Dynatronics Corp (DYNT) 2012 Q1 法說會逐字稿

We'd like to welcome everybody to the Dynatronics Corporation conference call to discuss the results for the first fiscal quarter of our fiscal year ending June 30, 2012. So, this is for the period ending September 30, 2011. Today's call is being recorded for posting to our website. My name is Kelvyn Cullimore. I'm the CEO of Dynatronics and will be conducting the call today.

Before we begin, as a reminder, during the course of this call, I may make forward-looking statements regarding future events or the future financial performance of the Company. Those statements involve risks and uncertainties that could cause actual results to differ, perhaps materially, from the results projected in such forward-looking statements. We caution you that any such statements should be considered in conjunction with the disclosures, including specific risk factors and financial data contained in the Company's most recent filings with the SEC, including our annual report on Form 10-K that we just recently filed.

As I mentioned, today I'm going to update on you our results for the quarter ending September 30, 2011, which is the first quarter of our new fiscal year. Following my presentation, I will take questions if anyone has some. The operator will handle that particular section of our call today.

First of all, let me just comment, Q1 of every fiscal year is always our most challenging, and typically our lowest performing. We've tried to put our finger on why that is. Usually it has to do with the fact summer vacation season taking a toll, as well as it being mid year on budgets, and people holding to see where their budgets are going to end up for year end. Which probably explains why the quarter ending in December is, typically, a decent quarter. The first quarter of the year when budgets are new is, also, a good quarter for us.

So, those factors combined to make Q1 as usually our lowest performing, and such was case against this year. Although, it is pleasing somewhat to report that the sales for the quarter ending September 30 compared to last year, were up just a little bit, about 1%. While that is certainly not stellar growth, we feel like we're still heading in the right direction. Embedded in those sales numbers are some specifics about GPO performance that I will address later in the call. Margins also, showed a slight increase. Our gross profit percentage increase from 37.3% to 37.5%, and total gross profit improved by about 2%, or around $50,000 for the quarter.

The big differential for this quarter versus last quarter was an increase in our SG&A expenses compared to last year. They were up almost $200,000 over last year. General expenses, themselves, were actually down. The majority of the increase came in sales and operating type expenses. The increase in sales expenses is directly related to our ramp up to drive sales increases through the GPO and national account business that we have been securing. We have hired additional personnel, and sales travel, and training expenses, and things of that nature, helping to build the foundation for servicing and making the most of the GPO and national account contracts that we have been signing. There's been slightly higher percentage in this quarter, sales by reps over dealers, and those reps -- that actually helped contribute a little bit higher margin percentage. Also, contributes to higher sales commissions, which increased sales expenses slightly during the quarter.

Our operating expenses were up, primarily related to our information technology initiatives. For the last couple of years, we have been working hard to bring the Company's IT infrastructure up to relevancy and making us better operators. For instance, as we have talked about in the past, our e-commerce site, which continues to be a bright spot for us with as much as 35% of sales coming across that e-commerce channel. So, the addition of personnel, as well as hardware and software upgrades, also increased our expenses during the quarter.

R&D expenses, while they remain high, and have continued high now for about five quarters, were fairly flat as compared to last year. It was during this quarter last year that we started to see the significant increases in R&D that support the new product introductions that we're anticipating. I'll address the R&D expenses a little bit later as well. Pre-tax profit, just as a direct comparison, $30,000 profit approximately last year compared to $106,000 loss this year. That is about $136,000 swing that essentially is accounted for by the $200,000 increase in SG&A expense, as was previously discussed; offset by about $50,000 more in gross profit; and a little bit lower interest expense than we had last year during the same quarter.

It should be noted for comparison purposes that in Q1 of 2010, that would be two years ago, we had R&D expense of about $216,000 compared to $356,000 this year. If you rationalize our R&D expense to these more historic levels, it shows that we should be adding about a $0.5 million dollars, approximately, to the bottom line once we complete the current R&D expenditure initiative that we have engaged in. We expect that the higher R&D expenses will continue through the next two quarters. After that, we will see the R&D expenses return to more historical levels. That will certainly make a difference on profits, starting with Q4 of this fiscal year, the quarter ending in June. So, from a profit perspective, the increased SG&A expenses that we incurred in ramping up for the GPO business and higher national account business has certainly had an impact, as well as the increasing infrastructure expenses for our information systems. Both of which we feel are important in helping to build the foundation for what sales increases we're anticipating in the coming 12 months, and believe that it's an investment that has been worthwhile.

As far as strategic initiatives go, let me address for a minute the GPOs and national account business. We have been pursuing the GPO business for several years. This is a market that we have not had access to in the past. We were able to obtain our first contracts, after a couple of years of effort, that we announced earlier this year. The Premier contract, Premier is one of the GPOs, one of the largest in the country. They gave us a small contract, but it exposed us to other Premier members that were, also, smaller GPOs, such as Champs and Yankee Alliance and a few others that we have been able to obtain contracts with. Amerinet is another large GPO. They ordered us a contract for capital equipment. FirstChoice, which is a smaller GPO, awarded us capital equipment and supplies. We are currently pursuing two other large GPOs. The largest one in the country, as well as another GPO, who are in the process of putting out contracts for physical therapy type equipment at the present time. We're working with both of them to see if we can secure access to those markets, as well.

What we have learned in this process is that these are definitely potentially lucrative markets in the sense that they represent a broad expanse of customers to whom we have not had access in the past. We, also, recognize that these customers have been doing business in a similar fashion for over a decade, and breaking into that business paradigm is going to take some time. We still are very optimistic about it, but we recognize that it's a lengthy process to start to achieve our sales goals with these GPOs.

Just to give some insight into what has happened. We estimate that we are doing only about $1.7 million in business with GPO related accounts prior on obtaining these contracts. In March and April, the first two months after signing the first contract, we saw a 20% increase in year-over-year sales. In the period of May through July, that increase was 28%, and August to October, we've seen a 55% increase. Now, granted, these are on smaller dollar amounts. So, it exaggerates the percentage number we recognize, but the important thing is, is to see that there is progress being made. Overall, sales to GPO affiliated accounts is up 35% since March. So, we are continuing see improvements in that area as we begin to make inroads, as we build up the structure, train our personnel, and take advantage of the opportunities being afforded us.

In addition, we are still on track for introducing new products, in early calendar 2012, anticipated in the quarter ending in March. As we mentioned, the heavy R&D expenses that we have been incurring will continue through that quarter, as we finalize the products. In the 12 months following that, however, we should see up to $0.5 million dollars in reduced R&D expenses annually, and higher sales from the new products that are introduced. So, we believe the flip there will have a significant impact on the bottom line.

We continue to pursue our STREAM, software as a service opportunity. We believe that has still got great potential. We have learned, and are adjusting our strategic approach, using that particular product line. We believe it still has significant potential to improve down the road, certainly have some exciting things in the works with STREAM that we hope to be able to disclose more in the next six to nine months.

We did receive, recently, a letter from NASDAQ indicating that our minimum bid price was deficient. We had traded for more than 30 consecutive days with our minimum bid not closing over $1. They, in the letter, they give us notice that we have six months to cure the deficiency, after which an appeal can grant an additional six months. So, essentially, we have about a year to cure that deficiency. That deficiency is cured by the stock trading at above $1 for 10 consecutive trading days. We have had this situation in the past, as many of you are aware of, and have always had success in curing that deficiency, and we believe that with the things that we have on the horizon, that we are confident that will happen again in the next year.

Some have asked about the recent drop in our stock price from the highs that we achieved last spring. We believe that, that drop represents some investors who expected, perhaps, faster outcomes from our GPO contracts then we have been reporting. We certainly recognize that may be a concern to some, but from our perspective, the potential has not changed from last spring. We believe that we still have great potential because of the new access to markets with the GPOs and national accounts. While we acknowledge the development of that business is a lengthy process, the potential still remains strong. The new products are still scheduled for introduction in the next year. Combine that with the fact that, we're introducing a new catalog that will, also add new products from other manufacturers, and the STREAM is still percolating and has potential for adding more significant contributions.

We believe those things, combined with the R&D expense that we expect to see diminishing after Q3, and the continued strength from our IT infrastructure, bodes very well for the future. While we certainly recognize that patience may be required, we believe that patience will eventually be rewarded because we have great anticipation for the foundation that we are laying right now and the future that we think it will bring. So, those factors all point to a positive outlook, despite the current quarter's performance. We are confident about that future and the investments that we're making.

So, at this time, I'll ask Kathy, the operator, if she'll go ahead and open the lines for a question and answer. She will handle that in order to keep the feedback on the line from being overpowering, she'll handle one call at a time. So, Kathy, if you'll go ahead and open the line for the questions.

Thank you. (Operator Instructions) Our first question comes from the line of Paul. Please proceed with your question.

Good afternoon, Kelvyn, or good morning. Congratulations on getting some sales increase for the first quarter of the new fiscal year. I know you had some concerns about any kind of increase at the last conference call. I wanted to know if you still anticipate, with your plans for fiscal '12, if you expect to achieve a 5% to 10% sales growth for the whole fiscal year? Is that still doable and achievable, in your opinion?

That is a good question, Paul. I appreciate that. We do believe that is achievable, but let me clarify my previous statement on that. We believe we will, by Q4, be at a run rate that is the equivalent at a 5% to 10% increase, yes.

Okay. So we may have to wait 2 or 3 more quarters to get up to that run rate. So maybe that's actually your forecast for sales increase for fiscal '13?

Definitely for fiscal '13, but we believe we'll see some increases as we move forward here in the next few quarters, especially with the new products being introduced in Q3, and as well as working through some of the opportunities for increases with the GPOs that we're laying foundations for now. We should see that run rate pick up, yes.

Okay. On the GPOs, thanks for sharing that it did $1.7 million, I believe, the last fiscal year. You've got salespeople hired, sales goals, and so on and so forth, and I know it's a long, lengthy process, but could you give us some color as to what your targeted GPO sales target is for fiscal 2012? What that number would be?

You bet. We would expect for the fiscal year ending June 30, we would hope to see up to about a $4 million to $5 million in run rate on GPO sales. So hopefully, by the end of the fiscal year, that $1.7 million in the prior year would turn into at least $4 million in the current year.

So this fiscal year alone, you should have a sales increase of $2.3 million to $3.3 million, just from GPO alone? Am I interpreting that correctly?

That is certainly our hope, yes. I will be the first to admit that we are still learning the process and figuring out the best ways to capture some of those sales, but we believe that a lot of the things that we are doing right now are foundational to building that business, and we would hope that we would see those kinds of increases to support those kinds of numbers, yes.

Okay. You focused more so in the last year, as you indicated, on your R&D for proprietary products. Can you give us your estimate as to your total sales, what proprietary products really represents? Is it, 10%, 20%, 30%, 40%? How large of a number is that from your proprietary products that you currently have?

We think our proprietary products make up about a third of our overall sales.

Okay. So it is a third. Once you do the hard launch on the new products in February or March of next year, can you really lift it up a lot for new products? Will that third go up to maybe 40% during the next year?

Probably in fiscal '13, we might see that, but I think it would be inaccurate to measure by percentage, because as we increase our sales, we expect sales to increase of third party products as well. Remember, I mentioned that we're are introducing a new catalog also in that time frame that is going to add other manufacturers' products to our product offering.

That's right.

And so I don't know that I can honestly say that it will increase in percentage of total sales, as much as it will continue to maintain its position and maybe increase a little, but if overall sales increase, it should increase those sales as well, which are higher margin products for us, obviously.

Okay, and the new catalog is still scheduled to go out around January, February time frame?

Yes, about the same time as the new products.

And that will include all the new proprietary products, right?

Yes.

Okay. Very good. That's all the questions I had.

Thank you, Paul. Good questions, as always.

Our next question comes from the line of Todd. Please proceed with your question.

I just want -- a point of clarification, just to make sure I understand the numbers. So you're saying that right now the revenue from the GPO contracts is $400,000 to $500,000 a quarter, and by June of next year, that run rate will be a $1 million or so, is that correct?

That is our expectation. That's what we are projecting, and when I say it is $400,000 right now, that's what it was in the year in the last 12 months before the GPO contracts, again.

But that's the quarterly run rate?

Approximately. I used an annual run rate of about $1.7 million.

Right, right. I just wanted to make sure I'm getting my arms around the quarterly numbers here.

Yes, and just for clarification, Todd, the quarterly rights can vary, just as I mentioned, Q1 for us is a slow quarter. That seems to be the case in general. So it may not be an even split before all four quarters.

Okay. Does the $1 million, is that just for the GPO contracts you currently have signed? If you sign new contracts, does that number grow?

We believe it could, but the new contracts that would be signed probably would not go effective until Q4, and as we have learned, it take time to ramp up. So I wouldn't expect much of a contribution from new contracts in this fiscal year, should we be fortunate enough to get them.

So when we're talking about $1 million per quarter run rate for next June that would be based on the current GPO contracts you have in place?

That is our expectation, yes.

Okay, and if you're looking at over the long-term, three, four, five years, again, just based in the GPO contracts that are currently in place, no new contracts. What is the potential run rate that you see from those contracts over that kind of long-term?

Well, over three to five years, a lot can happen because they renew those contracts every two to three years. So to making the assumption, first of all, that we would qualify to retain it, and not get any additional business, because if you recall with Premiere, for instance, they only gave us a contract for their colleges and universities, essentially, which is a very small piece of their contractual pie. On top of that, if in two years from now when they renew, if they open it up to capital equipment or even supplies to the physical therapy side, it could drastically change the scenery. So if you just base it on what we have right now, we think that run rate could be 4 to 5 times what I'm currently projecting.

Okay, great, and how about margins on this business? Are they comparable with your historical margins? Higher, lower?

On the capital equipment side, they remain fairly consistent with historical margins. Supplies are significantly lower, and so overall margins on the GPO business would not be as strong as historical trends, but it would be additional volume business. So we would hope that we could find ways of improving our operating model to handle that business without incurring additional significant overhead, which is part of the reason for the investment in the IT infrastructure, as we believe that is one of the ways to service this kind of business without being required to increase your overhead very significantly.

Okay, and one last question. I know that you are using a lot of cash right now for your sales effort and your R&D effort, but has there been any consideration given to continuing your share buyback program at these levels?

At the current level, we have not given a lot of consideration. The board has still authorized, I believe, there's about $450,000 left that could be utilized for share buyback, but to be very honest with you, right now with the position that we're in, we feel like that cash is better utilized for operational needs and R&D. We would probably look at this again after the new products are introduced, and if we haven't seen a significant improvement, based on Q2 performance, and even Q3 performance, I would expect you would see us kicking back in.

Okay, great. Thank you very much for your time.

Our next question comes from the line of Harold. Please proceed with your question.

Yes. With the R&D money that's being spent, is this primarily for new products, or just enhancements to products that are already existing?

Both, both. We will be introducing a family of products that will include new products, but it is mostly a generational improvement.

Okay. Anything that looks like might be a winner, anything in the new products?

We believe anytime you can add new features to your products, and introduce a new product line, it rejuvenates interest rather than having the same old tired product line, and so we fully expect to see that it will encourage interest in the product line.

Okay, thank you.

Our next question comes from the line of Joe. Please proceed with your question. Joe, your line is now open, you may proceed.

Joe, I can't hear you. You might have your line on mute on your end. You might want to check that.

What I'll do is I'll go to the next question. They can always re-queue for the question.

Okay.

And actually our next question comes also from the line of Joe. You may proceed with your question.

Hello.

Yes, I can hear you now Joe.

You can? Okay. Line of credit right now, as of September 30, you had used $3.2 million. What is the total line?

The borrowing base as of the end of the quarter was about $5.2 million, $5.3 million. So it was about $2 million of head room.

Okay, and far as I know, the previous caller had asked questions about the new products. Is there any color you can give us, as far as anything that's different from the existing product line?

I don't want to be coy with you, Joe, at all, but certainly we'd rather keep that a surprise for everyone, including our competitors.

Okay. (laughter) I can understand that, and when was the last time that you actually upgraded the existing product line? How far back was that?

It is about five or six years, actually six or seven years now. It will be, by February, March of 2012, it will be, because we introduce Solaris in 2004 and 2005. So that gives you the range right there. So it is important to keep the line fresh, and we think that this will help tremendously to do that.

Okay. Listen, good luck, and I think you are on the right track.

Thank you, Joe. I appreciate it.

Our next question comes from the line of Jeff. Please proceed with your question.

Quick question regarding the share buyback, you mentioned you got plenty of room to wiggle, if you will, regarding your amount of money you can borrow, as you mentioned, about $2 million. I know you have got to find the right balance of managing working capital, but why not use this chance to be a little aggressive with your stock prices? At $0.70-something, and if you have to dip into your line of credit a little bit, so be it. As you can buy, obviously, a huge chunk of shares with the amount of money you have remaining in your buyback. This is the time, really to me, to really be aggressive, buy those shares, reduce those shares outstanding, rather than waiting until your stock price gets above $1, especially if you have an ample room in your line of credit.

Well, that's certainly one strategy, and I appreciate your thoughts on that. That could certainly be approached, and probably will be discussed at the next Board meeting as well. Part of it also has to do with a knowledge of where shareholders stand at the current time and what kinds of positions may still be at risk, and allowing some market absorption of that, prior to us delving in to help support the stock. So I think at this particular point in time, I'm not saying that we absolutely would not, but the current thinking is, is that we need to get a profitable quarter under our belt, which we expect will be Q2, and then take a look at it.

Okay, and you do expect to be profitable Q2 and going forward? Have you stated that or implying that?

Yes, we do expect it won't be a huge profit in Q2, because of the continuing R&D expenditures, but everything points to Q2 being profitable, and Q3 is typically one of our better quarters. We should be introducing new products then, even though we will still have the heavy burden of the R&D expense. So we think that, yes, we're expecting a profit in Q2 and Q3. If we don't hit our profit in Q2, we won't miss it by much, but we fully expect it.

Okay. Very good. Thank you.

(Operator instructions)

There are no questions at this time. I will turn the call back over to you.

Thank you, Kathy. We appreciate all of you being on the call today. We are, as I mentioned, appreciative of your support. We recognize that the loss for the quarter certainly is disappointing, though explainable, and we feel like the investments that we are making have some long-term potential. Appreciate your patience, and we look forward to the future quarter calls when we can announce even better results.

So thanks for being with us today, and if you have any further questions, feel free to call in and ask for me or Bob Cardon, our Director of Investor Relations and VP of Administration. Thanks for being on the call today.