Transition to direct operations adds to lossesUntil January, Hologic had sold and serviced most of its products through distributors. No more. In a bid to increase revenues and improve product margins, the women's health and
Transition to direct operations adds to losses
Until January, Hologic had sold and serviced most of its products through distributors. No more. In a bid to increase revenues and improve product margins, the women's health and digital radiography company is developing a direct sales and service force for its mammography products. It will continue to use independent distributors, but only in select locations.
As of Feb. 5, the company had hired 28 new sales and service staff. It plans to have hired the remaining 24 personnel by the end of February, bringing the total new hires to 52: 41 in service and 11 in sales. This will bring the sales force to a total of 45 and the service force to about 120, including coverage for bone densitometry, C-arm, and mammography equipment.
"We are heavily investing in a major undertaking for Hologic, and it is going to benefit Hologic for the long term," said Jack W. Cumming, president and CEO. "Controlling our own destiny, improving margins, raising the level of sales performance in tandem with more sophisticated products-that is what this company now is all about."
Hologic has gone through several metamorphoses. After rocketing to fame in the late 1990s as a provider of bone densitometry, Hologic diversified, buying C-arm company Fluoroscan in 1996 (SCAN 9/11/96), flat-panel x-ray company Direct Radiography three years later (SCAN 6/23/99), and then the Lorad mammography assets of Trex Medical a year after that (SCAN 8/30/00. The ensuing product extensions were each completed while the company continued to adhere to the same business model of near total reliance on distributors. One of the biggest was Diagnostic Imaging.
But the purchase of DI by Platinum Equity and its later merger with Health Care Products (formerly owned by Marconi) to become SourceOne (SCAN 1/22/03) created uncertainty in the marketplace, leading to a sudden drop in orders for Hologic's Lorad mammography equipment, according to Cumming. Recognizing the challenges presented by the acquisition of this major distributor and the potential for increased sales that going direct might have, Hologic executives began in November to put in place the foundation for a direct sales force.
Changing its business model from distributors to a direct sales force, however, is taking a toll on the company. Hologic lost $912,000 in the first quarter of FY 2003, a loss due partly to the changeover from distributor-based to direct sales and service. Another factor affecting revenues and the company's bottom line was a shortfall in the sales of digital radiographic systems, as several customers failed to prepare rooms in time for the delivery of products. Another was a delay in the delivery of acceptable flat-panel components for DR products.
"It was our own inability to react quickly enough to solve some technical vendor issues that significantly impacted detector sales to OEM customers," Cumming said.
The company has more than its share of challenges working with suppliers and partners on the highly complicated technical components that go into amorphous selenium plates for DR products, he said. Over the past three months, Hologic has worked to develop and implement a multitiered supplier arrangement for the most critical parts. In early February, Cumming flew overseas to finalize multiyear agreements designed to provide the company with needed backup on components.
Costs were also increased in the first quarter, which ended Dec. 28, by Hologic's exhibit at the RSNA meeting that month and the U.S. commercial launch there of four new products: Selenia, Hologic's full-field digital mammography system, the Discovery series bone densitometers, and the Epex ER and Epex Symphony DR systems. The Epex ER is a single-detector DR system designed for emergency and trauma applications. The Epex Symphony is a dual-detector system capable of handling cross-table and tilt wall exams. All four products have begun shipping.
In Q1, the company shipped five Selenia units. Three were installed and recognized as revenue. Another five were shipped in January.
Despite the loss, revenues actually rose 3% in Q1 2003 to about $49 million compared with the same period a year earlier. The revenue growth occurred even though the company phased out its conventional general radiography product line. (Hologic continues, however, to service general radiography equipment sold previously and earned about $1.4 million from this service in the last quarter.) Comparing sales from the current product portfolio with those of the same products a year earlier, Q1 showed an 11% increase, Cumming said.
The big question for Hologic, however, is how well the organization can absorb the change in its business model resulting from the move to direct sales and service. Cumming believes the transition can be completed within about six months, putting Hologic solidly on the road to increasing revenues and wider product margins by the fourth quarter.
Expected to contribute substantially to the bottom line will be field service revenues, which will accrue to Hologic through its expanded force of service personnel rather than the dealers who would have otherwise done the work. These revenues could be especially attractive as sales of the company's full-field digital mammography systems begin to kick in.
Typically, service revenues amount to about 10% of the sales price of the unit. For a film-based Lorad M-IV mammography system, Hologic usually reaps about $8500 for the service contract. The Selenia, which goes for about $450,000, will bring in more than four times that amount.
"The transition to serving (mammography) customers in two dozen major cities directly will enhance our ability to provide and increase the level of consistency, reliability in sales, and service support," Cumming said. "It will improve long-term revenue growth opportunities for our entire family of products, including accessories."