been a few start-ups that been touted, but with FDA approval and other bits and pieces, they may be years away before even being commercializable, yet alone on big scale.

So look, there's always competition. We think, given our sales history, we're actually increasing our lead not the other way around. But clearly, we're not looking to be complacent, quite the opposite. We think now is the time to put the foot on the accelerator even harder. And big efforts we're doing with our New York R&D. They're not all around AI. They're around feature function in the product. The R&D back in Berlin and the stuff that we're looking to do AI was through partners and particularly with the research collaboration agreements, all part and parcel of that, keeping even further ahead than we were previously.

[Mathieu Chevrier, analyst]

Understood. And in terms of going to Europe, just wanted to just focus back on the U.S. and perhaps you can give us an idea of where you think you are in terms of penetration rate and what the way forward could look like in terms of potential penetration rate over the next few years.

[Clayton Hatch, executive]

Yes. I think in terms of the exam volume, we've spoken about this a little bit. We've said we're a bit over 5%, and we think we're still around that. The market -- and some of the data we're getting back is actually the market is growing. We've been using something around 500 million exams annually for the U.S. market. I think it's closer to 650 million. So we're still around that 5%. So it's still very early stages. In terms of the future, I think, as Sam has mentioned in our pipeline, we think we've got a great opportunity to continue to grow that and keep expanding our opportunity in the U.S. market. So there's plenty of runway in terms of opportunity there. We've got some good -- great clients in different segments of the market, but certainly by no means saturated in terms of the market penetration.

[Mathieu Chevrier, analyst]

Yes. Okay. And if I can just squeeze one last one with regards to changing economic conditions. Obviously, there's a lot of people forecasting a potential recession. I was just wondering how that could potentially impact you in terms of volume and then hospital budgets and spend, especially that you're obviously a premium solution compared to the other providers?

[Sam Hupert, executive]

Look, we haven't seen any downward pressure at this point because we think in our commentary, we're in an area where it's largely nondiscretionary. Our clients are incredibly well funded. They have to provide health care to a scale and level. So we haven't seen any impact over the last 6 months. From a business point of view, we -- people talk about wage inflation. And yes -- so I mean, we're not -- we don't live in a vacuum. But because we're very efficient in terms of staff numbers, the impact of that on us is very tightly contained, and then interest rates per se for us as a business, that don't impact us because we don't have any debt to service. So as much as you can be, we have been very strongly isolated from the impacts of the recent events with inflation and interest rates. And we have no indication in terms of our pipeline and everything else that is changing.

[Operator]

[Operator Instructions] Your first webcast question comes from Claude Walker who says, "Thank you for the great results and for including more information, the company's investment in debt and hybrid securities. What is the company's risk/reward analysis regarding these investments? How likely would it be that the company could lose money from this practice?"

[Sam Hupert, executive]

Yes. Thanks very much, Claude. In terms of looking at this, obviously, the Board look at the risk/reward on an ongoing basis. When those were first entered into a very low interest rate environment, it was used as the mechanism to increase interest for the cash holdings that we had. And those discussions are ongoing. Clearly, as interest rates increase, term deposits are more attractive and could be an area where we can certainly park some of the additional cash that could be used in future spending, either in terms of acquisition or in terms of working on the business and retaining some for development of our products.

In terms of losing money, we do have a policy around the grading of the securities, BBB negative, plus. I think our policy talks around 80% of that, but it's in the mid-90s in terms of where we hold that at the moment. Any loss that's made at this stage is unrealized. So it's only fully realized if we were to get out of those opportunities. We think some of those debts and securities will come back to their coupon rate once they get closer to maturity. Thank you.

[Operator]

The next webcast question comes from [ Judith Fraser ], who asked: "What percentage of the U.S. market do you think you have currently captured? And do you have a target which you think you can achieve over the next 5 years?"

[Sam Hupert, executive]

Yes. I think as Clayton said, we -- when we look at the market, and we've been doing a fair bit of analysis on it lately, the number of exams that come through from all the data points is actually bigger. So runway is longer. So we were assuming around 500 million. We're now saying it's north of 600 million. And based on that, we're a bit over 5% and growing, which doesn't sound like much, but there are very few companies that have done that, certainly not in the time that we've been able to do.

So I think that's plenty of runway to go. And we -- not only is it just the volume, but we think that the product is the only one that without modification can actually service all the different segments of the market. So even for some people, there's 600 million that they could only address maybe 50 million or 60 million because of the technology itself. We think we could address pretty much close to 100%. And then the only other consideration is the cost of sale when it's small -- too small. And again, that's changing because the small guys are either merging or they're getting bought out. So the number of smaller groups is diminishing, which works in our favor.

[Operator]

Your next webcast question comes from [ Ray David ] who asked: "Could you talk about the outlook for cost? For example, are you planning on investing more in resources/staff in FY '23? And what sort of cost growth should we expect?"

[Sam Hupert, executive]

Yes, we are. I mean we have been investing in resources and staff in the current year. So the cost base has gone up around 20% in the past year. I think what's been able to -- pleasing our EBIT margin has still been able to go up. So we've obviously had revenue to be able to cover that. And the incremental EBIT we get on the revenue is much higher. We will be looking to increase resources in FY '23. It's in all 3 jurisdictions, and it's all in all different departments around technical staff, clinical applications and project management and support. So it will grow, but we are -- we do believe we should be able to maintain our margins going forward.

[Operator]

Your next question comes from [ Abby High ] who asked: "How does the Visage product work alongside EMR providers, for example, Kona?"

[Sam Hupert, executive]

Yes. Look, we -- in all of our hospital environments, we integrate tightly with the EMR, the main ones we see are Epic. We do have some large clients that have, Sutter, I think MedStar, Intermountain, and we integrate with that. So clearly, it's a standard requirement of ours. We have very tight level of integrations with all the major EMRs.

[Operator]

Your next question comes from [ Ian Lee ], who asked, "Given the scale benefits, is there a cap on the margins?Can you please discuss the TAM on each of the segments? Any comments on the potential contracts in the pipeline for this year."

[Sam Hupert, executive]

Look, in terms of cap on margins, we thought when COVID hit, and they're in the mid- to low 50s, that we would -- and then we didn't have major costs like conferences in-person and travel obviously stopped and the margins went to the low 60%. We thought they would gravitate back down somewhere in between. When all of these costs came back, but they haven't. And so we've been able to incrementally grow them. But having said that, that we are at multiples of -- in terms of EBIT margins over our nearest competitor. So they are industry-leading. And as Clayton said before, that we don't expect them to shoot up. We don't expect them to materially decrease. They could go up and down a few percentage points in this range. Just depending on timing of when we bring on additional staff, which were planned at the [ time ] when revenue comes in from the new contracts.

In terms of TAM for each of the sections, like I said, it's almost impossible because some clients span multiple sections. All we're saying is that we think we have the biggest addressable TAM in the U.S. simply because of the product set being able to address any part of the market from a product perspective.

[Operator]

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

[Sam Hupert, executive]

Thanks very much. Well, thank you, everybody, for joining us. Hopefully, we've been able to answer the majority of the questions you've put to us. And as I said, thanks once again.

[Clayton Hatch, executive]

Thank you.

[Operator]

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