Cardiovascular Systems Inc (CSII) 2016 Q3 法說會逐字稿

Good afternoon, my name is Andrew, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Cardiovascular Systems Inc. Fiscal 2016 Third Quarter Earnings Conference Call. (Operator Instructions)

I will now turn the call over to Jack Nielsen, Senior Director of Corporate Communication and Investor Relations. Please go ahead, sir.

Thank you, Andrew. Good afternoon and welcome to our Fiscal 2016 Third Quarter Conference Call. With me on today's call are Scott Ward, CSI Chairman and Interim CEO, and Larry Betterley, Chief Financial Officer.

During 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. 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 Scott Ward.

Thank you, Jack. Good afternoon, everyone. It's a pleasure to be with you on today's all, and I'm excited to update you on many of the initiatives I outlined on our quarterly conference call in January.

First, let me begin with a summary of our stronger-than-expected third quarter results. Revenues of $44.5 million were $2.5 million above the high end of our initial guidance range and represented a 7% consecutive increase from our second quarter results. Improved stability in our territories combined with continued focus and increased success but targeting high-volume accounts translated into improved sales productivity.

Our net loss was $22.7 million including $12.4 million of one-time costs. Excluding these one-time costs, the loss improved $4.5 million from second quarter and was better than our third quarter guidance. This smaller operating loss is evidence of our efforts to align our cost structure with our revenue expectations and is indicative of the disciplined management practices we have implemented to attain positive cash flow and profitability.

We continue to make meaningful progress on the key initiatives that we described last quarter, most notably stabilizing our salesforce and regaining sales momentum, creating a pathway to positive cash flow and profitability, and addressing business uncertainties that may potentially influence our business.

Later I'll provide a detailed review of each of these points, but first Larry will provide his financial commentary. Larry?

Thanks, Scott. Good afternoon, everyone. We regained a consecutive Quarter 11 growth in Q3, with total revenues increasing 7% over Q2 of this year to $44.5 million. Revenues declined about 1% from prior year excluding Asahi Guide Wire sales in the comparable period last year of $1.9 million. About 13,000 devices were sold representing 92% of our earnings.

Coronary revenue totaled $10.5 million, a substantial increase of 23% over second quarter and a 31% increase over prior year. Peripheral revenue also resumed consecutive quarter growth with a 3% increase over second quarter led by growth below the knee. Peripheral product mix was approximately 60% below the knee compared to 57% in the second quarter.

Combined ASPs were similar to last year and increased 2% from Q2. Reorder revenues remained high at 97% of total revenue. We added 44 new peripheral accounts and 53 coronary accounts. Gross profit margin is very strong at 80.4% versus 77.8% last year. The improvement was driven primarily by unit cost reductions.

Operating expenses excluding one-time costs declined 2% from last year and 5% in the

second quarter. Reductions were driven by our cost realignment actions including a reduction in force of about 8% on March 31st.

One-time costs of $12.4 million included an agreement in principle settlement with the Department of Justice of $8 million, $2.4 million of restructuring charges related to our workforce reduction, and $2 million of CEO retirement benefits.

Net loss was $22.7 million, or $0.69 per share compared to a loss of $10.7 million, or $0.34 per share last year. Excluding the one-time cost of $12.4 million or $0.38 per share, the third quarter loss was over $3 million favorable to the guidance range as a result of lower operating expenses and higher revenues than anticipated.

Adjusted EBITDA excluding the one-time costs improved $4.7 million from second quarter to a loss of $6.4 million, which was similar to last year's loss of $6.1 million.

At quarter-end our cash balance was $62 million. Cash usage in the third quarter was about $3 million, which is down significantly from the $11 million in the second quarter. The lower usage was driven by a lower loss before the one-time costs that were accrued at year-end, a lower receivable balance as a result of more consistent daily sales throughout the quarter, and stable inventory levels.

Our priority is to live within our current cash levels to reach positive cash flow and profitability. We believe our cash balance of $62 million is sufficient to achieve that. However, we also continue to evaluate additional non-equity financing options to potentially provide a cushion as warranted.

I'll now discuss our financial outlook. For the fourth quarter of fiscal 2016, we anticipate revenues in the range of $45 million to $46.5 million including approximately $11 million of coronary product revenue. We expect gross profit as a percentage of revenues to be about 80%.

Operating expenses are projected to be 7% lower than the third quarter of this year excluding the one-time costs. This reduction reflects the impact of our cost realignment efforts to date including our reduction in force at the end of the third quarter.

Net loss is expected to be in the range of $5.9 million to $6.9 million. This equates to our loss per share of $0.18 to $0.21 based on $32.7 million average shares outstanding.

I'll now turn the call back to Scott for additional commentary.

Thank you, Larry. I'd now like to take a few minutes and provide an update on many of our key initiatives starting with our salesforce. In January, I emphasized the near-term importance of stabilizing our salesforce and regaining sales momentum. As you recall, we made many changes that were disruptive to our salesforce and reduced our customer focus including the rapid expansion of our sales channel, changes to sales territories and extensive sales training.

We implemented these changes and endured the turbulence to create a larger and stronger sales channel with the capacity and the core competency required to realize the full potential of orbital atherectomy.

Since October 1st, our focus has been to stabilize the salesforce and allow them more time to support cases, educate their customers, and properly develop accounts. Exceptional customer focus is a hallmark of our strategy to celebrate market penetration and improve the quality of care for patients with calcified artery disease.

With more time and territory, and the increasing tenure of our sales professionals, we are now delivering improved continuity in our daily sales cadence, and we have resumed consecutive quarterly revenue growth. This is encouraging evidence that our business is regaining momentum.

Our field sales organization remains at about 240 professionals including sales representatives, sales associates, and clinical specialists. As we discussed last quarter, we have implemented a more flexible approach that better aligns the staffing and the territory with its stage of opportunity. This approach is resulting in both increased productivity of our sales representatives and lower costs.

Overall, third quarter productivity increased about 12% over second quarter. More importantly, our veteran dual franchise representatives achieved an average of over $250,000 in sales, which is near our near-term quarterly target for all sales representatives.

We are encouraged by the performance of this veteran group. Achieving this level of productivity is a strong leading indicator that our dual franchise sales strategy is gaining traction. In addition to regaining our sales momentum, an important part of our business plan is to put CSI on a clear course to achieve positive cash flow and profitability.

We began this effort by implementing a more flexible sales strategy, prioritizing our activities, focusing our organization on a smaller number of high impact initiatives and lowering our cost structure.

On March 31st, we completed another step in this process by reducing our workforce by 8%. The result of these cost reduction efforts is an expected 11% decrease in quarterly operating expenses in the fourth quarter compared to the second quarter this year for annualized savings of over $20 million.

In addition to stabilizing the salesforce and right-sizing our cost structure we also made progress in Q3 on a few open items. In March we announced an agreement in principle with the Department of Justice to settle all charges against the Company. As we noted earlier, we reserved $8 million for this agreed-upon amount. We are still completing the details of this settlement agreement, and we'll continue to update you as warranted. We will certainly let you know when the case has been fully resolved.

Regarding the CEO search, the Board of Directors is conducting a search for my successor and recently retained Spencer Stuart to assist with this effort.

During my five months in this interim role, I've been impressed by the strength of our management team and encouraged by the incredible dedication and commitment of our CSI employees. Together we have positioned the Company for revenue growth and future profitability. We look forward to selecting a new CEO who will continue these initiatives and lead CSI to even greater success.

Naturally, I will remain as CEO until a successor is named, and I will continue to influence the direction of the Company in the future as the Chairman of the Board.

In closing, we are pleased with the progress we have made on the key initiatives we described last quarter. We believe the actions taken provide us with sales momentum and confidence going into the fourth quarter and fiscal 2017.

Furthermore, our cost realignment actions position us to leverage revenue growth for a clear pathway to positive cash flow and profitability in the future. Despite the sales disruptions we have experienced, one thing that has never faltered is the unique utility and performance of the Diamondback 360 in treating calcified artery disease.

Our orbital technology, which is backed by a large and growing body of medical evidence has been used in over 250,000 cases to date. Our biggest competitor is under-treatment of this very challenging patient population. We are confident that our large, highly skilled sales organization will be successful in educating physicians on the numerous benefits of treating calcified lesions with the Diamondback 360, reaching many more patients and driving attractive growth for many more years to come.

We look forward to updating you on our progress when we record our fourth quarter results in August.

Before we turn the call over for your questions, I do have some sad news to share with you. Our past CEO, David Martin, passed away on May 1st at the age of 51 due to cancer. Dave guided our Company on an extraordinary journey developing orbital atherectomy from an early stage innovation to a market-leading product that has saved lives and improved the quality of life for thousands of patients living with peripheral and coronary artery disease.

We will remember Dave for his boundless enthusiasm, extraordinary sense of humor, and his passionate commitment to our technology and the patients we serve. We know that the Martin family is grateful for the love and support they have received, and we certainly ask that you keep them in your thoughts and prayers (inaudible) with Dave today.

Larry and I will now take your questions. So, Andrew, if you would please repeat the instructions for the Q&A. Thank you.

(Operator Instructions) Ben Andrew, William Blair.

Congratulations on a strong quarter, guys, and my condolences about Dave. That's terrible news.

I guess my question, first, Scott, is as you have made some changes in the organization, maybe talk a little bit about the specific changes. And I saw the R&D line came down relatively materially sequentially. I'm just curious, what specific projects or initiatives maybe that represents? And then, similarly, in terms of the changes in the field organization above and beyond people, what other kind of cost and investment changes you made?

Let me start with the field sales organization, Ben, and thanks for those questions, appreciate your attention to detail on that.

As we look at the sales organization, actually, we made minor reductions, overall, in the total number of headcount. But we actually have really been committed to this more flexible approach allowing our local sales management teams to really optimize the deployment of their resources to really maximize local growth.

What that has meant is that we have had a bit of a change in the mix of our sales organization where the number of our quota-carrying reps has come down a bit, but the number of our sales associates and our clinical specialists has increased.

And, of course, what that does is it's given us just much stronger local flexibility to occasionally place a clinical specialist where we have high-volume accounts or where we have a really a high-volume territory. And we also have increased our talent pool by increasing the number of sales associates that we have in our organization.

So, really, in sales I would say we're optimizing our approach there. As we look at R&D, Larry, do you want to comment on R&D as we look back, and then I'll make a few comments as we look ahead.

Sure, yes, Scott, thanks. Ben, the reduction in R&D is really more in the clinical side, and we had a lot of enrollment going into LIBERTY 360 and a lot of work going on with that. And the enrollment phase of that has wound down now, and we're scrubbing the data and getting ready for presentations. That's primarily it, is reduction in the clinical study activity. We expect that to ramp up a little bit again, going forward.

I guess that's what I would comment on there, Ben, is just a follow-on. As we look to the future, we do not really intend to make major reductions in R&D. We will continue to invest in improving and innovating our product line, and continuing to expand the medical evidence that will support the utilization of our product in coronary and peripheral applications. So our R&D will continue to be a very important part of our Company, going forward.

Okay, and then the last question for me, the fourth quarter guidance implies a nice sequential uptick. I mean, part of that seasonality, if you will. How should we think about, kind of, a durable rate as we look towards fiscal 2017? Should we think of you all as a market grower in peripheral or below the market? And then on coronary, obviously, that's, sort of, an entity to itself, and so perhaps that would grow well above that rate.

Our objective has been, as I described in January, our goal really was to stabilize the sales organization and to achieve consecutive growth quarter over quarter. I think as we look now in Q4, as we've mentioned, we do see continued sequential growth. I think we will see that as we head into the next fiscal year, and I would expect that both in peripheral and in coronary, we'll begin to see year-over-year growth and continued [sequential growth].

Danielle Antalffy, Leerink.

Hi, good afternoon, guys. Thanks so much for taking the questions. I second Ben's thoughts, congrats on a great quarter but so, so sorry to hear about Dave. So thinking about his family and the entire CSI family today. It almost makes this call seem like so -- no offense, but, like, not important, right, put things into perspective.

So -- but really great quarter. I guess one of the questions I had. You mentioned salesforce productivity grew 12%, but if I read the press release correctly, the top line only grew 7%. Can you walk us through the disconnect there and how much further -- you're already at, I think you mentioned, your near-term target. So what's the rate number for salesforce productivity and how many quarters until we get there from a peak productivity perspective?

So, Danielle, let me just -- thanks for your comments, by the way, and I think it does put today and perhaps everything we do in a little different perspective.

But let me address your questions. So here what I had described earlier was really the performance of our veteran sales reps. So veteran sales representatives would be those that were with us after Q4 of 2015. And those sales representatives now are performing at or above that benchmark level of $250,000 per quarter.

In my experience and perhaps in yours, as well, as we look at medical technology, that level of $1 million per rep per year is a good benchmark that indicates a healthy and productive sales organization.

So as we look at those veteran reps, and by that I mean these are the reps that have been with us a for a while, they're trained, they're educated, they know how to educate customers and how to work effectively in their territories. We are seeing that organization perform very well.

Now, as we look at the rest of the organization, that group, now, has completed training, the territories are established, that organization is stable, and we have every reason to believe that their performance will continue to improve as they have more time and territory and they get more time just to focus on their customers and to build sales in their current accounts.

So that's really -- I don't know that that's necessarily a disconnect, but I was referring to veteran reps, and I think that gives you some indication that as we look to the future, where we really anticipate our growth to come from, I think our veteran reps will continue to improve in their performance but, really, the whole organization now, I think, we'll see continue to move towards that health care level of about $250,000 a quarter.

Do you want to add anything, Larry?

(multiple speakers)

I think that one of the disconnects you mentioned, Danielle, is the $20,000 seemed to be a little higher than the revenue growth rate, and I think part of that is, as Scott mentioned earlier, is we have a more flexible approach to territory management now.

So the mix of our professional force is going to change quarter-to-quarter, most likely, with the number of [core artery reps], specialists and associate sales folks. So that can impact the ratio a little bit as well.

Understood, okay, that's helpful. And then I'm just wondering if you could comment on the market this quarter because another major player, Boston Scientific, had very positive comments, actually, on growth in their atherectomy business. So I'm wondering if we saw a pickup in the atherectomy market this quarter and, if so, what's driving that? And how sustainable is that or what are you guys seeing, maybe, is just the best way to answer that question. And I'd be curious about the breakout. Sorry if you already gave that above and below the knee, too. Thanks so much.

Sure, okay, thanks. It's a little bit hard to comment on the market and the market growth because, obviously, Boston does not report that level of detail. And the other thing, of course, is, as you know, we deal with this need to somewhat unpack the atherectomy market. They focus on the soft plaque segment of the market while we focus more on -- well, completely on calcified artery disease. So we're much more about calcified lesion. That really is our unique competitive advantage and it is where we focus.

I think in the coronary segment of the market, we have seen, certainly, continued increased utilization of orbital atherectomy there. I think we are seeing increased market penetration for the treatment of these more severely and heavily calcified lesions. In the below-the-knee segment, we also saw continued market growth there.

I think above the knee we continue to see a fair amount of trialing by physicians who are using drug-coated balloons. That trialing is -- we kind of expect that to continue for probably 12 to 18 months. Most of the physicians that I've spoken with over the course of the past quarter say that sometime over the course of the coming year, they anticipate that drug-coated balloons and the use of drug-coated balloons in combination with atherectomy will begin to, kind of, return to a standard of care or a more standard medical practice.

But for right now physicians are still trialing that, kind of, in that middle range. So by that I mean where we're still getting the cases when we have severely or heavily calcified lesions or calcified smaller vessel. There is a -- we don't get the cases where there is soft plaque or where our device just would not be indicated to use, obviously,

It's that middle area where you perhaps have eccentric calcium but not sufficient to say, boy, you know what? For sure this is severely calcified, and I'm going to use it. And I think it's in those circumstances right now where we're seeing the physicians trialing drug-coated balloons to see if, in fact, that's going to be sufficient to achieve a good outcome.

We don't think it will be because we don't believe [Aquataxil] has a very liquid fill of compound. It's going to effectively penetrate into heavily calcified lesions. So we do think, over time, we will see a return to more standard medical practice, and we'll see physicians return to adopting orbital atherectomy in the treatment of these calcified lesions.

So, Larry -- ?

So, Danielle, the mix below the knee increased nicely in the third quarter to 60% of our peripheral business, and that's up from 57% in Q2. So we had a nice progression [building in the core].

Jan Wald, Benchmark.

Good afternoon, everyone, and my condolences as well.

I guess I have two questions, more of a follow-up than anything else, but in terms of the salesforce and the flexibility that you're talking about, one thing that I kind of heard is that some of the flexibility you've given the field management team -- or the sales management team -- is to say to somebody, if you're a peripheral salesman, sell the peripheral stuff, and you're letting that, sort of, guide what's happening. So sales are more important rather than trying to somehow get to some kind of ratio between coronary and peripheral. Is that the kind of flexibility you're giving the salesforce?

Well, I think, let me be just a little bit more specific. What we're actually doing is really following our customers. So where we have customers who have adopted, let's say in the case of peripheral, who have adopted orbital atherectomy and have a practice where they are treating a high volume of peripheral artery disease, we may focus in on that particular physician or account with, let's say, a dedicated peripheral rep. In that case, that particular rep, obviously, is not going to have a coronary number, and he's going to focus on delivering their performance solely with peripheral.

There's other circumstances where we may leverage a deep core competence that we may have in coronary or peripheral along with a clinical specialist, and we might create more of a team approach where we have strong core competency in coronary and peripheral in different people. And those individuals will move around the territory covering those cases and those accounts, and then where we have high-volume accounts, we supplement that with a clinical specialist.

What we have learned, over time, is that this is certainly not a one-size-fits-all situation. And where we will benefit the most is by driving decision-making deep in our organization and allowing our sales management team to take the actions that are necessary to really optimize sales.

I think your final comment is right, though, and that is if we can maximize sales in peripheral by doing that, that's what we'll do. We agreed are going to, obviously, support our customers and drive growth in each segment, once again, as determined by the customer's interest and the customer's focus.

Okay, thank you for that. And I guess my last question is -- and I think Larry may have answered this in a way, but I always consider it to be an ambitious and kind of cool clinical program going at CSII and I'm wondering -- that's going to continue. That's not part of the reduction. Are there some things that we should expect not to happen, that we kind of had expected to happen -- clinical trials?

I'll (technical difficulty) that question. And that's why I clarified that point. We will continue to invest in the generation of medical evidence. And I like your characterization, that is a cool clinical program, and we definitely plan to keep that going.

Ben Haynor, Feltl & Company.

Hey, guys, sorry to hear of Dave's passing. That's sad news.

Just a couple of quick ones from me. On the improved sales productivity, it looks like you had a nice step up from last quarter. Can you talk, maybe, a little bit about how that tracked throughout the quarter you just reported and have that continued into the current quarter, I would assume, but the guidance, that it does?

Yes, this is the scenario that I am most pleased about. As we talked about in our last call, a very important effort that we watch closely is really driving the variance out of our average daily sales. And seeing a good, healthy cadence in our -- the performance of our sales representatives day in and day out.

And I have been really pleased to see, really, over the course of the past four or five months now, we have seen that variability in average daily sales really get squeezed out. And we now are seeing this very good continuity and very strong average daily sales.

So -- I think it is that consistency that really has contributed to our sense of confidence and I think, also, our level of confidence in our ability to predict that future performance.

Okay, great, very helpful. And then, secondly, for me, I just wanted a point of clarification on the guidance on the operating expenses. I assume when you're talking about excluding one-time costs, those were in the just-reported quarter and not in Q4?

No, that's correct. It's excluding the one-time costs in Q3, and that's the basis for the 7% reduction.

Bob Hopkins, Bank of America.

Hey, good afternoon, can you hear me okay?

Hi, Bob.

Great, hey, guys. Boy, I can't tell you, I'm just absolutely devastated by this news. I had no idea. I'm just beside myself. I feel so badly for everybody at your Company and the entire family. What a great guy, what a great innovator, what a great important medical device entrepreneur and individual. It's just terrible news, I'm sorry to hear it.

So, anyway, I just -- I wanted to ask just one question, because the thing that really stuck out to me was the terrific growth you saw on the coronary side. And I'm wondering if you could just describe a little bit what happened there. Scott, obviously, you have a lot of great connections in that world. I'm sure you have a strong view on what caused the uptick here.

So as a place to start, just maybe a little more detail on what drove the really nice growth on the coronary side this quarter?

Thanks, Bob, and thanks for your comments about Dave. That certainly resonates with all of us.

Coronary is, as you know, treating these really complex coronary lesions, operating and partnering with physicians in a coronary cath lab is an entirely different game. It's easy, it's not easy, it's difficult, it's a hard challenge. Oftentimes these patients are very challenging. The cases are difficult.

I think what you're seeing in our increased growth in coronary is, really, the net result of the fact that our reps now are better trained, they're spending more time in the cath lab. We have reduced the amount of disruption we've been throwing at them, and they just have time to be present and to support their customers.

The real advantage that we have with orbital atherectomy is that we can both open an inclusion and prepare a vessel, and we can do it fast and easy. So the Diamondback is really quick to set up, it's easy to use, it's quick in and quick out. And when physicians come to realize that, they really start to get comfortable with the idea that the use of orbital atherectomy actually makes them better and faster at treating a really complex case.

So -- as our sales reps just get more time in these cath labs and have the opportunity to develop these deeper partnerships, we're picking up just a lot more of these cases. I'm sure that you're aware of the fact that the treatment of these complex coronary lesions is increasing, I think, because of surgical turndowns and for other environmental reasons, we're seeing just a lot more of these really complex and heavily calcified lesions showing up in cath labs.

I think beneficial for us is that those cases are oftentimes aggregating into, let's say, higher-volume accounts, and, frankly, aggregating into the hands of physicians who are skilled and expert at treating these patients.

So what that means is that we can target our channel at those accounts really pretty effectively and relatively quickly gain adoption. And that's what we saw. The other thing I would say, and just, finally, is that most of that growth actually came from same-store sales. So we just saw really nice growth in our current and existing accounts, which is really gratifying because it does tell us that we're -- where we train and educate accounts, we're getting the increased penetration and adoption.

So that's great, thanks for the question.

Yes, that's very helpful. I mean, it was pretty early, and you're still off of a low base. But from what you're seeing, do you feel comfortable suggesting that this should, at least, settle in to serve a 20% growth cadence off of this low base?

Well, I think it's hard to predict. I don't know exactly -- I will tell you that it is my expectation that we'll continue to see strong growth in coronary. Will it remain at the 20% level or higher? It's difficult for me to predict, and I think there are, obviously, numerous environmental factors and other things that play into that.

But this is -- I am encouraged with what I'm seeing, though, Bob. I mean, this is a large unmet medical need. It's really under-penetrated, it's an under-treated patient population. Marty Leon describes it as the unmet medical need of our time, and I think we're really well positioned right now to participate as a leader in improving in the care of these patients.

And so we're going to have a great opportunity to really be the market leader and contribute to improving care in this environment, and I'm really excited about that.

There are no further questions at this time. I would now like to turn the call back over to Scott Ward for closing remarks.

Great, thank you, everyone, and thanks for your kind comments regarding Dave. We appreciate that and certainly do appreciate your support.

Thank you for joining us all today, and thank you for your interest in CSI. We look forward to updating you on our progress next quarter. Good afternoon.

This concludes today's conference call. You may now disconnect.