Lumisys has strong first quarter despite softer digitizer revenues

Lumisys has strong first quarter despite softer digitizer revenues

Company to develop a low-cost CR reader

Film digitizer manufacturer Lumisys can't seem to get any respect in the financial markets. The Sunnyvale, CA, company's stock hovered near its 52-week low last month, even as it posted strong growth in sales and net income for its most recent quarter (end-March). The lackluster performance of the firm's shares continues to puzzle company executives and investors alike.

For the first quarter of 1997 (end-March), Lumisys posted revenue of $5.8 million, an increase of 14% over the same period in 1996. Now reporting earnings on a fully taxed basis, Lumisys netted normalized income of $788,000 in the first quarter, a 57% gain over normalized earnings from the first quarter of 1996. Earnings per share, however, were slightly below some analysts' expectations.

The strong financial numbers did little to boost the vendor's stock price. As of April 17, Lumisys shares languished around $6.25 a share, a big change from a year ago, when the stock surged to as high as $30 in late April 1996.

"We were as confused when it hit $30 as we are today," said COO and CFO Craig Klosterman during an April 10 conference call with industry analysts. "Since going public, every quarter (has) exceeded revenues and normalized profits to the comparable quarter in the prior year."

The recent slump could be attributed to declines in the overall stock market. The drop may also be due, however, to concerns about the company's long-term prospects as the digitizer market peaks.

Lumisys believes that growth rates in the digitizer market may be starting to plateau, and that the company's revenue growth, previously averaging 40% to 45%, may now come more in line with overall PACS market growth levels. Market analysts have put that market figure between 15% to 20% for the next few years.

In addition, Lumisys is experiencing a softening in its backlog, primarily as a result of inventory buildup by some of its OEM clients and a lengthening of the selling cycle to end users. As a result, Lumisys is projecting a revenue increase of approximately 10% for 1997. Revenue growth should pick up in the third and fourth quarters of the year, however, Klosterman said.

Direct digital competition

Lumisys also faces the potential of reduced long-term demand for its digitizers, due to the growth in x-ray digitization technologies like computed radiography and digital detectors, which could cut film scanners out of the image digitization loop.

In the short to medium term, the company believes these new technologies will actually increase demand for digitizers.

"As (radiologists) become more comfortable with soft-copy diagnosis, they'll want to get more and more of their plain film into that network system, not only for reading but for storage and distribution of images throughout the hospital," said John Burgess, vice president of sales.

While the long-term prospects for film digitizers are less rosy, Lumisys has an ace up its sleeve. The vendor last month revealed that it is developing a low-cost computed radiography reader that could be released as early as 1999.

Although the company would not disclose many details, the product will leverage off technology developed for a CR reader that Lumisys has been selling into the non-destructive test market since 1996. Elements of that technology were licensed nonexclusively to Kodak in 1992 during development of that company's Model 400 CR reader.

Beginning in the second quarter of 1997, Lumisys expects to embark on a two-year project to convert its technology into a low-priced CR reader for the medical market. With a key patent from Fuji set to expire in 1998, Lumisys believes the barriers to its entry into the medical CR market have been removed.

The Lumisys CR reader will encounter stiff competition, however, not only from market leader Fuji but also from Agfa and Kodak, which both sell readers using technology licensed from Fuji.

Fuji's main CR patent, for barium fluorobromide storage phosphor material, will expire in 1998. Fuji also has other patents on CR technology, such as optics, electronics, and data recognition, that are not due to expire for years to come, according to John Strauss, Fuji's national marketing manager for CR products. It is possible, however, for a company to develop a CR reader that does not infringe on these patents, according to Strauss.

As Lumisys develops the new CR reader, and makes other diversification moves, it will continue to enjoy strong sales in its core digitizer market, according to company executives.

"You're not going to see any wholesale replacement of all x-ray equipment with CR equipment in the next 10 years, so for the foreseeable future, the advent of direct digital capture systems will foster more digitizer demand," Burgess said.