AngioDynamics Inc (ANGO) 2016 Q2 法說會逐字稿

Good day, and welcome to the AngioDynamics second-quarter FY16 conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Doug Sherk. Please go ahead, sir.

Thank you, Cody, and welcome, everyone.

Thank you for joining us for the AngioDynamics conference call this afternoon to review the financial results of the FY16 second-quarter results, which ended on November 30, 2015. The news release detailing the second-quarter results crossed the wire this afternoon, and is available on the Company's website at www.angiodynamics.com. A replay of this call will be archived on the Company's website.

Before we get started, during the course of this conference call, the Company will make projections and forward-looking statements regarding future events, including statements about revenue and earnings for the FY16 third quarter and full year ending on May 31, 2016. We encourage you to review the Company's past and future filings with the SEC, including without limitation the Company's Forms 10-Q and 10-K, which identify specific factors that may cause the actual results or events to differ materially from those described in the forward-looking statements.

(Caller Instructions)

With that, I would like to turn the call over to Joe DeVivo, President and Chief Executive Officer.

Thank you, Doug, and good afternoon, ladies and gentlemen. Thank you for joining the call.

During our second fiscal quarter of 2016, AngioDynamics showed signs of revenue improvement over the first quarter, while strengthening the core foundation of our operations. We improved manufacturing efficiencies, and continued to drive our commitment to regulatory excellence. As a result, we generated substantial cash from operations during the quarter.

The FDA notified the Company that we had resolved all outstanding warning letters, and the letters were officially lifted. The significance of this development represents a major achievement for our team, and has created opportunities for growth in the future.

When I arrived at AngioDynamics in 2011, the Company had two outstanding warning letters. Three months into my tenure, an FDA inspector arrived just before Thanksgiving and did not leave until Valentine's Day, issuing us 18 483 observations, many of which were repeats. As you recall, we instituted a quality call of action, bolstered by the acquisition of Navilyst to aggressively build a culture of quality throughout the Organization. I am proud of our Company, not just for addressing these concerns, but for creating today our own culture of quality.

Our Organization is poised for greater operational excellence and greater international market access, as evidenced by nearly 20 clearances in the past six months, mostly from international markets and the more predictable R&D roadmap to commercializing in the future. Our operational excellence program remains on schedule to complete the product line transition from Queensbury to Glens Falls. We've already begun production in our recently opened manufacturing space. And as Michael will review in a few minutes, inventory has been reducing, and our cash generation has been improving.

A recent positive development was the decision to suspend the Medical Device Tax for two years. Like most device companies, AngioDynamics' ability to invest in R&D and other growth-oriented investments was impacted by the tax.

Earlier today, New York Senator Chuck Schumer visited AngioDynamics. And we thanked him for his bipartisan leadership efforts to repeal the tax. As an executive committee member and director of AdvaMed, the Medical Device Industry Association, I've worked with our local elected representatives over the years to bring light to the issue, and want to thank Senator Schumer and representatives Christopher Gibson, Elise Stefanik, and Paul Tonko for their leadership to abolish this Device Tax, at least albeit temporarily for the moment.

With this fresh news, we will communicate over the next several months how we plan to reinvest for growth. As an example, this afternoon I shared with Senator Schumer that just last week we signed a contract with an outside R&D firm to develop a novel technology that will become the next generation of NanoKnife. The suspension of Medical Device Tax gave us the ability to make this investment in this technology, and positions us to bring this product to market 6 to 12 months sooner than the current schedule.

Moving on to results for the quarter, sales and adjusted EPS came within our guidance range at $89.2 million and $0.14, respectively. We also reported $9.2 million in free cash flow. Our earnings and cash performance are evidence of effective execution of expense and operating management programs, which Mike and his team have played a major role in creating and implementing. Adjusted for constant currency and the impact of Morpheus, our sales were down 1% compared to the second quarter of last year.

Let's look at each business, starting with Peripheral Vascular. The franchise had a solid second quarter, recording $51 million in sales, and a growth of 3%.

We made an investment during the first half of the year to add dedicated fluid management representatives to the business, in an effort to drive focus and specialization. We believe this expansion will benefit the entire PV portfolio. The team has successfully transitioned our entire FM business as a specialty organization, starting in the third quarter. And the collective effort drove US fluid management to 3% growth in the second quarter.

A leading indicator for future growth in fluid management is a 103% increase in US custom kit sample orders, which is the first step in new account conversion activity. Also, the addition of our national EVLT business manager has shown positive early results, including 25% growth in US laser sales and 1% revenue growth in overall EVLT procedure kits. We expanded a significant effort in the first and second quarters, which we believe will pay dividends to our focused PV growth products in the second half of the year.

We have also consolidated our Thrombus Management portfolio to include our AngioVac product and UniFuse, the broadest and most comprehensive line of catheter-directed thrombolysis products on the market, which we believe will allow us to serve not just AngioVac candidates, but every candidate with thrombus. The thrombus category grew 17% in the quarter, with UniFuse up 19% and AngioVac up 6%.

I believe AngioVac was impacted by most of the transition of FM to specialist sales organization undertaken during the first half of the year, and the reinvigoration of the UniFuse sales through the development of a Thrombus Management selling process. This is -- in my view, the transition had a purely short-term effect on AngioVac's sales development, and we will return to double-digit AngioVac growth in the second half of the fiscal year.

On the venous front, revenues in the quarter were up 1%. We were pleased to see moderate EVLT growth for the second straight quarter, and believe the market for venous ablation procedures has stabilized. While sales did improve, as we expected during the second half of 2015 calendar year, we do not believe that we reclaimed the sales that were lost during the first half of the calendar year of 2015. We do, however, believe that if CMS and private payers move to more quality pay-for-performance and outcomes-based payment methodologies, the market opportunity for EVLT will continue to expand.

The statistically significant benefit and improved patient outcomes when using endovenous laser for the treatment of venous disease are undeniable, and have been confirmed repeatedly, and most recently by a health technology assessment report published by NICE in 2015. That said, our efforts to work with CMS, and private payers and physician societies, to rationalize reimbursement in the outpatient setting between RF and laser is ongoing, and has resulted in a more conservative view on EVLT progress during the second half of this fiscal year.

Starting the first day of the quarter, the full-line PV organization can now focus on market development activities for both our thrombus portfolio, as well as our venous portfolio. We believe that having our 80-plus commercial team in the marketplace focused entirely on thrombus and venous, and our core interventional radiology products, should show greater progress in these areas going forward, while maintaining FM at moderate growth. Being our largest business, PV is on the right track.

Now moving to Vascular Access, the second quarter was the last full quarter of Morpheus impact year over year. Revenues for the franchise during the second quarter were $25 million, down 11% from last year, driven primarily by PICC revenues, which were down 13%.

Our Vascular Access business continued to be a tale of two stories. The first story -- hard comps with Morpheus and non-BioFlo product sales. In past quarters, we have discussed how managing customers through the Morpheus withdrawal has distracted our sales team from reestablishing momentum for growth.

Last year at this time, VA was seeing steady sales growth until that withdrawal of Morpheus. And even when normalized for the performance net of Morpheus, our growth was significantly impacted. And the impact didn't just affect PICCs, but also ports and dialysis.

However, the second story for VA does provide confidence for the franchise going forward. BioFlo sales continue to grow across all product offerings, and sales of our recently launched products have been positive. While overall PICC sales were down 13%, BioFlo PICCs grew 16%. Ports were down 7%, while BioFlo ports were up 15%. And dialysis was down 6%, while BioFlo dialysis grew 72%.

From an overall percentage of sales, BioFlo is now 73% of all PICC revenues, 15% of ports, and 19% of dialysis. In total, BioFlo now represents 41% of all VA sales. Sales for non-BioFlo products were not just impacted by Morpheus recall, but started to reverse what had previously been positive momentum for the business. Moving in to the second half of the year, regaining that momentum will be key to returning the franchise to growth.

During the second quarter, our team placed over 20 Celerity units worldwide, and achieved clearances for the device in Europe. We filed for Celerity Navigation with the FDA for 510(k) approval, and are targeting an early March clearance, which should help us with the end of the year.

As you can see, we were not able to overcome the Morpheus challenge during the second quarter to the degree we had planned. And that changes our outlook for the balance of the year. As we get through the year, we see the negative growth comparisons declining, and we are now looking at resuming overall top-line VA growth starting the first quarter of FY17.

For this business, the year has been tougher than we original expected. As we look through the rest of the fiscal year, we are specifically focused on restoring overall growth to the entire VA portfolio, with an emphasis on opportunities within ports and dialysis, while retaining the momentum we've established for BioFlo.

Moving to Oncology/Surgery, total revenues during the second quarter were $12 million, down 9% from last year. US oncology started the quarter with fantastic news, that the FDA had lifted a 2011 NanoKnife warning letter. The warning letter has been the key barrier to gaining new FDA clearances for indications.

Currently, NanoKnife treatment for pancreatic and liver cancer is considered experimental and investigational by NICE and some US payers. With the warning letter now lifted and key data published in The Annals of Surgery, conversations with CMS and NICE are progressing. We also gained five new international NanoKnife clearances with certificates to foreign governments released by the FDA earlier in the year.

We believe the business is on the right path, given the continued strong ramp for disposable revenue during the quarter. NanoKnife disposables rose 35% in the US and 21% OUS during the period. The same is true for Microwave. Disposable sales were up 29% in the US and 15% OUS during the second quarter.

That said, gaining new capital placements has been a challenge for NanoKnife; and as a result of lower capital sales, US oncology was down 8% for the quarter and 9% worldwide. We believe the key to capital sales becoming more predictable will be the positive guidance and coverage decisions for the product leading to worldwide reimbursement. The technology clearly is working for clinicians, as consumable growth continues at a very healthy pace, which is a tremendous positive.

Conversations with the decisionmakers are ongoing, and we believe we will achieve an ICD-10 code in the US, and positive recommendation from NICE in the calendar year 2016, although we did not hit these goals for the beginning of 2016 calendar as we had hoped. As we look to the second half of the year, we have revised our NanoKnife capital outlook to reflect this view until we achieve our reimbursement goals.

Now moving to international, top-line sales in international were down in the second quarter 6% year over year, or down 1% constant currency year over year. We have made progress since a very weak first quarter internationally, where we posted negative 17% growth and negative 11% constant-currency growth. While pricing pressures will continue, a raft of new international clearances bodes well for a more positive second half of the year internationally. We believe international will turn positive in the third quarter, and show continued positive momentum in the fourth quarter.

We have a significant number of clearances in the Asia-Pacific market that we anticipate occurring later in the fiscal year. These include a clearance for NanoKnife disposables in China during the fourth quarter, which we expect to lead to a $2 million to $3 million incremental sales for the approval -- and the approval of an RF device in Japan, which will provide a very positive boost to the end of the year. In addition, we expect to launch a new Microwave product at the end of 2016's calendar year.

With that, I will turn it over to our interim CFO, Mike Trimarchi. Mike has been with us since 2013, hired to lead our FP&A activities, and then as our Global Controller for the past 18 months. During his tenure, he has led a reconstitution of our finance organization, and managed the remediation we went through last year following the Oracle implementation. Prior to AngioDynamics, Mike held roles as the VP of Corporate FP&A and Global Controller for Vistaprint in Boston. We have commenced a search for a CFO, and have asked Mike to be a candidate, as he has smoothly stepped into the role the past few months.

So, now I would like to turn it over to Mike. Mike?

Thank you, Joe, and good afternoon, ladies and gentlemen. I'm excited to take on the additional interim responsibilities for AngioDynamics, as we focus on maximizing the opportunity ahead of us. I will spend first -- I will first review our financial performance highlights for the quarter, and then provide our updated guidance.

From a top-line perspective, total revenue was down 3% from the prior fiscal year. However, excluding the impact of FX and the Morpheus discontinue, underlying net sales were down 1%. We will fully anniversary both of these headwinds about halfway through our third fiscal quarter. The primary commercial driver of our year-over-year underlying decline was the broader impact the Morpheus recall has had on our momentum in the VA business, as Joe described.

Gross margin for the second quarter was 51.4%, as compared to 51.7% in the prior-year period. FX negatively impacted our gross margin by 50 basis points, so underlying margins improved by 20 basis points over the prior year.

On a positive note, our operational excellence program continues to deliver unit cost savings, contributing nearly 90 basis points of year-over-year gross margin improvement in the quarter. These savings were partially offset by 70 basis points of product price headwinds, split evenly between our US and OUS business.

In the US, we're seeing negative price impacts on our VA products, driven primarily by the increased percentage of contracted revenues. The shift towards GPOs results in lower prices from both their buying power and the admin fees they charge. On the OUS side, we continue to work with our distributor partners through the impact of last year's currency fluctuation.

As a reminder, because our distribution sales are denominated in US dollars, our distributors saw a 25% to 30% price increase when the dollar strengthened a year ago. As a result, on a market-by-market basis, our team continues to evaluate, and where appropriate, make price accommodations to ensure our products remain competitive. These pricing adjustments negatively impact our margin.

To go into more detail on our operational excellence progress, over the last two years our manufacturing organization has executed on our plans to be more efficient. Key major milestones have been delivered on track with our ERP implementation completed in 2014 and our plant integration scheduled for completion in our fiscal third quarter. We are already seeing benefits of both of these initiatives.

The ERP integration has not only enabled the facility consolidation, but the detailed visibility into our plant performance has enhanced day-to-day lean management activities, which are driving about half of our 90-basis-point improvement in the quarter. From a facility consolidation perspective, we are benefiting from a leaner operations management and overhead structure, in advance of project completion in the upcoming quarter.

Moving to operating expenses, selling, general and administrative costs totalled $34.8 million, consistent with prior year's spending of $35 million. At the outset of the fiscal year, we made investments in our US sales force, including the creation of a FM-specific sales force, adding an EVLT national sales leader, and compensation plan changes to improve retention. These investments increased expense by approximately $750,000 per quarter. In the current quarter, this investment was offset by a $500,000 benefit in our OUS expenses from currency fluctuation and in additional disciplined spend management efforts.

Medical Device Tax of $1 million in the quarter was down $100,000 from the prior year. Since its inception in 2013, we have paid $11.6 million of Medical Device Tax, including nearly $2 million year to date. The suspension of this tax is effective one month into our Q3, and as Joe discussed, gives us the opportunity to further invest in our growth drivers and long-term Business.

As outlined in the supplementary tables to our release, total acquisition, restructuring and other expenses was $3.9 million, which included $1.5 million of M&A-related legal and consulting costs, $1.4 million of litigation-related expenses, $700,000 of operational excellence, and $300,000 of other items. Amortization expense was $4.5 million in the quarter.

Adjusted earnings per share was $0.14 versus $0.17 in the prior-year quarter. We lost $0.01 to FX, and the remaining decrease was caused by the lower revenues.

EBITDA was $8.4 million versus $11.9 million in the prior-year second quarter. Adjusted EBITDA was $13.4 million versus $15.9 million in the prior year, with the decrease driven largely by the same factors as our adjusted earnings performance.

We are pleased with our free cash flow generation of $9.2 million in the quarter. This performance compared to prior-year free cash used of $4.6 million. Beginning to consume our elevated inventory stock was a key driver. In addition, our receivable collection efforts, which have also benefited significantly from our ERP integration, have yielded DSO improvement of approximately five days, year to date. At the end of the quarter, total cash and investments was $20.6 million, and total debt outstanding was $133.9 million.

Turning to guidance, we are advising our net sales range for the FY16 to $353 million to $359 million. This range equates to 1% to 3% growth, excluding the headwinds from currency and the Morpheus product discontinuance, which, taken together, are a 2% impact on the year. At the midpoint, second-half revenue growth would be approximately 5% excluding the currency and Morpheus impacts, which are approximately a 1% impact on our second half.

As Joe discussed, we expect to begin regaining momentum in our VA business during the second quarter, and it is going to take longer than we anticipated. Additionally, despite the continued positive clinical outcomes of NanoKnife, until we have reimbursement, we feel it is prudent to reduce the level of capital sales included in our guidance. These two factors represent $7 million to $8 million, and approximately $2 million, respectively, of the reduction in our guidance at the midpoint.

We expect sales for the fiscal third quarter to be in the range of $84 million to $87 million, up 3% at the top end, adjusted for the 1% partial-quarter impact of currency and Morpheus. The implied Q4 sales include approximately $3.5 million of registration-dependent oncology sales in the APAC market. A significant portion of these sales are related to the NanoKnife disposable approval in China, where we've already received approval of our generator earlier this fiscal year.

From an earnings perspective, we expect adjusted EPS of $0.59 to $0.63 for the full fiscal year, which represents, at the midpoint, a 5% increase from the prior year. At the midpoint, second-half adjusted EPS growth would be approximately 38% over prior year, which illustrates the strong operational progress we are making. For the fiscal third quarter, adjusted EPS is expected to range from $0.10 to $0.14. This includes a partial quarter of annualizing the headwinds from prior-year currency fluctuations and Morpheus sales.

Our earnings growth at rates much faster than our sales growth rates can be attributed to the scalability of our cost structure. As our volume increases, we are able to better leverage our manufacturing overhead, increase the benefit from our operational excellence efforts, and manage growth and operating expenses to be slower than top-line growth. Additionally, when the revenue growth is generated by our higher-margin innovative products, we realize a mix benefit. We expect these factors, combined with moving past our foreign exchange headwind, to create 100 to 200 basis points of year-over-year gross margin improvement in our fourth quarter.

Finally, we anticipate free cash of approximately $30 million for the year. Year to date, we have generated $13.1 million in free cash, and our outlook for the full year is the result of our expected profitability, working capital effort, and the minimal maintenance CapEx requirements of this Business. This would more than double free cash generation in the prior year, or for that matter, any of the last three fiscal years, demonstrating the potential of the Business following our recent period of integration investments.

With that, I will turn the call back to Joe for his final comments.

Thank you, Michael.

We came in to FY16 needing to annualize currency and Morpheus headwinds. In the first half, we saw a broader challenge in our VA business, which we now expect will continue into the second half of the year. That said, our second-half guidance continues to represent top- and bottom-line growth, and significant free cash generation. We are making great strides operationally, and we expect the Device Tax relief to identify additional areas to invest. We remain bullish our advanced technology will deliver growth, and we continue to push growth initiatives around market development, enhanced reimbursement, and regulatory clearances.

With that, operator, I would like to open the call to questions.

(Operator Instructions)

Tom Gunderson, Piper Jaffray.

Good afternoon, everybody. Just a quick clarification. The new guidance on the earning side includes the benefit of not having to pay Medical Device Tax January through May, correct?

Yes, Tom. But there is -- it's not -- we're not having 100% of that drop to the bottom line. There are things that we're funding on the interim. So this just happened a couple of weeks ago. We don't have that many shovel-ready products to just start. But we did have something that we did start, and that we will be funded out of those dollars. It's an impact, but it's not a full impact.

Got it. And then you clarified one of the questions I had going into the call. But I was hoping to get a little bit more clarification on the lower guidance on the revenue side, Joe, from what you said on VA and longer than anticipated to get back on track to back to where you wanted to be. I think you used the word maybe tougher environment. Is it competition? Is it the market? Is it the lower pricing on the contracts? What changed in the last three months that it's tougher for VA to get back now?

The -- I would say that the biggest challenge has been the magnitude of the sales effort in trying to save the Morpheus business and how much of the momentum in the other products came out. Because we are taking, when we look at our dialysis view and our port view for the second half of the year, it comes down considerably because we've lost our momentum there, and we did not expect that to happen. If I go back to the fourth quarter of last year, I wish I just drew a line through the Morpheus line in total and kicked it out of everyone's numbers, saying don't try to save the business. Let's just -- let's go sell what we got. I think we probably would've done better.

But when you have customers you've been with a very long time and you feel like you are letting them down, you want to serve them and you want to be there with them, and sometimes it's not all whatever is the best commercially. We tried our best to serve their needs. And in doing so, that of course created a great opportunity for our competitors now to go in, because while they were using one of our products, they chose that product. They didn't choose the other product that we were using. And so once you take that away from them, they see it is a jump ball for everybody to take that business. And our competitors are bigger and have larger salesforces. And it's kind of like a compounding effect.

You spend so much time trying to save that, you really kind of leave your flank open. And we had expected that we would be over it by the first quarter, if you recall. And it occurred in the first quarter. And it's continued in the second. And it's continued in the second to a magnitude that it's just imprudent for us to keep the bullish outlook that we had given. We were stunned in the first quarter, but we just couldn't give up on the year at that point, given all of the items that were in the pipeline. But what we saw in the first quarter continued into the second. And we've chosen to be very prudent now to not keep any optimism there. We want to be able to reset our expectations on the VA business, given what we've learned in the first six months. And then we want to beat it. And then we want to get back in and rebuild that momentum.

This time last year, Tom, this business grew 7% year over year. And before the Morpheus recall we had a bounce in our step, we had a pipeline of new business, we had new contracts and a lot of things going. The reality is what the reality is. I am very proud of the team, because you know what? Our VA team stuck with the business and is sticking with the business. They believe in the technologies and we're fighting for new accounts.

But I can't give the type of rosy picture that we started the year off of. Maybe I regret we didn't take guidance down in the first quarter, but we also didn't have enough data. And we saw what happened in the first quarter. But the second quarter it continued. And when you see your port and dialysis business get kind of pulled into that because of the distraction for the salesforce, we have taken the view on VA down pretty hard. And as Mike had said, that's $7 million, $8 million of the whole thing. And that's in the face of the fact that our PV business is actually now regaining momentum and there's a lot of positives that are occurring there. And I think we will all be pleasantly surprised in the second half of the year with that business.

Got it. Thanks, Joe. And then just one quick -- is there any update on EmboMedics? I think there were going to try and file this month.

Yes. No, that is probably a good three-quarters of a year behind. They have gone through, and now that we are with them we are helping them develop their processes and working very closely with them. We remain very encouraged by the technology. But to get to filing for the FDA the way we would like to see it, it is probably going to be in the fall of next calendar year.

Got it. Thank you.

Thank you Tom.

Jason Mills, Canaccord Genuity.

This is actually Jeff filling in for Jason. Can you hear me okay?

We hear you great, thank you.

I just wanted to follow -- piggyback on Tom's question about guidance. Joe, just wanted to ask if you could give us a little more comfort that the forecast that your revised guidance is indeed conservative, given all the challenges that you listed in the VA business?

Well, I think we've taken a pretty hard look at the business. And with a one-quarter view, I think the past quarter we came in where we said we did. I guess, at the beginning of the year we set some pretty big objectives for ourselves. And I guess we weren't willing after the first quarter to accept that and wanted to see a little bit more. But now that we have had the view for the first and second half, actually the first and second quarter. Second quarter is doing better than the first. And we're seeing the beat rate of the business improve. But when you annualize it and you compare it to year over year, you'd see the numbers. But from an absolute ADS basis, second quarter was better than the first quarter. And we feel pretty confident that the third quarter is probably conservative.

If there's any risk in the forecast it's around we're expecting some clearances over in Asia on some technology that we feel is very highly probable. But if there's something that goes wrong there, than that's where there would be risk in the forecast. But especially with Mike taking in the interim role and us really taking a hard look, we've challenged ourselves to make sure that we have a set of revised numbers that we feel comfortable with. And I think in the third quarter it's probably a bit on the conservative side. And if we get those clearances that we expect, I think the fourth quarter would be there.

Okay, great. And to continue there. You have often spoken about the GPO contract as being a license to hunt and not necessarily a guarantee any success there. So how do you turn the tide on BioFlo? It looks like 41% of your overall business flat with last quarter. So how do you grow it from here?

We just keep doing what we're doing. Everything is affected by the change of momentum. And again, when you're playing so much defense, it's hard to reestablish. It took us, if you recall, three or four quarters to establish the momentum we had this time last year. We will do it again.

I think one of the other key drivers is going to be the navigation clearance in March. Our Celerity is a good product. The competitive products are also very good. And while the Celerity is helping us in a lot of accounts, we do need the navigation technology to really start taking some increased share. But I think the BioFlo is still very strong, and the data is there. I think customers get it. It is a harder environment to ask for a premium product when you're asking someone to take the price up. And that is a struggle, especially in an environment where your competitors are willing to do virtually anything on price.

And so that is probably the biggest headwind, is just making sure that you get ahead of it and you're talking to people in the hospital who are in charge of all the costs in the hospital, not just the procurement costs. Someone who has just have procurement responsibility, especially on the GPO side. If they're agnostic, they just want the best price. The truth is, we're taking significant amount of costs out of the healthcare system by improving patient outcomes. And those who are compensated and care about that, see it.

So we're going to get our momentum back. But it's not going to happen as quick as we had hoped. The realities on the ground are what they are. Customers wanted to see lower prices and GPOs want to see lower prices. So you're right, it is a license for hunt, it's also a license to be hunted. But we are in the game. And while we're getting over the tough spot, our portfolio has never been stronger. We launched our BioFlo Midline in August. And it's a very small part of the number at the moment, but is doing better than we thought it would, and there's a possibility that it could be really additive in the future.

So I think the keys for us is just to stay the course. Our team is staying the course. We believe in the technology. Get our navigation system out. And then hopefully within a little more than a year we will file for FIREFLY and get that out. I think we will leapfrog our competition on the tip location side.

Great. Thanks for the color. Those are my two questions. I will get back in the queue.

Thank you for your questions.

Matt Mishan, KeyBanc.

Thank you very much, Joe. My first question is related to the confidence around the cadence of your guidance. I think as I am looking at it, if I take the midpoints, and hopefully I'm doing the math right. It looks as if the midpoints revenue is going to be down 1% next quarter and then up 7.5% in the fourth quarter. So the question is, what gives you confidence in that fourth quarter 7.5% number?

Matt, the thing that really kind of pushes that number is we've been working for the last three years on two major Asian oncology clearances which represent probably upwards of $3 million. It could be more than that if it goes well.

So that is kind of what the anomaly would be and why -- and then second of all, we typically have stronger fourth quarters anyways, it being the end of our -- obviously the end of our fiscal year. And we have preserved our sales team through the year. We have -- we still think we have a lot of things going for us. But obviously we've trimmed that perspective quite handily.

If those oncology clearances don't come through, you take the $3 million off and it kind of moderates the view a bit as well. But we have it in there because we believe it's going to happen, and we're obviously taking guidance down hard. But that's something that we are confident in and very hopeful of. But if you wanted to take it one other level of conservative, then that's the anomaly you have to look at.

Okay, got it. And then on NanoKnife, I think you had said last quarter that you expected at least NICE to change the status from investigational in January. It seems as if with NICE and with CMS there seems to be a little bit of a delay as far as reimbursement goes. Can you give us a little bit of color on why the delays and some of the conversations you're having with these organizations?

Appreciate the question. And yes, that something at the beginning of the year we were banking on getting both of those positive decisions, and both of those positive decisions helping us accelerate our second half of the year, especially on capital. Again just to reiterate, we're seeing very nice growth in procedures. And it's evidence of the market acceptance of the technology. We have over 180 peer-reviewed publications for International, 180. It's insane how much the medical community has studied and is seeing this technology. And that's why these warning letters were just such a barrier and it really affected and created a perspective of technology that was incredibly unhelpful.

The conversations have been fruitful. They have been very positive. Actually they were so positive that it led us to believe we might hit -- because as you are very well aware on an annual basis, CMS will make decisions in the November -- October/November timeframe for the next calendar year. And we convinced ourselves that we would catch this cycle. And also the same with NICE. In our conversations, they were very positive, and quite frankly there are still positive.

But in our last conversation there were additional requirements for data that kind of surprised us, to be quite honest with you. And it's going to take a little more time. And that disappointed us, because that's a decision that private payers really look to that very credible third-party organization for their guidance. And when you have an experimental moniker on it, no matter how loud the thought leader at a local level screams and the hospital CFO wants to move forward, the barrier on capital is pretty high. We've actually -- one of the things that's driving our consumable growth is we are actually starting to come up with ways with Nano to do temporary placements of capital.

And so we are getting into new accounts, and new accounts are getting there. But the ability to get them to flip the switch to make a $300,000 commitment, especially with that part of it, is hard. And we think we've -- on the adoption curve, we've gotten all the early adopters. We're at the next phase right now and we have to get a different level of overall healthcare system validation. So, yes. We believed that we would have it at this cycle. We did not get it.

We've moderated our guidance for it on capital. We think the [disposable] of those who do have it will continue, and we will also be a little bit more flexible on evaluations and (inaudible) for those thought leaders who wish to start programs to find ways to get in there. But we've been really kind of tied to this drug called NanoKnife capital, because you have one $300,000 Nano miss, and it just makes the business look like it's, my gosh up and down. Or it looks like you've got another Nano in the quarter and you're growing 50%.

It's a big, big number that sits on top of consumables. And when, if you own a business, you look at the business, you want to see are your consumables growing? Are people doing procedures? Are the outcomes good? Are you increasing your overall perspective in quality in the medical community? It's yes to all of the above. But for us to continue at a level of capital equipment sales, we need to not have a thought leader have to put their -- jump up and down and [relations] on the line. We need the CFO to look at and say, this is great. Covered privately, we have a specific code for it with CMS, check the box.

And if we have that, it would be easy. We don't. And it will probably be in the next cycle in the US unless they make it an interim decision, which is atypical. But the conversations are -- if you were in the room and you're hearing the conversations, your enthusiasm level would be high. And we allow that to form our view. But given where we are right now, even if for some reason they make an interim decision, we don't want any of that in our numbers for the balance of the year. We kind of feel bad that we had that in there. And I think the view as it is right now is accurate.

Okay, great. Last question for me. On the free cash flow, congratulations on a nice free cash flow number. First, what is normalize CapEx for Angio look like going forward? And then second, I think I heard you right when it said there was about $1.5 million in M&A consulting activity. Are you starting to look more at acquisitions now that the free cash flow is starting to perk?

I think as a Company we always are -- take the opportunity to look at M&A from all different fronts. And in the quarter used some advisory work to help us evaluate some strategic opportunities. And that's what that expense item is. And from Mike's perspective, I will let him go into CapEx.

From a maintenance CapEx perspective, I think you can look at our business as requiring between $6 million to $8 million. Some years will be a little less, some years tends to be a little more. But $6 million to $8 million is a fair representation. This year coming off the last couple of years of pretty high CapEx I think we'll come in a little under that, which is helping along our free cash flow outlook for the year.

All right. Thank you. I will jump back in the queue.

Jayson Bedford, Raymond James.

Good afternoon and Happy New Year, guys. So just to follow on the last comment on NanoKnife. I think I understand the reimbursement dynamic as it relates to the new capital placements. But do you think this reimbursement issue is impacting procedure growth? Meaning, you're growing disposables pretty well.

So a lot of the NanoKnife procedure is used in conjunction with other procedures. Surgical oncologists will use it as an additional tool in conjunction with other things they do. And so hospitals, given that the benefit that those thought leaders believe they get, they kind of qualify it under a general surgery-type reimbursement. And quite frankly, everyone has their own method of reimbursement. We find when the NanoKnife gets in the hospital, it's used.

But when they are looking at their CapEx budget and they're going to separate with $300,000 and they go through all the formal checks, the formal checks are not favorable. We don't have a ICD-10 code, we don't have a specific reimbursement DRG, we don't have a private pay. So for radiologists who would want to do a procedure as a sole therapy, meaning the patient is coming into have a NanoKnife, that right now is very few and far between. We have a few [cult of] personalities who are really multispecialty and do it to tremendous success by the way, and specifically University of Miami. But we are not going to see a significant radiology penetration until we have a specific code allowing them to come in and do it as the primary therapy. Does that make sense, Jayson?

It does. So the thought is once you get the ICD-10 code, that just relaxes some of these capital equipment constraints that hospitals have?

True. And if we also -- if we get a NICE recommendation, we think a lot of private payers would follow that recommendation as they've done in the past with other technologies we have had before. And it would allow for procedural coverage on the private pay side. Because especially if someone is going to use it for some of the applications that are being used today, this is a Medicaid population, but also there is -- if they use it for a terrible disease that it has no -- it will affect people of all ages. So I think that's how I view it. The procedures will increase more with the private pay coverage capital -- will increase more obviously with the private pay coverage but also with ICD-10 code.

On the peripheral vascular -- sorry did you have something else, Joe?

No, no. That's (multiple speakers).

On the PV side, growth picked up there. A couple of questions. What was revenue growth in laser or EVLT? I missed that. Also I was unclear. It sounded like you expected that business to soften a bit in the second half. And I was unclear as to why.

Okay. I don't expect it to soften from where we are today. But I don't expect it to do what we thought it would do originally. And it is a part of the guidance takedown. We had hoped for -- we had hoped to see more of a normalization and reimbursement between RF and laser. And we had forecast a little bit more growth originally at the beginning of the year. So we took some of that out. But it's not going to soften from where we are, I don't believe. Actually, the comps are pretty favorable.

We had a horrible first part of the calendar year last year. And some of that was, as we had talked about, the elective procedures and what some of our customers were telling us. But also, frankly, some of that was we were going through some salesforce attrition at the end of last year and there was definitely some internal challenges that as we did more and more analysis and root cause where this was, some of it was self-inflicted.

We are blessed right now, Jayson, actually to have virtually a full salesforce in place, great compensation. They are all tracking very well with their plan. And by actually now really sequestering fluid management to a separate organization, we have now alleviated a lot of work that (technical difficulties) has. And the balance of the sellers are now laser-focused on EVLT and AngioVac. So from an overall market standpoint, if we receive the RF parity with laser in this cycle, it would've been an extra boon. But since we didn't, there is a little bit in our guidance that kind of moderates that. But it's not off of these levels. It's off of what the original guidance expectations were.

And then just lastly from me if I can squeeze it in, thrombus management, how big is that business?

You mean Uni-Fuse (multiple speaker) both of them together?

Yes, you referred to 17% growth. And I'm guessing that's both Uni-Fuse and AngioVac. So I'm just wondering how big is that?

Yes. Between 18 and 20, something like that. I have to see with the exact number is. Uni-Fuse is a product, Jayson, that we have had for 20 years. And it's one of these products that we kind of forgot about. And it's been used -- if someone's got a clot burden then they'll go into the ICU, have the catheter (technical difficulties) to the clot and they'll sit there overnight with this pulsing through the clot trying to dilute it. We find that going in all the AngioVac call points, AngioVac is not for every single thrombus case. It is a specific case that we go for. But now every single call that we make, we're pulling out Uni-Fuse like we've never done before. We were pretty surprised, actually, that we've seen the type of benefit just a little bit of focus has created.

So between really retraining everyone on Uni-Fuse and getting them to pull it out, and then also the salesforce put a lot of work into transferring their customers, their relationships, the competitive dynamics from managing on their territory to a special -- to another seller, it was just a lot of work. But I guess I get criticized for being too positive so I won't be to positive. But I like where we are. I think the leadership in our PV business is strong. And I think the strategy they put in place at the outset of the year is starting to pay dividends.

Great, thanks. I will jump back in queue.

Thank you, Jayson.

(Operator Instructions)

Charles Haff, Craig-Hallum.

Hi. Thanks for taking my questions. Just to follow up on the previous question, what was the EVLT growth this quarter?

1%.

Okay, thank you. And what was AngioVac revenue in the quarter?

I don't think we give a revenue number but it was a 6% growth over prior year.

Okay. And Joe, you have the version two product -- sorry, go ahead.

It's about $3 million.

Okay, thanks. And then you have the version two product out there. The physician feedback that we have heard is very positive. Why do you think you only had 6% growth in AngioVac this quarter, given the fact that you had a new product that seems to be very well received right now?

I think after the launch of the product and the trajectory for the first 1.5 years, 2 years, it's become a sales issue, Charles. It is a product that requires a lot of handholding and account development. After you get past that first great case, there's still a lot of work to do. And these reps have day jobs. They're out there selling EVLT and lasers, and then they're going -- 40% of the revenue is the fluid management business.

When you [root] cause and looked at the amount of activity that they had, we said to ourselves, we need to create greater focus and energy to accelerate this growth. And you would think that you would take that investment and put it on AngioVac, but actually the investment we made was on fluid because it alleviated the entire organization. I've seen early signs that that's working. I think you will be pleasantly surprised with AngioVac in the second half of the year.

It's a sales issue. It's not a product issue. It's sales issue, or a sales and marketing execution. It's, we have to now get the resources because we have so many different things that we are selling in that bag. Fluid was just taking too much away from the organization. And interestingly, we put one of our best people in the Company to run our fluid management specialty organization. And here we are just hoping he can maintain it and manage it.

And as I mentioned in the call script, the amount of evaluation accounts we have right now is up 100% from last year. And the amount of kits we're putting out to evaluate is great, and that's with only a small team of people. So I think, again, our PV leadership and our team under John Soto and Chris Crisman's leadership have made some good decisions. And I think we will be pleasantly surprised.

The real difficulty in the story, Charles, is that recall and the momentum really hurt us on VA. We had much bigger expectations for growth in the second half. We should have taken it down in the first quarter, given how off we were. But we thought it would turn quicker and it just didn't. And we don't want to do that again. And we've taken it down to this level.

Okay. And then specifically back to AngioVac, you think it's going to return to double digit? Obviously when you have a emerging product, it's sometimes hard to predict where the growth levels will be. But when you say double-digit are you thinking more like 10% or 20%? Or how should we quantify double digit in the back-half growth range for AngioVac, do you think?

It's kind of a slippery slope. I guess I would say that we didn't buy AngioVac for 10% growth. But in order to get to the growth rates that the marketplace and the product we think are capable of, we have to get our sales model right. And we kind of hit a wall at the end of last year, even with AngioVac Two coming out. AngioVac Two did a wonder from us from a clinical perspective and from a case coverage and from a clinical success and ease-of-use. The product has performed as billed, but it's also we have had growing pains with the amount of products in the portfolio. And that's where we made our investment to address it.

And now at December 1 we had 60 salespeople. We told them, stop selling fluid. You're not going to get paid on it. Don't think about it. Because we have successfully transitioned it to another organization. And that's pretty profound when you have 40% of your territory all of a sudden to not have to focus on. There's going to be a lot of energy and bandwidth displayed, not only on AngioVac but also for the thrombus category we talked about it, and also on EVLT.

So I am very curious to see. You know, Charles, that I believe in our business and I get kind of bullish. I have to pull myself back a little bit, because I am eating some crow today on the second half of the year. But the opportunity for AngioVac is very strong. And I am hoping that the additional bandwidth it's going to receive in the second half of this year will pay dividends. But we didn't get to this in our forecast and our belief for this is not a 10% business. But I don't want to give you guidance and an expectation until I can deliver. Let's let those results kind of form our view in the future.

Okay. And then on NanoKnife, did you have any placements this quarter in capital equipment?

Charles, we placed one in the US.

Okay.

And we did six OUS. We thought in the second quarter we were going to place four. And up until the mid of the quarter, we were like those are in those bag. It's just unbelievably frustrating to all of the sudden see $1 million, $800,000, $900,000 of 75% gross margin not get into the number. And that's kind of where we said, you know what? Until this goes, I am done. We're just going to take the capital out. We are going to treat it as upside. We're going to focus on the root cause for that and not let ourselves get ahead of ourselves. The first couple of years we weren't getting ahead of ourselves. Beginning of this year we allowed ourselves to get ahead of ourselves. And I regret it. And we are making the correction now, Charles.

Okay. And last question for Mike here. So Mike, on maintenance CapEx you mentioned it was kind of $6 million to $8 million. You're doing a little bit better than that for FY16. What should we be thinking about for CapEx for FY16?

Charles, I would say if you say $4 million to $6 million, that is a reasonable guess. I wouldn't want you to be too aggressive in our free cash flow, but I think the $4 million to $6 million range is probably [where we're] baked in.

Great. Thanks for your time.

With no further questions in the queue, I would like to turn it back over to management for any additional or closing remarks.

All right, everyone. Thank you so much for being with us on this Thursday evening. It's been a long call. And we appreciate the questions. We know where we are. We have a lot to be bullish on, but also we needed to -- given, we need to do with some of the realities. But we're managing the business. And we're managing our cost. We are managing our cash. We're managing our operational excellence. And we continue in my view, especially with the warning letters being lifted, have a stronger story for the future than we've ever had. But we have to also keep our expectations in line. And I appreciate your time and attention, and I hope to see many of you at JPMorgan and in the near future. So thanks.

That does conclude today's conference. Thank you all for your participation. You may now disconnect.