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Operator
Welcome to the AngioDynamics fiscal 2006 first-quarter conference call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will hold a Q&A session. (Operator Instructions). As a reminder, this conference is being recorded today September 27, 2005. I would now like to turn the conference over to Kim Golodetz. Please go ahead.
Kim Golodetz - IR
Thank you. This is Kim Golodetz with Lippert Heilshorn and Associates. Thank you all for participating in today's call. Joining me this afternoon from AngioDynamics are Eamonn Hobbs, President and Chief Executive Officer and Joseph Gerardi, Chief Financial Officer.
Earlier today, AngioDynamics announced financial results for the first quarter of fiscal year 2006 which ended on August 27, 2005. If you have not received this news release or if you would like to be added to the Company's distribution list, please call Lippert Heilshorn in New York at 212-838-3777 and speak with Nidia Fortilla (ph). This call is being broadcast live over the Internet and a recording of the call will be available for the next 12 months on the Company's Web site at www.AngioDynamics.com. Instructions for listening to the replay are contained in today's news release. This call will follow the standard format beginning with prepared remarks by management and then we will open up the call to your questions.
Before we begin, I'd like to caution that comments made during this conference call by management will contain forward-looking statements that involve risks and uncertainties regarding the operations and future results of AngioDynamics. I encourage you to review the Company's past and future filings with the Securities and Exchange Commission, including without limitation, the Company's Forms 10-K and 10-Q which identify specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements.
The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, September 27, 2005. AngioDynamics undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call. With that said, I would like to turn the call over to Eamonn Hobbs.
Eamonn Hobbs - President, CEO
Thanks, Kim. Good afternoon everyone and thank you for taking time to participate in our first-quarter financial results conference call.
We've begun the year on a high note with strong revenue growth of 25% which is a direct result of our growth across our product portfolio. Our gross margin expanded to 58%, net earnings were up 70% and our diluted EPS was $0.10 a share, up 67% from the prior year. We are extremely pleased with this start and foresee several factors that will continue to drive this momentum throughout the rest of the fiscal year.
Before I share with you the events that have contributed to our success in our fiscal first quarter, I would like to turn the call over to Joe Gerardi, our CFO. Joe is going to share with you our financial results for our fiscal first quarter.
Joseph Gerardi - CFO
Thanks, Eamonn. Good afternoon everyone and thank you for participating in today's conference call. I would like to comment on our results of the fiscal first quarter ended August 27, 2005. I will present the highlights of the income (ph) statement and discuss how some of our key product lines have performed.
As Eamonn indicated, net sales for the first quarter rose a healthy 25% to $16.4 million, up from $13.1 million in the fiscal first quarter of 2005. This increase reflects strong growth from our newest products, along with continued market share gains across our product portfolio. Most of the revenue gains were due to increased unit sales with a modest price increase contributing 1.6% of the total revenue growth.
Our gross profit for the quarter was up 36% to $9.5 million compared with gross profit of $7 million for the prior year first quarter. Gross margin during the quarter reached 58%, up from 53% in the comparable quarter ended fiscal 2005. Our favorable product mix accounted for approximately 380 basis points of the 480 basis point increase, or around 80%. Modest price increases allowed us to improve our gross margin by 40 basis points while net production efficiencies accounted for a 60 basis point improvement.
Our operating profit for the fiscal first quarter ended increased 51% to $1.9 million compared with $1.3 million in the first quarter of fiscal 2005. The operating margin expanded by 200 basis points to 12% of net sales.
Selling, general and administrative expenses for the first quarter were $6.1 million or 37.2% of net sales, slightly above our annual guidance of 35 to 36%. As revenue increases throughout the year, the percentages will fall in line with our annual guidance. This represents a 32% increase from SG&A expenses of 4.6 million for the prior year first quarter.
R&D expenses was $1.5 million or not quite 3% of net sales for the current quarter compared with $1.1 million or 8.6% of net sales recorded in the first quarter of fiscal 2005. We will expect R&D expenses to drop as a percent of sales in the upcoming quarters which will bring the fiscal year in line with our guidance of about 8%. The effective tax rate for the 2006 quarter was 37.8% compared with 40.8% for the first quarter of fiscal 2005. The decrease is attributed to the use of R&D credit carryforwards and a contribution carryforward during the first quarter. We expect our effective tax for the fiscal year to be approximately 39% of taxable income.
Taking a look at the bottom line, net income for fiscal 2006 first quarter was $1.3 million, or $0.10 per diluted share. Compared with the prior year, this represents a 70% increase in net earnings and a 67% increase in diluted earnings per share. We continue to break out sales by product category on an annual basis. However, I would like to give you some insight into the performance of our lead product segments compared with the fiscal 2005 first quarter.
Angiographic products increased 10% from the first quarter of fiscal 2005 with sales of $4.6 million for the first quarter fiscal 2006. Morpheus CT Picc continues to be an important contributor to our net sales, contributed $1.6 million to the top line for the first quarter. We began marketing Morpheus CT last September after receiving FDA approval in July of 2004. Sales for the total vascular access line in which Morpheus is a part of was up 157% to $2.5 million compared to fiscal 2005 first quarter.
Sales of our hemodialysis product line rose 17% or $640,000 over the prior year first quarter to 4.4 million. The EvenMore chronic dialysis catheter, the Company's newest internally manufactured catheter, contributed over $0.5 million to the top line during the fiscal 2006 first quarter.
Sales of our venal (ph) care products grew 37% to $2 million, a $560,000 increase over the prior year first quarter. During the first quarter of 2006, the Company sold 21 lasers, bringing the total laser units sold in the field to 305. Sales of disposable kits increased 107% to 1.4 million compared to the fiscal first quarter of fiscal 2005.
As of August 27, 2005, cash and short-term investments were $28.8 million, an increase of $1.7 million during the quarter. Cash flow counties to be quite strong. We generated $1.4 million in cash from operations during the current quarter compared with 290,000 in the first quarter of 2005. With that summary, I would like to turn it back to Eamonn.
Eamonn Hobbs - President, CEO
Thanks, Joe. We're very excited about our first quarter results and progress to date. Sales growth along the Company's diversified product lines in conjunction with management and production efficiencies have led to our outstanding profit growth for the first fiscal quarter. The Company's diversified line of angiographic catheters continues to grow at a double-digit rate, 10% over the prior year first-quarter. The Mariner, our newest hydrophilic coated catheter experienced tremendous growth in sales of 300% for this first fiscal quarter compared with the same quarter last year. Our SoftView and sizing catheters continued to show strong sales with 1.9 and 1.3 million in sales respectively. We expect sales of the Mariner catheter to continue to increase significantly.
Net sales of our vascular access catheters grew by $1.5 million in the past quarter compared to $120,000 for the same period last year. As Joe mentioned, sales of the Morpheus CT Picc have contributed significantly to our overall growth in the past quarter. The Morpheus is receiving excellent reviews from the physicians who are using it. Interventional radiologists have quickly accepted the Morpheus CT Picc into their practices and the uptake continues to outperform our initial projections. We anticipate that we will continue to have strong sales of the Morpheus CT Picc going forward.
We're also very pleased with the sales growth from -- of our EvenMore hemodialysis catheter. The EvenMore catheter, which is designed for a long-term use in dialysis patients, was launched in December of 2004 and achieved sales of $257,000 in the fourth quarter of fiscal 2005. In this past quarter, the EvenMore catheter achieved sales of $522,000, an increase of 103% over the previous calendar quarter. This catheter will continue to be a strong performer for us.
In addition, the VenaCure laser system has contributed to our growing sales. In the first quarter, the Company sold 21 new laser systems which is comparable to the number of lasers of 23 that we sold in the first quarter of fiscal 2005. These sales numbers are not unexpected as the seasonality in our business typically results in relatively softer lasers sales in our first fiscal quarter which is comprised of the summer months in comparison to the remaining quarters of the fiscal year.
We continue to be excited by the swift uptake of our more physician-friendly VenaCure disposable procedure kit. Our VenaCure website continues to provide both physicians and patients with detailed information on varicose veins in our laser procedure. Offering patients this information helps our network of physicians to market the laser procedure and encourages patients to look for doctors offering the VenaCure laser procedure.
We continue to grow our gross profits which were up 36% for the fiscal first quarter. We remain focused on maintaining high gross margins which increased 480 basis points over the prior year quarter to 58.2%. Our sales and marketing professionals continue to build strong relationships with the physicians who use our catheters and other products. We enjoy our interactions with our physician customers and strive to understand their needs so we can provide them with new innovative and proven solutions.
We're committed to growing our sales force. We currently have 52 sales professionals, including 45 sales representatives and seven regional managers. We added six sales reps and one regional manager this past quarter and plan to add eight more sales representatives this fiscal year for a total of 53 sales reps in fiscal 2006. We plan to increase our total number of dedicated sales reps to 70 and sales management to 11 over the next 30 months.
The Total Abscession (ph) drainage catheters currently in test marketing continues to receive strong results. We intend to release this new product to the national market in the near future.
Looking ahead, we're optimistic about the rest of the fiscal year and beyond. We're affirming our financial guidance for fiscal year of 2006. We expect net sales growth to exceed 20% compared to fiscal 2005 to at least 72 million. Year-over-year net income growth is expected to exceed 27% to $5.8 million, which includes the anticipated onetime charge totaling $366,000 net of income taxes to be incurred in conjunction with our requirements to comply with Section 404 of the Sarbanes-Oxley Act by May 2006. Without the effect of these onetime expenses, net income would be expected to reach $6.1 million, or 35% net income growth from fiscal 2005. R&D and SG&A expenses should continue to be approximately 8% and 36% of net sales, respectively.
Gross margins have increased nicely according to our plans and we see gross margins increasing in fiscal 2006 by at least 200 basis points, continuing on our goal to achieve gross margins in the low to mid 60s range by 2008.
On a final topic, I want to highlight our upcoming industry conference calendar. On November 7, we will be presenting at the Rodman & Renshaw Health Care Conference at the Palace Hotel in New York City. The conference runs November 7 through 9. We will also be participating in two very important industry conferences -- the Advanced Interventional Management, or AIM conference, and the VEEP (ph) Symposium in New York City from November 15th through the 19th.
That ends our formal remarks. Operator, we would like to now open up the call to questions.
Operator
(Operator Instructions). Jasyon Bedford, Adams, Harkness & Hill.
Jayson Bedford - Analyst
Good afternoon; nice as quarter guys. A few quick questions for you. On the EvenMore, that was -- growth seemed to accelerate pretty quickly here. What accounts for that? Is that just hitting new accounts? Is that sales force focus? What accounts for the growth in EvenMore this quarter?
Eamonn Hobbs - President, CEO
Certainly, it's sales force focus. EvenMore is our first internally manufactured dialysis catheter and we've put some emphasis on that. We have taken advantage of our current customers who buy other dialysis catheters from us and leverage that business in addition to seeking out new customers with that product.
Jayson Bedford - Analyst
What's the gross margin on EvenMore?
Eamonn Hobbs - President, CEO
The gross margin is in the high 60s.
Jayson Bedford - Analyst
And then just looking over at VenaCure, the disposable strength was there, up 107%. Is that largely unit-driven, or is there price increases beyond I think 1.6% that you highlighted earlier?
Eamonn Hobbs - President, CEO
It is unit-driven.
Jayson Bedford - Analyst
And maybe Eamonn, if you could just comment on office usage versus hospital and then how you are kind of dedicating your sales force and kind of moving their time between both the office and the hospital?
Eamonn Hobbs - President, CEO
Well, we see the usage in the office is increasing rapidly and office usage accounts for in excess of 60% of the usage now, maybe as high as 65%. We are balancing our sales force between the hospital and office across our product lines and having them call on both the hospital-based physicians and the office-based physicians.
Jayson Bedford - Analyst
Super. And then I think you mentioned one new product. Can you just outline other new products that you plan to introduce this year?
Eamonn Hobbs - President, CEO
We currently have in test market the Total Abscession (ph) Drainage Catheter, which we will hopefully release to a national market in the near future. That continues to receive very, very positive reviews and we are looking forward to that being a strong national introduction for us.
In addition, we're planning on introducing a line of low-profile arterial angioplasty products called Profiler which should enter test market in late Q2 to early Q3. This product line is a broad arterial low-pressure, lowest profile angioplasty balloon system that we have great expectations for. We're looking forward to that proving itself in the test market and hopefully we will be able to release that to national marketing before the end of the fiscal year.
Jayson Bedford - Analyst
Great. And the step-up in R&D, is that related to these two products, or are there other products you're working on a little longer-term?
Eamonn Hobbs - President, CEO
The step-up in R&D is primarily due to longer-term projects that just happened to hit in Q1. We expect that our R&D is going to come in on the year still within our guidance of approximately 8%. It just happened to be skewed a little more towards Q1 that bumped it up a percent.
Jayson Bedford - Analyst
I know you have made investments in the past. Can you just talk about potential acquisitions or distribution agreements that you see, at least in this fiscal year?
Eamonn Hobbs - President, CEO
Well, we are aggressively looking for opportunities that meet our strategic criteria for accretive acquisitions and distribution agreements. I really can't discuss those at the present time, but we certainly are very busy working on a number of them.
Jayson Bedford - Analyst
So there is no change in that?
Eamonn Hobbs - President, CEO
There is no change.
Jayson Bedford - Analyst
Great, thanks guys.
Operator
Arnie Kaufman, Brean Murray & Company.
Arnie Kaufman - Analyst
Hi, thanks. Another good quarter. A couple of follow-up questions I had regarding the VenaCure. I was just wondering -- if I remember correctly, your last quarter, I think your sales unit was 37 and this quarter, it was about 20, if I recall just looking through this. I was just wondering -- you said it would be a soft quarter. Would you say that the decrease is mostly attributable to it just being a soft quarter? Because I recall also last quarter, you said you had focused your sales force on that product and that had a lot to do the increase and I was just wondering if there was a new focus or strictly basically the decrease is really driven by just your historically soft first quarter?
Eamonn Hobbs - President, CEO
Hi Arnie. The first quarter for us is a very soft quarter due to the fact that it's the summer months. So our first fiscal quarter, June, July and August, we typically see a dip over Q4. We sold 37 lasers in Q4 this spring, which is our peak quarter and the 21 lasers in Q1. Now the 21 lasers should really be compared to the prior year Q1, which was 23 lasers. So this came in right about where we thought it would. We were very pleased with the year-over-year growth in the disposables of 107%, which is really how we gauge the business. We are basically pumping out a little north of 25 boxes a quarter on average and that -- we don't expect that to change anytime soon. The consumables is really where we're focusing and that is a better way to judge the business.
Arnie Kaufman - Analyst
Right. So, but just getting back, would you say next quarter, you expect to see the boxes up, sort of getting back up thinking of ramping up again?
Eamonn Hobbs - President, CEO
Absolutely, yes, and we would expect it to be somewhere around the mid-20s range.
Arnie Kaufman - Analyst
And your new products you had just spoke about this year, I was just wondering, I think in the past, you had said you were planning on about two a year for the next -- I forget how many going forward future years. Is that still your goal would you say -- two over the next few years?
Eamonn Hobbs - President, CEO
Our strategic goal is to introduce approximately two per year, and this year it's the Total Abscession drainage and the Profiler angioplasty system, though there may be others on top of that depending on timing. So we may have two to three per year, depending on how the cards fall on approvals and test market links (ph) before we release it to national marketing.
Arnie Kaufman - Analyst
I was just wondering also if you could just discuss maybe what you're seeing on the pricing front going forward?
Eamonn Hobbs - President, CEO
Well, we successfully instituted a price increase this month actually that we're still seeing the effects of. But we have annual price increases that typically net out to be between 1.5 and 2% net affect. And we typically see that our prices -- that we can support those price increases and have supported them for a number of years.
Arnie Kaufman - Analyst
Okay. And one last question I guess for Joe on the tax. I think you said last quarter, you were expecting a rate of about 39% going up, and this quarter was obviously less. Maybe I missed it earlier, but are you still saying that we should be looking for a 39% tax rate going forward?
Joseph Gerardi - CFO
That's correct. There was some R&D tax credits that we were able to take advantage of that dropped the rate a little bit, but 39% would be the average for the year.
Arnie Kaufman - Analyst
Okay, great. Thanks a lot.
Operator
Robert Goldman, Key Banc.
Robert Goldman - Analyst
Question on the aggregate earnings per share projection. Just running through the numbers, after obviously a very strong first quarter with earnings-per-share up about 55%, and just accepting your guidance and stripping out the impact of the Section 404 charge, you are projecting a deceleration in earnings growth for the nine-month period remaining compared to the prior year to something I think on the order of 30 to 35%. Outside of just conservatism, recognizing the very strong first quarter, is there some additional reason we should focus on to expect a deceleration?
Joseph Gerardi - CFO
No, there's no specific reason. I think you've hit the nail on the head in that we are a conservative management team. We would prefer to exceed expectations than --.
Eamonn Hobbs - President, CEO
The only other thing would be that there would be continued further dilution and diluted shares -- it will be about 13 million by the end of the fiscal year.
Robert Goldman - Analyst
Let me, if I can, follow up on Profiler. I think you answered pieces of this. I just wanted to get comfortable again on the rollout of Profiler. It's obviously approved and you speak of a test market that will occur by the early part of Q3 with national rollout hopefully by the end of the year. But what is left to be determined on this product that you need to see during the test market phase?
Eamonn Hobbs - President, CEO
We typically do a very classic test market where we analyze the performance of the product, we analyze our marketing programs and their effectiveness. We test the pricing strategy to make sure that it's appropriate. And this also gives us an opportunity to really test our manufacturing systems to make sure that they're running at peak efficiency so that when we scale up the numbers to go to a national market, we are really confident about that and being able to meet the demand. Last but not least, we really refine the training programs for our sales force and our customer base to make sure that we have all of our ducks in a row so that when we take the program to a national level, we have all the tools necessary to really make it go in a strong way.
Robert Goldman - Analyst
Finally if I can on that rollout, the six-month period from test market to national rollout, can you just put that in perspective relative to what you've seen with other product rollouts? This is a typical rollout for you, so is six months typical or is three months typical and you're giving yourself some wiggle room?
Eamonn Hobbs - President, CEO
I'm definitely giving myself some wiggle room. Three months would be about the minimum that is required for a test market. Four months is probably very typical and then six months is conservative.
Robert Goldman - Analyst
Thank you very much.
Operator
(Operator Instructions). Nelson Sheridan (ph), Punk Ziegel.
Nelson Sheridan - Analyst
Congratulations on the great quarter, guys. Actually all of my questions were answered by the previous callers, so I'm okay.
Eamonn Hobbs - President, CEO
Nice to hear from you.
Operator
(Operator Instructions). Ladies and gentlemen, this concludes today's question and answer session. I will now turn the call back over to management for closing remarks.
Eamonn Hobbs - President, CEO
Well, thanks again for your continued interest in AngioDynamics and for taking the time to participate in today's call. We're off to a terrific start in 2006 and expect sales to continue to grow slightly above 20% this year. On behalf of AngioDynamics, I want to thank you all for your continued support and I'm looking forward to seeing some of you at our upcoming conference events.
Operator
Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a great day.