ISG restructures work forceto focus on OEM relationships

March 13, 1996

High-level Siemens manager leads the transitionMaking a profit these days isn't easy for medical imaging OEMs.Smaller technology suppliers, however, may find generous incomeopportunities if they can ride a wave of outsourcing contractschurned up

High-level Siemens manager leads the transition

Making a profit these days isn't easy for medical imaging OEMs.Smaller technology suppliers, however, may find generous incomeopportunities if they can ride a wave of outsourcing contractschurned up by scanner vendors, according to Thomas Cafarella,president and CEO of image processing firm ISG Technologies ofMississauga, Ontario.

"This (outsourcing trend) helps companies of our sizethat can be quick and that have a high-level, dedicated groupof software people," he told SCAN. "There is room forus to help (OEM) companies with their development costs."

Cafarella knows OEMs. The medical imaging veteran moved fromSiemens Medical Systems to ISG in November. He served most recentlyas group vice president for Siemens Nuclear Medicine Group inHoffman Estates, IL.

ISG has been busy transforming itself in reaction to technologyand market changes. First, over the past several years, the companyhas become almost exclusively a software house. Its image processingprograms now run on high-speed, off-the-shelf workstations, mainlythose made by Sun Microsystems and Hewlett-Packard.

Only a few of ISG's Allegro workstations, with its proprietaryimage-processing accelerator board, are still being sold, saidGerry McDonald, ISG vice president of finance and administration.

"We were always a hardware company out of necessity,"McDonald said. "Once that (proprietary processing power)requirement went away, we were quite happy to switch to an unacceleratedsolution."

Second, the company opted last year to discontinue direct end-usersales and focus exclusively on OEMs, systems integrators, andvalue-added resellers. ISG incurred a $401,000 restructuring charge($550,000 in Canadian dollars) for severance payments relatedto closing down direct sales in its fiscal 1996 second quarter,which ended Dec. 31.

Overall, however, ISG continues to employ about 200 peopleworldwide and plans to build its staff of OEM sales and marketingpersonnel, Cafarella said. The company has also advertised fora new vice president of marketing and sales, and expects to fillthat position shortly.

Making a profit. ISG managed to start making a profit thisyear, even though its exit from direct sales has been costly.In the first half of fiscal 1996 (end-June), ISG revenue rose25% from the same period of 1995 to $10 million (C$13.6 million).The company had a profit for the half before restructuring chargesof $492,000 (C$675,000). Net earnings for the first half afterthe restructuring charges were $91,000 (C$125,000).

The company's revenue for all of fiscal 1995 was $16 million(C$22 million). ISG had a net loss of $2 million (C$2.7 million)last year.

ISG should take in about $23 million (C$32 million) in revenuethis year, Cafarella said. The corporate goal is to reach $73million (C$100 million) in annual sales over the next six years.

Some additional revenue may come through growth in the company'ssize. ISG is scouting out potential acquisitions, he said. Despitepast losses, the firm has money in the bank and plans to spendsome of it.

Most revenue growth, however, should arrive by way of improvedsales of existing product lines. In contrast to many medical imagingcompanies, ISG expects to exploit current market trends to boostbusiness, Cafarella said.

Hospitals now hold on to their imaging systems longer as theyscramble to compete in a managed-care environment, he said. Withmarket demand remaining tight, medical imaging system vendorshave had to parcel out their technology development funds judiciously.

Imaging OEMs can achieve competitive advantages and solid returnson investment when they focus on their core camera technologyand advanced software applications, Cafarella said. ISG, in turn,can fill the basic software gap with its own products, such asits Imaging Application Platform (IAP). The company hopes IAPwill become a standard software engine that scanner and PACS vendorswill use to run their equipment and to develop higher-level softwareapplications. Current IAP customers include such scanner OEMsas GE, Siemens, Philips, Hitachi, Toshiba, and Elscint.

IAP stands to become the strongest product for ISG in the futurebecause it results in a continuing flow of royalty revenue, Cafarellasaid.

Each of ISG's four main product lines makes up about a quarterof the company's revenue, McDonald said. These include ViewingWand for surgical guidance, IAP, contract software R&D, andPACS software/workstations.

ISG's PACS technology received a boost in November from theeducational committee of the Radiological Society of North America,which chose the company to put on the PACS educational displayat its 1995 conference. The RSNA has selected ISG to run the programagain this year.

The market for ISG's Viewing Wand is still emerging and isat a stage similar to the PACS market several years ago, Cafarellasaid. Viewing Wand is a 3-D image guidance product targeted initiallyto neurosurgeons (SCAN 10/25/95). Viewing Wand is sold by severalpartners worldwide, including Elekta of Stockholm.