Vital Images Announces Third Quarter Results

Vital Images, Inc. (NASDAQ:VTAL), a leading provider of advanced visualization and analysis solutions, today reported revenue for the third quarter ended September 30, 2008 of $17.7 million, compared to $17.1 million for the third quarter of 2007. Net loss for the 2008 third quarter was ($243,000), or ($0.02) per diluted share, compared to net income of $927,000, or $0.05 per diluted share, for the 2007 third quarter.

The company also reported adjusted EBITDA (a non-GAAP measure) for the third quarter of 2008 of $1.4 million, compared to $2.0 million for the third quarter of 2007. For an explanation of the "Adjusted EBITDA” calculation, see the description and reconciliation of non-GAAP financial measure in the Non-GAAP Information section of this earnings release.

Michael H. Carrel, Vital Images president and chief executive officer, said, "In a difficult environment, revenue increased both over the year-ago quarter and the sequential quarter. While we are pleased with our third quarter results, the progress we are making with ViTAL Enterprise and our international growth, the market and industry outlook for the fourth quarter and 2009 is uncertain. Therefore, today we announced actions to reduce our costs by over 10 percent in order to align our operations with the current market conditions and improve profitability in 2009 and beyond.”

Carrel continued, "We are looking forward to RSNA, our industry’s most prominent gathering, which starts in a few weeks. At RSNA, we will be introducing important capabilities giving clinicians greater access to our solutions. Specifically, as part of ViTAL Enterprise, every ViTAL application will be available on the Web, underscoring our ease-of-use benefits and reinforcing our technology leadership.”

The company’s cost-control plans include a reduction in workforce of approximately 11 percent and other internal cost control measures. This initiative is expected to result in a pretax charge of approximately $800,000 in the fourth quarter of 2008. Carrel said, "Although we are in an excellent financial position, gaining market share and building technology-leading products, we believe strong profitability is an important and necessary step for success and greater impact going forward. We are positioned for long-term success and will continue to invest in exceptional customer service, and research and development.”

Financial Summary

• Cash and investments as of September 30, 2008 were $157.8 million. During the 2008 third quarter, the company repurchased 784,000 shares of its common stock for $11.3 million under the $40.0 million share repurchase plan initiated in May 2008. As of October 31, 2008, the company had repurchased 2.1 million shares of its common stock for $30.0 million.
• Operating Expenses Summary:

Full-Year 2008 Guidance Maintained

The company maintains its full-year 2008 guidance but anticipates revenue, adjusted EBITDA, net loss and net loss per share in the lower half of the ranges, given the prospect of a down economy and pressure on healthcare spending.

Factors considered in preparing guidance include the following estimates for 2008:

• Gross margin of approximately 77 percent.
• Sales and marketing expenses of approximately 45 percent to 47 percent of total revenue.
• Research and development expenses of approximately 26 percent to 27 percent of total revenue.
• General and administrative expenses of approximately 20 percent to 21 percent of total revenue.
• Equity-based compensation of approximately $5.2 million.
• Depreciation and amortization of property and equipment of approximately $5.2 million, and estimated capital expenditures of approximately $5.1 million.
• Amortization of acquired intangibles of $1.0 million.
• Estimated interest income of $4.7 million based on an estimated return on investment of 2.75 percent for 2008, which is significantly lower than the return on investment in 2007 due to general market conditions; further interest rate changes would have a significant impact on results. This estimate includes the projected impact of the share repurchase program.
• An effective income tax rate of approximately 44 percent to 49 percent in 2008 compared to 36 percent to 37 percent previously provided. The change in the estimated effective income tax rate is a result of the extension of the research and development (R&D) tax credit by Congress in October 2008. The extension of the R&D tax credit will result in an estimated $650,000 tax credit in the fourth quarter of 2008. The company does not anticipate paying any significant federal income taxes for the next two to three years due to the utilization of deferred tax assets relating to net operating losses and tax deductions from the exercise of stock options. Actual results could accelerate or defer the utilization of the company’s deferred tax assets. Additionally, if the company is unable to generate sufficient taxable income, causing management to believe that the company’s deferred tax assets will not be utilized, additional valuation allowances may need to be established on the company’s deferred tax assets, which could materially impact the company’s financial position and results of operations.

Conference Call and Webcast

Vital Images will host a live webcast of its third quarter earnings conference call tomorrow, Thursday, November 6, 2008, at 10:30 a.m. CT. To access this webcast, go to the investors' portion of the company’s Web site, www.vitalimages.com, and click on the webcast icon. The webcast replay will be available beginning at 2:00 p.m. CT on the same day. If you wish to listen to an audio replay of the conference call, dial (888) 203-1112 and enter conference call ID #8744480. The audio replay will be available beginning at 2:00 p.m. CT on Thursday, November 6, 2008, through 5:00 p.m. CT on Thursday, November 20, 2008.

About Vital Images

Vital Images, Inc., headquartered in Minneapolis, is a leading provider of advanced visualization and analysis software solutions. The company's technology gives radiologists, cardiologists, oncologists and other medical specialists time-saving productivity and communications tools that can be accessed throughout the enterprise and via the Web for easy use in the day-to-day practice of medicine. Vital Images also has offices in Beijing, China, and Den Haag, the Netherlands. For more information, visit www.vitalimages.com.

Non-GAAP Information

Vital Images provides certain non-GAAP information to supplement GAAP information. Adjusted EBITDA (non-GAAP) is defined as earnings before interest, taxes, depreciation, amortization, impairment of patent, equity-based compensation and reduction in workforce charges. Adjusted EBITDA (non-GAAP) excludes certain items that are non-cash in nature and/or items that are affected by market forces that are difficult to predict and may not be within the control of management. Accordingly, management excludes these items from its internal operating forecasts and models when establishing internal operating budgets, supplementing the financial results and forecasts reported to the company’s board of directors, determining a portion of bonus compensation for executive officers and certain other key employees, and evaluating short-term and long-term operating trends in the company’s core operations. Management believes that this presentation facilitates the comparison of the company’s current operating results to historical operating results.

Non-GAAP information is not prepared in accordance with GAAP and should not be considered a substitute for or an alternative to GAAP and may not be computed the same as similarly titled measures used by other companies. Management expects to continue to incur expenses similar to the non-GAAP adjustments described above, and the exclusion of these items from its non-GAAP net income should not be construed as an inference that these costs are unusual, infrequent or non-recurring.

The following is a reconciliation from GAAP earnings to adjusted EBITDA for the three and nine months ended September 30, 2008 and 2007:

Forward-Looking Statements

Except for the historical information contained herein, the matters discussed in this news release are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are intended to enjoy the protection of the safe harbor for forward-looking statements provided by that Act. These statements involve risks and uncertainties which could cause results to differ materially from those projected, including but not limited to dependence on market growth, challenges associated with international expansion, the ability to predict product, customer and geographic sales mix, fluctuations in interest rates, regulatory approvals, the timely introduction, availability and acceptance of new products, the impact of competitive products and pricing, dependence on major customers, the ability to successfully manage operating costs, fluctuations in quarterly results, approval of products for reimbursement and the level of reimbursement, and other factors detailed from time to time in Vital Images’ SEC reports, including its annual report on Form 10-K for the year ended December 31, 2007. Vital Images encourages you to consider all of these risks, uncertainties and other factors carefully in evaluating the forward-looking statements contained in this release. As a result of these matters, changes in facts, assumptions not being realized or other circumstances, the company’s actual results may differ materially from the expected results discussed in the forward-looking statements contained in this release. The forward-looking statements made in this release are made only as of the date of this release, and the company undertakes no obligation to update them to reflect subsequent events or circumstances.

Vital Images^® is a registered trademark of Vital Images, Inc. Vital Images disclaims any proprietary interest in the marks and names of others.