Company Interview / A bigger, longer, better blueprint for future renewals

Sam Hupert from Pro Medicus (ASX: PME) shares insights on their recent contract renewal with Mercy Health. The eight-year, $98 million deal is described as a testament to the company's strong technology and customer satisfaction. Sam notes that this renewal includes a price increase, an additional contract year, and no service fees, setting a pattern for future renewals.

Sam discusses the company's promising sales pipeline with various market segments. Pro Medicus aims to maintain its 70% profit margins, supported by high transaction revenue and professional services charges. Sam highlights that growth challenges include balancing profitable expansion and right-sizing the company but remains optimistic.

Pro Medicus is expanding its product range, with new offerings in cardiology and AI. The company continues to focus on the US market, where it holds 7% market share. Sam sees potential growth in Europe and Southeast Asia but remains primarily driven by opportunities in the US.

Full unedited transcript below:

0:00

Paramedics locking in an eight year, $98 million contract renewal with Mercy Health in the United States. To get us across the details of what the deal entails, paramedics CEO Sam Hooper joins me now. Sam, welcome. Nice to have you back on office. This is pretty incredible. If you don't mind me saying you've got 100% hit rate on renewing existing customers, that's got to speak to the technology itself.

0:35

Yes, well, we're very pleased. Clearly when we this is our seventh or eighth main renewal. So we're relatively early into the process but not not too early. And in all of our previous renewals, including this one, the clients have either renewed for an entire contract term again, which is five years or in often longer. So Mercy's original contract was seven years. The renewal is for eight. So we we see that as a strong vote of confidence in the technology. Yeah. And this renewal includes an increase in pricing an additional year on the contract and no service fees. Can that be a blueprint for other renewals. Because it sounds pretty good.

1:22

Well, all of them in the past have a similar sort of pattern because our pricing in the market has gone up substantially since mercy first signed. And whilst we don't try and bring them to current market price because they have been loyal clients and early adopters, we do try and bring them somewhere in between what they were previously paying and what we now charge for new clients and um, because they have confidence in the product, uh, because they've been using it for seven years, they're often prepared, as I said, to go again for a full contract term or in this case, even extended by.

2:00

Okay. Um, so when we think about what's to come, how how many of these renewals are, are due in the, you know, do you look at it in a year's period. So FY 25. Usually in a year we have um, two others, one that was signed around the time of mercy. They're part of the same buying group. Um, so they're in a sense, you know, connected, but but different organizations. And then we have another one coming up early, um, early in the new calendar year. Okay. So and then we'll get into a, maybe a broader bunch of them because, you know, the increased cadence of sales, but that won't be within 12 months. Yeah. And so you're still going after new contracts as well. I know you had nine and FY 24. Is there any way to forecast how many you could be up for this year. Oh no. It's very lumpy. Uh, I think the main thing is we have told the market we, we have, you know, a very strong pipeline, um, across, uh, a

3:00

large and broad range of market segments and different size opportunities. So it's a very good mix. Um, some of them, you know, coming hopefully towards the tail end of, of that pipeline journey, some are right at the very beginning. So really across all stages. And that will determine, you know, the sales that we're looking for for the rest of the year. And what about the sales mix? I know last year most of it was exam and license revenue, followed by support, professional services. And actually quite a chunky little bit on archive data migration is, you know, do you anticipate the mix to be sort of similar or what's dynamic about that? Yeah, the bulk of our new contracts are transaction revenue. And in those contracts we do charge professional services. So that's for the implementation and training. Um, and each contract will have that at the beginning a renewal like mercy won't because they're already implemented and have been using it. So, um, that that will be part of it. And if

4:00

the client does take our archive product, which more and more are doing, uh, there is a migration, in other words, moving the data out of their existing repositories, um, scrubbing it and then putting it into our archive. And so that's how we get the three types of revenue, the service revenue of more traditional contracts, which we wrote many years ago before we started, uh, with transaction revenue contracts and talk to us about new products, expansion into new geographies. I know I has a tailwind for Pro Medicus.

4:37

Well, we we, uh, bought out a course stack is is actually three separate modules of which Worklist is our newest product, which we bought out about two years ago. But we've now released a new option for cardiology, which is, we think, the first cousin, the most related to radiology in terms of a hospital department. And we're also looking at commercializing AI. Some of it will be our own, uh, some of that will be third party. And again, we'll be releasing some new announcements, um, towards the RSA, which is the big conference at the end of November that's held in Chicago every year. Okay. Look forward to that then. And, um, you know, margins, I think margins are around 70%. And at the most recent result, you reckon, Sam, that those margins are sustainable. So today's contract renewal would certainly lend support to that view.

5:34

Yeah we do. Our margins are you know, we're a bit of an outlier because they're three times our nearest competitor. But we do believe they are sustainable in and around at these levels. And uh, I mean, it's it's hard to really punch holes in it, I suppose from a, from a markets perspective. I mean, the share price for ProMedica is hitting a record high today. Looks pretty fully valued. But, um, yeah, I guess I would be curious to know what is challenging for you. Nassim.

6:04

I think the challenges of any business one is, you know, how to balance growth, uh, and, and profitable growth, uh, right sizing the company for it. I think we've done that well to date. And but obviously, each time, uh, the base gets bigger, continuing that growth, um, becomes a bigger and bigger job, but we think we can do it. So nothing that's, um, outside the norm for any company. I think we have the luxury of certain issues that don't affect us, like, uh, changing input costs, um, and also interest rates because we, um, crew cash don't have any debt and our clients are well funded. So now the normal things, minus a few of the things that maybe other industries have to deal with. Yeah, but, um, I know that there is a shortage of radiologists, partly because there was or there is a vein of thought that I will take over, but very much, um, you know, the technology as of

7:04

now still needs humans very much, doesn't it? Absolutely. So I think I, you know, it's gone through two of the three phases. It's particularly in healthcare and healthcare imaging. It's gone through a, you know, a serious heart phase where people believed you wouldn't need radiologists, um, at all. And that's proven to be incorrect. Uh, then the disappointment phase. But I think we're starting to see in in a number of pockets what I call the reality phase, where there are some real world uses that, that not only are cost effective, but also change the clinical outcome in a positive manner. So I think we're going to see more and more in pockets develop. Uh, and then eventually it all becomes a lot more mainstream. Exactly. When that happens. I don't believe anyone knows, but I think the pockets will start developing in the relatively near future. All right, so you obviously want to get new clients,

8:04

renew existing contracts on better terms for you at transaction growth from existing clients. What geographies do you really think are the next frontier?

8:13

Well, for us, the I think the main prize is the US. We have 7% of that market and growing. And so we have a lot of runway ahead of us and we've been successful there. I don't think anyone's gone from 0 to 7 as quickly as we have, but the technology can work anywhere, um, around the world. And there would be pockets of Europe and Southeast Asia that that will present opportunities, but I'd think they will be more mid-term and not as large as we have currently in front of us in the US.