Cardiovascular Systems Inc (CSII) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the first quarter 2012 Cardiovascular Systems, Inc. Earnings Conference Call. My name is Francine, and I am your coordinator for today. At this time all participants are in listen-only mode. We'll be facilitating a question and answer session towards the end of today's conference.

(Operator Instructions)

I would now like to turn the presentation over to your host for today's conference, Mr. Larry Betterley, Chief Financial Officer. Sir?

Thank you, Francine. Good afternoon and welcome to our fiscal 2012 first quarter conference call. Before we begin I'd like to remind you that during the course of this call we will make forward-looking statements. These forward-looking statements are covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and include statements regarding CSI's future financial and operating results or other statements that are not historical facts.

Please be advised that actual results could differ materially from those stated or implied by our forward-looking statements due to certain risks and uncertainties including those described in our most recent Form 10-K and subsequent quarterly reports on Form 10-Q. CSI disclaims any duty to update or revise our forward-looking statements as a result of new information, future events, developments or otherwise.

We will also refer to non-GAAP measures because we believe they provide useful information for our investors. Today's news release contains a reconciliation table to GAAP results.

I'll now turn the call over to Dave Martin, CSI's President and CEO for comments. Dave?

Thank you, Larry, and hello everyone. As you know, last month we announced our preliminary financial results for the first quarter. After five consecutive quarters of double-digit growth, top line growth slowed.

While we were disappointed with CSI's revenue performance, we believe that the factors combined to impact revenue are temporary in nature. Our confidence in CSI's ability to penetrate the underserved peripheral arterial disease market remains unchanged.

Let me briefly recap the challenges we faced. First, we saw increased demand for the conversion to the Stealth 360 PAD system. The Stealth 360 customer base grew the more than 120% to 240 accounts this quarter and Stealth device sales grew 40% with 44% of our total device unit sales.

Higher demand consumed selling time and accelerated transition of customer inventory between product lines. The simplified and improved Stealth 360 has only five crown configurations versus 13 configurations for the Diamondback. So Stealth reduces the amount of inventory the customer needs to have on hand.

Secondly, some high volume physicians moved their practice from the hospital to the office-based setting. In the long term we expect this to be a growth driver for CSI as it will broaden access to treatment for the 3 million people diagnosed annually with PAD.

But in the short term this transition has reduced our sales as a result of a decline in purchases by hospitals that these physicians are leaving, the amount of time necessary to make these labs operational, low inventory levels maintained by these labs and the additional selling time required.

Office set up and practice transitions for those physicians who are new to the office setting disrupted procedure volumes for the short term in some of these situations. Those office-based physicians who had set up practices in previous years serving diabetics or venous procedures avoided disruption as they added arterial intervention to an ongoing operation. And they continued to be solid CSI customers in the first quarter.

One example is Dr. William Julien who concluded a 100-patient study using the CSI devices. His 100% freedom from perforation and treatment of advanced disease, including calcified arteries, multiple lesions and small vessel limb salvage in the office setting, reinforces the unique safety profile of the CSI orbital atherectomy system.

The effect of these two factors was heightened by organizational changes and seasonality. In May of 2011 Kevin Kenny joined CSI as an Executive Vice President of Sales and Marketing. Kevin's skill and experience including recent management of $1.5 billion in revenue and 1,500 employees at Medtronic is being applied to build a foundation for accelerated peripheral franchise growth and a coronary product launch upon FDA clearance in the future.

During the quarter, CSI added a VP of Marketing, a Medical Education Director, a Director of Science and Publication, a National Sales Training Manager, while exiting three senior sales management positions among other organizational changes and upgrades.

As part of our improved medical education, in October we trained more targeted physicians in the month than in the entire period of June, July, August and half of September. Investment in personnel and process changes are disruptive initially but support our advances in science and technology and position CSI for scale over the coming years.

Finally, typical procedure slowdown occurred this summer and several sources indicate that the decline may have been more pronounced this year. We were encouraged by a number of milestones CSI achieved and we saw progress on multiple fronts.

Highlights for the quarter included year-over-year revenue growth up 3% from last year to $18.7 million, a decline in operating expenses of 3% on a year-over-year basis, improved profitability with year-over-year EBITDA loss down 18% to $1.4 million, accelerated roll out of the new Stealth 360 PAD system, and additional data presented at medical conferences that supports the safety and efficacy of our technology.

Our priorities remain unchanged and we are committed to expanded use of our Stealth system in the PAD market, continued generation of scientific data, entering new markets, introducing new products, and achieving profitability.

Now, Larry will provide more details on our financial results, and then I will come back for some additional comments before we take your questions.

Thank you, Dave. For the first quarter of fiscal 2012 compared to a year ago, revenue grew 3% to $18.7 million. Diamondback and Stealth device revenue was 89% of the total. Nearly 5,300 devices were sold in the quarter bringing the total sold life-to-date to over 70,000.

Other product revenue remained consistent with last year at $2.1 million. We added 41 new accounts compared to 56 last year as we continue to place our priority on driving adoption at key existing customers. As a result, reorder revenue was 94% of total revenue.

Gross margin remained consistent at 77%. Improvements in operating efficiencies, product cost reductions, shipment of fewer controller units and strong ASPs were offset by the ramp up of our Texas production facility in advance of full Stealth device production, and by the high initial unit cost of Stealth due to its limited initial component purchases and production volumes.

Operating expenses declined 3% to $17.4 million. Investments made during 2011 to expand the sales force and customer education programs were offset by operating efficiencies, cost reductions and reduced R&D project spending, particularly related to the Stealth product development. Also CSI's prior year SG&A expenses included $500,000 in net expenses from the legal settlement with eV3.

The increase in interest and other expense to $759,000 was primarily due to $386,000 of expense from conversion and valuation changes of our convertible debt during the first quarter. The resulting net loss was $3.9 million or $0.22 per share, improving 10% from $4.3 million or $0.28 per share last year and included the $386,000 or $0.02 per share of convertible debt expenses.

The number of weighted average shares outstanding rose to 17.5 million from 15.4 million last year with the issuance of stock from our employee stock plans, exercises of stock options and warrants and the conversion of 5.5 million of convertible debt into 678,000 shares of common stock since last September.

Adjusted EBITDA calculated as loss from operations less depreciation and amortization and stock-based compensation expense improved by $318,000 last year to $1.4 million.

We finished the quarter with nearly $23 million of cash and continue to manage our business to live within our available cash and debt capacity. As we've said before, we may raise additional capital in the future to fund acceleration of our current growth initiatives or additional growth opportunities if we believe it will significantly enhance CSI's value. We have a universal shelf registration statement in place for this purpose if needed.

I will now turn it back to Dave for additional comments. Dave?

Thanks, Larry. As we have outlined in the past Stealth 360 combines our proven orbital mechanism of action in an electric-powered device with an improved shaft design. This shortens system setup times and enhances operational performance.

The simplified Stealth 360 design eliminates a separate console, moves controls to the handle and into the hands of the physicians during procedures. As a result, physicians now have complete control of the device operation. Our device is well-positioned as a front line therapy for both complex and routine cases. Further, eliminating the capital equipment portion of the current product reduces CSI's production cost.

We believe all these innovations will encourage more physicians to adopt our technology to treat lesions throughout the leg, including the most difficult lesions below the knee.

The Stealth 360 gives physicians the ability to remove plaque in peripheral arteries faster and more efficiently than ever before and provide successful treatment for more patients. Initial feedback from the physicians has been impressive. We expect this product to drive substantial revenue growth in 2012 and beyond.

Earlier this month CSI presented at the 2011 Vascular Interventional Advances conference or VIVA. There we announced 12-month results for the Predator 360 clinical study for treating PAD. Data was presented from a single center clinical study titled "Use of Orbital Treatment in High Volume Clinical Practice Modifies Non-compliant Plaque to Deliver Durable Long Term Results."

Principal Investigator Prakash Makam from Cardiovascular Research of Northwest Indiana reported showing nearly 90% freedom from re-intervention at 12 months. He also reported short treatment times, low pressure balloon inflations post-orbital atherectomy treatment and the elimination of bailout stenting.

In (inaudible) balloon angioplasty typically requires much higher balloon inflation pressures in fibrotic and calcified plaques. And subsequent dissection rates range from 40% to 74%, with bailout stenting rates as high as 40%.

We're also presenting results from six studies next week at the Transcatheter Cardiovascular Therapeutics conference or TCT. Presentations include the six-month data from our COMPLIANCE 360 study of severely calcified above the knee lesions, and several poster sessions including six-month date on our CALCIUM 360 study, confirmed to data, and six-month and two-year data on our ORBIT I coronary trial. We will summarize our findings in a news release after our presentations.

From CSI's inception we've invested in our product technology and clinical studies for the long term. Small calcified vessels, long lesions, multiple lesions, represent and understudied and challenging treatment dilemma, and CSI is the only atherectomy company providing physicians with the clinical and scientific data needed to treat them.

Our outcomes data provides powerful irrefutable evidence about the safety, efficacy and cost effectiveness of our orbital technology in lesions throughout the leg as we sell to hospitals, office-based labs and new physicians.

Our 12 clinical studies have more than 3,800 patients and 5,600 lesions are demonstrating several distinguishing features about our orbital PAD systems. First, our systems have a high safety profile and for the first time give patients and physicians the ability to address PAD throughout the entire leg.

Next, we have irrefutable evidence of acute and long term success in treating PAD. And last, patients with more severe conditions can be treated with our PAD systems, including calcified lesions, multiple lesions, long lesions, lesions in small vessels and patients with diabetes or renal failure.

Now, turning to coronary, in May of this year CSI received FDA approval to continue enrollment of 429 patients in the ORBIT II investigational device exemption or IDE clinical trial. We secured approval following the FDA's review of the first 50 cases.

Enrollment in ORBIT II is proceeding and is currently over 150 patients at nearly 20 sites. We are adding more centers this quarter and anticipate that as many as 50 US medical centers may be participating in this study by the end of this calendar year.

Many patients with small calcified coronary arteries have been excluded from other clinical studies because they are limited in treatment options for their condition. The coronary application gives patients a new minimally invasive treatment option as well as providing CSI with a large growth opportunity.

We have demonstrated that our orbital mechanism of action is effective in treating small, calcified vessels in PAD cases and our ORBIT I coronary feasibility trial of 50 patients met both its safety and efficacy endpoints.

ORBIT II endpoints are favorable to the results achieved in ORBIT I. As a result, we are confident that we will be able to successfully complete this trial and are targeting to have this study fully enrolled by the end of fiscal 2012.

Now, I'd like to share our outlook for the fiscal 2012. In general, we expect increasing revenue growth rates in future quarters. As temporary impact from the factors that affected this quarter subside, we will not be able to make up for the slow start to the year but do expect to return to double-digit growth of the full year with about 10% growth over fiscal 2011.

With the introduction of the Stealth 360 and the FDA approval to proceed with our ORBIT II coronary trial, CSI is at an appropriate stage to invest further to capitalize on our growth opportunities. Therefore, we still plan to increase operating expenses in the fiscal year 2012 though it will be at a slower rate than originally anticipated as a result of our lower revenue projections.

The higher operating expenses are expected to result in a net loss in second quarter of fiscal 2012 similar to the first quarter of this year. However, we plan to resume progress towards profitability in the second half of fiscal 2012 and achieve our goal of profitability in the fourth quarter, excluding the effect of conversions and valuation changes of convertible debt.

Specifically for the second quarter of fiscal 2012 ending December 31, 2011, we anticipate revenue to be in the range of $19.5 million to $20.5 million or growth at 4% to 9% over the second quarter of fiscal 2011.

CSI's gross profit as a percentage of revenue should be similar to the first quarter of fiscal 2012 as the higher initial Stealth 360 unit cost and ramp up of our second manufacturing facility in Texas will continue to offset other efficiencies.

We expect [operating] expenses to be about 8% to 9% higher than the first quarter of fiscal 2012 as we expand the ORBIT II trial and make additional investments in physician and sales education and commercial infrastructure for our next phase of growth. We anticipate interest and other expense to be about negative $300,000, excluding the effect of conversions or valuation changes of convertible debt.

The resulting net loss is expected to be in the range of negative $3.3 million to negative $3.9 million or loss per common share ranging from negative $0.19 to $0.22 assuming 17.8 million average shares outstanding. Again, this excludes the potential effect of conversions or valuation changes of convertible debt. The adjusted EBITDA loss is expected to be between negative $1.5 million and negative $2.1 million.

On a final note, we remain firmly committed to our key priorities. Those are to expand the use of our Stealth system in the PAD market, continue to generate scientific data, enter new markets, introduce new products, and achieve profitability. Executing on these initiatives positions us well for significant profitable growth and shareholder value over the long term.

Thank you for listening, and now we'd like to open up the call to questions.

(Operator Instructions). Our first question comes from the line of Jose Haresco from JMP Securities.

Hey, guys, good afternoon.

Hey, Jose.

A question for you on, I guess first on your commentary about the double-digit growth. I just want to clarify that. You said 10% revenue growth in the second half of the fiscal year or for the entire fiscal year? I just want to make sure I heard that right.

We said for the entire fiscal year.

For the entire, so you're assuming a big pickup then in the second half. I guess it comes down to can you give a sense of where that's coming from kind of given the dynamics of the market that we've seen in the first half? Are you assuming stable pricing, price erosion, are you -- I guess how do we get those customers back that have seemed to kind of -- so I guess looking for financing as they look to set up their labs?

Yes, well, two things. We've got a limited launch in progress with the Stealth. It accelerated last quarter. We've moved through our largest accounts in a great way. They're screaming for the new product and fighting us about the old product, but we've been able to transition through a number of those accounts, 240 already at this stage.

So we'll continue to move through our largest accounts and most opportune accounts throughout the first half of this fiscal year. That's one indicator for second half growth because we will have moved through that Stealth 360 transition and more, and especially our largest institutions, will have the new easy to use Stealth.

Additionally for those physicians who are going out into the office-based setting, there was bucket one and bucket two. Bucket one are those office-based physicians, those that we engaged with in the first couple of quarters of this calendar year, they were great and they continue to be great. They had ongoing operations. They did not have the stress and pressure of setting up an office.

And bucket two who we kind of encountered this quarter, we've responded nicely with consignment and credit terms for that bucket two of physicians who are in the startup, the disruptive startup mode for getting their offices started. So we think we've got a great response and a great offering for those physician operators as well. Those are two of the indicators for second half growth.

Are you assuming pricing remains stable at this point or are you assuming that the competitors will still try to push their market down?

Yes. We've had pricing stability. We've got a new product which gives us a chance to introduce our science and our easy to use product at the same time. And at the moment it's given us some stable pricing and we expect that to continue to be in the range of stable.

Okay. On the hiring plan, could you give us a sense of where we are? I mean obviously we went through a transition period in the last quarter. Are we done now or do you expect to see some more changes in the next quarter or two?

No. We're done. Kevin's done a great job. He's really reformulated management, programs, process. He's professionalizing this commercial organization. And it's a nice add. We've got key company assets in our Stealth technology, in our scientific build, in our coronary franchise that's on the up and come. Quality and regulatory has always been an earmark of this organization.

And we have really controlled expenses on the back of our commercial team, but now in light of some of the other strengths including technology and science it is time to position our commercial organization for scale. So the investment in Kevin and in the new management, in the new processes, in the new medical education, it is going to show in the forward quarters and another indicator for second half fiscal growth.

Okay, and then last question and I'll hop back into queue, obviously, I guess when do you expect to see the benefits of the lower gross margins, or I'm sorry, the better gross margins on the new Stealth relative to the prior expectations because at some point -- at what point do you expect the manufacturing overhang to be gone?

Yes. We'll (inaudible - multiple speakers).

And how should we think about -- no, go ahead.

The gross margins should -- well, we'll still see some pressure in Q2 due to the buildup in Texas. And we purchased the initial Stealth components at smaller volumes so we have higher component costs for that. We should be getting through that now in the second quarter and should see improvement in the second half and to get back to fiscal year '11 levels by the fourth quarter of this year.

Okay, great. Thank you very much.

And our next question comes from the line of Ernie Andberg from Feltl and Company.

Good afternoon, Dave and Larry.

Hi, Ernie.

Hey, Dave, could you talk a little bit about the Stealth accounts? If I just do a simple division of 240 into the 44% of the units, the utilization obviously in those accounts is much higher. But you brought on accounts over the course of the quarter. What are you seeing in utilization on those accounts?

Yes, Stealth utilization is dramatically different than Diamondback, and that's the great news. And that is expected even better than expected given the ease of use and the continued scientific build.

We're also managing operating plant expense carefully so we don't have a return program. We don't go in and sweep out the old and credit the account. We're asking them to work those down. The right thing to do for the long term is to simplify our portfolio.

Advances in the crown and the shaft and the technology allow us to offer five simple devices that lets the physician treat the entire leg. It is different from the more than a dozen that were offered with the Diamondback. So we're working with our customers thoughtfully on utilizing that inventory alongside and in advance of bringing the Stealth in.

But back to your original question, the Stealth is great. It's got dramatically different double-digit utilization rates, and we're excited about that.

So it's simple math doesn't really tell me what the 240 accounts might be doing because you're also probably doing some Diamondback 360 procedures at the same time as you try to work that inventory down in the accounts?

Yes, we are. That's exactly right.

Okay. Could you give us a little idea of the relative magnitude of the headwinds you faced in the first quarter that the disruptions of practices, the training and lower inventory levels in the Stealth accounts, and the possibly lower overall volumes out in the field? You've described them in some order. Are they rank order, Dave?

Well, one example I think what you're looking for is just like a specific example of how that might [convert]?

Well, I'm trying to figure out what was the -- was the disruption in accounts going from hospital to in-office the greatest influence or was it the Stealth 360 switchover?

It was the Stealth 360 switchover primarily. We went after the biggest accounts, obviously, our volume operators which posed the biggest transitional time. We also had some of our top 10 operators leave the bureaucracy of the hospital and go to the office-based environment, so they were both significant.

Okay.

And in the long term it's great. We'd love to see nothing more than 1,500 office-based opportunities for patients to go get treatment match the 1,500 to 2,000 hospitals in the US. But both last quarters were -- took some time and some execution to move through.

The good news is that we've really one, we've modified our approach to the office-based setting, particularly for those physicians who have an empty cabinet of devices that are just setting up their offices.

Yes.

We've got a nice offering for them now. And then for Stealth working with our customers to work down the old inventory as opposed to taking a credit and introducing our new technology. We're even better at that now. And we've worked through and behind us are some of the largest institutions that we work with.

Okay. Last question just on the dynamics of the business, on your pre-announcement conference call, Dave, you suggested that you saw lower revenues in the first two months of the quarter and I think you used a figure like a 14% bounce in the last month of the quarter, September. And you're forecasting right now a 4% to 9% increase in revenue in the first quarter. Does that mean that we're starting with this quarter slower or is there some conservatism in your estimates?

Well, certainly a little conservatism, but October was better than July and better than October of last year, so we think we're on the mark for our guidance.

Okay, fair enough. Larry, one question for you, in the balance sheet the only thing that looks a little bit out of whack is the inventory line. Could you talk about that?

Yes, sure. The inventory ended up being higher for a couple of reasons. One is we have two device product lines in place now with the Stealth and Diamondback so we are juggling inventories there. Then also with sales being lower for the quarter we had higher finished goods at the end of the quarter.

Okay. Is there any influence from the stocking you're doing for in-office consignment?

No, nothing significant in the first quarter.

Thank you. Thanks, thank you very much.

(Operator Instructions). Our next question comes from the line of Larry Neibor from Robert W. Baird.

Thanks. Good afternoon everybody.

Hey, Larry.

So I think you said you plan on completing enrollment in ORBIT II by the end of the fiscal year. What will then be the follow-up period on those patients and your potential timeline for filing?

Well, it's the last patient plus 30 days. We also expect to apply [Daisy] and statistical analysis to the study cohort and that may give us a break. Of course we've got to allow 12 months for the FDA to work that process and we are hopeful for revenue on the coronary franchise in fiscal 2013.

This will be a PMA filing?

It will be. And it's the last patient plus 30 days, which is one huge difference from a number of the coronary PMAs that we're all used to seeing.

Right. Do you feel that you lost share in the marketplace during the quarter?

I think in the office-based setting I think there was less below the knee procedures done for a couple of reasons. One is when you're starting out in the office-based setting a number of even our experienced physicians were just worried about setup and filling up their closet. Some of the big companies have fantastic bundling opportunities and you've got to do first things first.

And so that didn't include getting the Mercedes of below the knee products which would be our device, but that will come. And Dr. Julien proved, as well as a number of other physicians proved, that our safe device and clinical track record is great for the office-based setting.

But I would say that we did lose a little bit of share in the very beginning, and we also lost a number of below the knee opportunities. They just weren't done, and I think they might have been done if that same patient was in a hospital.

Okay. I think you mentioned that some of your highest volume clients were not really in business in the quarter because they were in transition. What would you expect --

I did --

-- to happen with those clients in the December and March quarters when they have completed the transition to their office-based practice?

I think in this quarter some of those that made the leap and they're doing procedures now will ramp up over time back to their original volumes, ideally a little bit more.

How many sales reps did you finish the quarter with?

We finished with just over 100, over 110, and that's the footprint we expect to keep for the year, fiscal year.

Okay. And on the share count, I should probably be able to calculate this myself, but it seemed to be going up very rapidly. What would you anticipate the share count to be for the fiscal year?

I'd say it would increase per quarter for the rest of the year about 100,000 to 200,000 -- about 100,000 to 150,000 per quarter.

Okay. And you're not experiencing any sales reversals? You did not experience that during the quarter, correct?

That's correct.

And is there a potential for that in the next quarter?

Sales reversals, you mean like credits to revenue?

Right.

No, we're not anticipating credits to revenue, and as Dave said, we're not doing any broad return policies.

Great. Thank you very much.

Thanks, Larry.

And there are no further questions in the queue. I'd like to turn the call over to Chief Executive Officer Dave Martin.

Thank you. CSI has an exciting new product in the Stealth 360 that enhances ease of use and performance for treating PAD. We continue to add our excellent clinical data results which is what physicians need to make sound decisions for their patients. And we continue to make progress expanding our technology to a coronary application.

With these initiatives we are excited about our future potential. Thanks again for joining us today.

Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect and have a good evening.