PRO MEDICUS LIMITED — Interim / Quarterly Report 2018

Aug 15, 2018

==> picture [594 x 110] intentionally omitted <==

CEO on Update

Open Briefing interview with CEO Sam Hupert

==> picture [141 x 46] intentionally omitted <==

Pro Medicus Limited 450 Swan Street Richmond VIC 3121

In this Open Briefing[®] , Sam discusses:

o Financial results for the twelve months ended 30 June 2018

• Key contract wins and operational update

• North American pipeline

• Outlook on dividends

Record of interview:

openbriefing.com

Pro Medicus announced an after-tax profit of $12.74m, up 36.7% year on year for the FY18 year and underlying profit of $12.57m, which excludes currency movements, was +27.4% year on year. Margins continue to rise, with revenues up 13.9%. Can you tell us what drove the margin and revenue growth?

CEO Sam Hupert

The key driver for margin and revenue growth was our North American business. We brought more sites online so had a good year in terms of professional services, which includes implementation and training. Those sites that were online continued to build their transaction volumes which is pretty much what we expected, so we’re very pleased with that.

Looking at margins, we’ve always said that the US is a higher margin business and therefore the greater the contribution from the US the higher the margins in total. As we grow this business and build our base of recurring transaction revenues in that market we should see further margin expansion.

openbriefing.com

The rate of growth in both margins and sales looks to have slowed in the second half when we consider that first half FY18 underlying profit was +33.0% year on year, well ahead of first half revenues which were up 9.0%, whereas underlying profit for the full year grew 27.4% despite revenue growth being higher than the first half. What were the underlying drivers of this?

CEO Sam Hupert

Comparing margins half to half is difficult because there are different forces in play. Year on year we’ve continued to grow our margins. The initial spurt occurred a few years ago when we started to gain traction in the US and we began to approach 40% EBIT margins. We foreshadowed back then that we thought we could continue to grow margins, which we have, but we also knew that the rate of margin growth would be slower and would be more step-wise as we moved from 40% towards 45% and beyond.

1

ASX Announcement: August 2018/Open Briefing®/Pro Medicus Limited

==> picture [100 x 47] intentionally omitted <==

==> picture [112 x 37] intentionally omitted <==

This last year we went from 45% to 47% in line with expectations which moves us a fair bit closer to our near term goal of 50%.

openbriefing.com

Looking at the operational drivers of this result, can you tell us about the timing and quantum of key contracts you won and implemented during the year? Also how this impacts the revenue and margins?

CEO Sam Hupert

We won a number of significant contracts in the US and Australia over the past financial year including Yale New Haven, I-MED and Mercy archive. We also successfully implemented some of the contracts we won from the prior year such as Mayo Rochester, which was one of the largest single go lives in the history of the industry. We knew that Mayo Rochester would be late in the financial year as it was always scheduled to go live in May 2018 and would therefore only have a small impact on transaction numbers in FY18, but be a significant contributor in FY19 onwards.

We also knew that Yale New Haven, which we won in November 2017, would not be implemented until the June-July timeframe. So whilst we did get professional services revenue from this contract, like Mayo, the transaction revenues will only start in the FY2019 year.

The other big win in the US was Mercy archive which we had been working on for a while. It was contracted at the end of FY18, so again, whilst we did book some professional services in this financial year, the bulk of it will now be realised in FY19 and beyond.

These are large contracts so clearly the scheduling of these implementations, which is largely determined by the client, affect us in terms of financial years but it is purely a timing issue.

In terms of revenue mix from year to year, we did say at the half we expected an increase in transaction revenues in the second half of FY18 and we delivered on that. Professional services, which was lower in the first half, made up ground in the second half with the full year being higher than FY17, in line with expectations.

Margins, as we said above, we believe these will continue to increase incrementally.

openbriefing.com

FX movements contributed a small gain of $0.18m, which compares to a loss of $0.54m in FY17. Should we expect currency to impact results going forward and what mitigation mechanisms have you in place?

CEO Sam Hupert

The movement in the Australian dollar versus the US dollar went in our favour in the second half. We took advantage of that in a number of ways. First of all, we made an active effort to exchange US Dollars reserves for Australian Dollars when the rates were favourable.

The second thing we did was take out some active currency hedging to ensure that if the exchange rate did go against us we were not further adversely affected. So between those mechanisms we were able to turn a loss in the first half of FY18 into a profit for the full year and reduce our exposure to future currency fluctuations

openbriefing.com

The final dividend for FY18 of 3.5 cents, fully franked, is +40% on the final dividend from last year and the interim dividend for FY18 was 2.5 cents, also fully franked, was +66.7% year on year. Can you explain to us the company’s dividend policy and also reference franking and your cash balance which closed the year at $25.24m?

2

ASX Announcement: August 2018/Open Briefing®/Pro Medicus Limited

==> picture [100 x 47] intentionally omitted <==

==> picture [112 x 37] intentionally omitted <==

CEO Sam Hupert

The Board reassesses the dividend every 6 months. Given we increased our cash reserves and franking account during the year and believe we will continue to accrue cash into the coming year, the Board felt that 3.5 cents is in line with our current guideline of 50% payout and still leaves the company with more than sufficient cash reserves for our day-to-day operations.

openbriefing.com

Cash from operations of $13.88m was down from $14.83m in FY17 and net cash inflow of $2.42m was down from $6.19m in FY17, despite the strong increase in profit. In part this reflects an increase in debtors, including $2.35m of non-current receivables. Is this just a timing difference that will reverse in FY19?

CEO Sam Hupert

It is pretty much a timing difference that will largely be reversed in FY19. We had some invoicing towards the end of June 2018 for professional services work we had done over the previous few months which explains the increase in current debtors. We also pre-agreed to a deferred payment scheme for two clients in order to fit into their budgetary cycles, hence the increased amount in non-current receivables, however we expect a good proportion of the cash from these transactions to come in FY19.

openbriefing.com

You introduced a new long-term incentive plan in the FY17 year and the remuneration report for FY18 shows that total remuneration for key management personnel for was $3.38m, down from $3.66m in FY17. What were the drivers of this and how does the new incentive scheme work?

CEO Sam Hupert

We started the new incentive scheme when the previous 5 year scheme came to an end. This new scheme is designed to take us through the next 5 years and include a broader base of management and staff, and we see this as a good thing. There are both company based and personal based metrics taken into account when determining the yearly allocations for the LTIs.

The total remuneration report also includes sales commissions, particularly for the US. The upfront component of these is based on total contract value which is payable when we receive the first major payment from the client with the rest of the commission paid as the revenue is received over the life of the contract. So it’s possible to sell in one year and receive the upfront portion of the bonus in the next financial year, which happened between the FY16 and FY17 financial years.

openbriefing.com

Looking at the pipeline, how does the quantity and quality of opportunities look versus a year ago and what has win rate been on the key contracts you’ve targeted over the last year?

CEO Sam Hupert

In terms of contract wins over the last year, we think that it was pretty much in line with what we expected. Two big contract wins with Yale and Mercy archive in North America, plus the significant contract win here in Australia with the renewal and extension of our agreement with I-MED.

The Mercy archive sale was interesting not just because of the size of the deal but also because it was the first enterprise sale of Visages Open Archive in North America. Once fully implemented it will be up there as one of the largest archives in the US so we think we have achieved a significant milestone in terms of our overall enterprise imaging strategy.

As for the pipeline, we commented at the half year that we thought it was the best it’s been and we think this is still the case. We haven't lost any of the opportunities, they are all progressing through the cycle. We’ve also had a number of new opportunities come in so, if anything, the

3

ASX Announcement: August 2018/Open Briefing®/Pro Medicus Limited

==> picture [100 x 47] intentionally omitted <==

==> picture [112 x 37] intentionally omitted <==

pipeline is even bigger than it was at the half even after taking into account the fact that the Mercy archive opportunity has now moved from pipeline to contract.

openbriefing.com

North American revenue growth accelerated slightly in the second half of FY18, with full year revenues from this segment +18.4% year on year, ahead of the +17.2% delivered in the first half of FY18. What were the key drivers and of this and can you also talk to us about margins and revenue mix in this market?

CEO Sam Hupert

The key drivers of growth in the US were two-fold.

One was implementing a number of the opportunities we had previously won which provides us with professional services revenue. Key implementations throughout the year included Mayo Rochester and even though Yale did not go live until July there was a lot of work done beforehand which also contributed to professional services, as did the early phase of the data migration for the Mercy archive.

The second was building on the base of transaction revenue which we expect to increase yearon-year as our existing clients grow and we continue to implement the contracts we have won.

All of these helped increase our EBIT margins to 47% and we anticipate margins to grow further in the coming year.

openbriefing.com

What is the status of your current and recently completed deployments in terms of budget and time line?

CEO Sam Hupert

We believe we are still either on, or ahead of schedule with all our implementations. As mentioned above we had arguably one of the largest go lives in Mayo Rochester. Over 250 radiologists spread across multiple Mayo campuses went live in one day. This was in addition to a number of other deployments we did throughout the period so we believe we are in good shape and well positioned to cater for any future contracts we may win.

openbriefing.com

Europe was your strongest segment for revenue growth with external revenues of $2.32m +33.2%. However, segment EBIT of $0.75m was -38.4%. What drove both the top line and the fall in segment EBIT?

CEO Sam Hupert

The key activities of our European office are R&D and providing ongoing technical and clinical support globally for the Visage Suite of products. As we have mentioned previously, we’re looking at building our sales and marketing capability in Europe using our Berlin office as the base. So it was very pleasing to see our European operations do well in terms of revenue growth albeit off a small base. The decrease in EBIT margins was due to an internal charge related to employee incentive payments so once you strip this out the division did well

openbriefing.com

Australia external sales of $8.17m were -2.0% year on year, while this segment’s EBIT of $15.90m was +36.9% versus a decline of -10.8% in the first half. This EBIT includes a mix of external and intersegment earnings. Can you help us understand the drivers of this including intersegment sales, royalties and the roll out of the Primary contract and extension of the I-MED contract?

CEO Sam Hupert

We won a large contract with Primary in March 2017 and the first site went live on schedule in early 2018. It is common with these large rollouts to implement a few “early adopter” sites before

4

ASX Announcement: August 2018/Open Briefing®/Pro Medicus Limited

==> picture [100 x 47] intentionally omitted <==

==> picture [112 x 37] intentionally omitted <==

starting on the bulk of the rollout which, for Primary will start in the beginning of FY19 financial year. So, whilst we did get some revenue from that contract being a transaction-based deal, the majority of it will come into the FY19 year and beyond.

The I-MED deal is similar in that the additional revenue will come as we roll it out, which is anticipated to take 12 months.

In terms of inter-segment sales and royalties, Visage 7 intellectual property is owned by one of our subsidiaries here in Australia so there is a royalty stream from the US back to Australia.

openbriefing.com

Looking to the next 12 to 18 months and thinking of existing clients, implementations and the pipeline, what will be the key drivers of both earnings and margins?

CEO Sam Hupert

As we said above, we will continue building our recurring base of transaction revenue both by implementing new sites as well as organic growth from the sites we already have. We also think there may be opportunities for additional product sales such as Visage Open archive or Enterprise imaging where we extend the use of Visage 7 into the other “ologies” within the health enterprise. And, of course, growing our footprint by converting some of our pipeline opportunities to clients.

All three of these drivers are additive to our business with success in any one area helping lift both revenues and margins.

openbriefing.com

Previously you have estimated that you have a 12 to 18 month lead on your competitors in technology terms and we note that you continue to invest in R&D. Do you still have a 12 to18 month lead and what developments is that R&D money being focussed on to keep Pro Medicus ahead of the competition?

CEO Sam Hupert

Yes we believe we still have a 12 to 18 months lead, if not more. It’s not just the technology but also our proven ability to implement in less than a quarter of the time of the industry standard that gives us the edge

In terms of R&D, we have three development cycles. The first is developing feature/function which we do on a continual basis with updates released approximately every six months which is far more frequent than the industry standard. The second is developing larger, longer term projects aimed at broadening our reach within the healthcare enterprise such as Visage Open archive and our Enterprise Imaging suite of products. And then we have “over the horizon” developments such as artificial intelligence (AI) which we believe our platform is ideally suited to support so we are actively looking at opportunities in this area.

Thank you Sam.

For more information about Pro Medicus, visit www.promedicus.com or call Sam Hupert on (+61 3) 9429 8800.

For previous Open Briefings by Pro Medicus, or to receive future Open Briefings by email, visit openbriefing.com

5

ASX Announcement: August 2018/Open Briefing®/Pro Medicus Limited

==> picture [100 x 47] intentionally omitted <==

==> picture [112 x 37] intentionally omitted <==

DISCLAIMER: Ramsgate Advisors Ltd and Orient Capital Pty Ltd have taken all reasonable care in publishing the information contained in this Open Briefing®; furthermore, the entirety of this Open Briefing® has been approved for release to the market by the participating company. It is information given in a summary form and does not purport to be complete. The information contained is not intended to be used as the basis for making any investment decision and you are solely responsible for any use you choose to make of the information. We strongly advise that you seek independent professional advice before making any investment decisions. Ramsgate Advisors Ltd and Orient Capital Pty Ltd are not responsible for any consequences of the use you make of the information, including any loss or damage you or a third party might suffer as a result of that use.

6

ASX Announcement: August 2018/Open Briefing®/Pro Medicus Limited