Stereotaxis Inc (STXS) 2006 Q3 法說會逐字稿

Good afternoon. My name is Mary and I'll be your conference operator today. At this time I would like to welcome everyone to the Stereotaxis third quarter 2006 earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [OPERATOR INSTRUCTIONS] Thank you.

It is now my pleasure to turn the floor over to your host, Brian Ritchie from Noonan Russo. Sir, you may begin your conference.

Good afternoon, and thank you for joining us today for the Stereotaxis third quarter 2006 investor conference call. By now you should have received the press release. If for some reason you have not received the press release or are unable to log on to the webcast, please call me, Brian Ritchie of Noonan Russo, (212) 845-4269, and I would be happy to assist you.

Speaking today, we have the Company's CEO, Bevil Hogg, and the CFO, Jim Stolze. Before we get started, we would like to remind you that this conference may contain forward-looking statements regarding future events of the future financial performance of the Company, including, without limitation, statements regarding operating results in calendar 2006 and 2007; growth opportunities, and other statements that refer to Stereotaxis' plans, prospects, expectations, strategies, intentions, and beliefs.

These forward-looking statements are based on the information available to the Company today and the Company assumes no obligation to update these statements as circumstances change. For additional information, please see the cautionary statements included in Stereotaxis' most recent public filings filed with the Securities and Exchange Commission.

At this time, I will turn the conference call to Stereotaxis' CEO, Bevil Hogg. Please go ahead, Bevil.

Thank you, Brian. Good afternoon, and thank you to everyone for dialing in. We have positive news to report on this call. The key message I would like to convey is that we enjoyed an excellent third quarter, performing as we had predicted that we would on our last three calls.

We are confident that our fourth quarter performance will comfortably put us in the range of our revenue guidance for the year and that our yearend backlog status will be as we had predicted, in the order of $40 million. This, combined with our favorable pipeline profile, puts us in a strong position for growth into 2007.

Probably the best way to illustrate the very strong commercial momentum and adoption of Stereotaxis' technology that we have already received is to observe that when we include both orders and installations we have now sold more than 90 systems worldwide. We clearly expect to exceed the 100-system mark by yearend.

We placed systems at most of the top EP institutions in the world, as well as with major high-volume commercial-driven EP sites. Moreover, when we look at our backlog and pipeline, we can see our way well beyond the next 200 sites. This establishes a formidable position for us among key opinion leaders worldwide.

On this call, I would like to update you on the sales momentum that we've generated during our third quarter, including updating you on our backlog and pipeline trends in the US and in international markets, on the training programs that are a key part of driving our clinical utilization, and on the strong sales effort that we are engaged in to leverage these factors into new-order activity.

I'll also be providing you with an overview of our progress in evolving and expanding new applications for our technology. I'll then ask our CFO Jim Stolze to provide you with additional financial detail.

Our backlog at the end of the third quarter was $44 million, and we received $10.3 million in new orders during the quarter. These orders were spread 60-40 between the US and the rest of the world. And our late-stage pipeline activity shows that sales activity in the US is now largely exceeding that of the rest of the world.

This order and pipeline activity demonstrates not only our successful catch-up in US commercialization momentum following capital availability, but also, the depth of our international market opportunity.

Further, it is an important milestone for us that we have now received our first order for two systems simultaneously from a single hospital, both for use in EP.

Also of note, we are beginning to experience tangible results from the Siemens [inaudible] program with orders for free systems in the quarter originating from this program, although we do not necessarily expect similar results in coming quarters.

The $10.3 million in orders for the quarter comprised a mix of Niobe I and Niobe II systems. Our pricing trends for Niobe II continued to be highly favorable with significant ASP increases again being experienced.

As to our revenue-recognition cycle, the time from order to installation, it was at 12 months for the quarter, but included a number of pre-FDA-approval orders without which we would be maintaining an 8-month expectation.

I note of course that our end-of-year quarter -- excuse me, that our end-of-quarter backlog figure is major shipments made and taken to revenue during the third quarter in which systems revenues were $6.4 million and total revenues were $7.6 million.

To reiterate, we are confident and reaffirming our revenue guidance for the year. However, I must, as always, emphasize that lumpiness based on hospital cath lab installation schedules is an inherent part of our business. We look forward to providing you with our revenue guidance for 2007 in February.

In terms of margins, we achieved a gross margin of 52% during the quarter. As I anticipated in our last conference call, overhead absorption issues in the production and installation departments had a continuing impact into the quarter, albeit at a significantly lower level of significance. Approximately 5 percentage points of margin currently compared to the 15-percentage-point impact in the prior quarter.

Looking forward to the next quarter, we expect that our margins will approximate 60%.

I noted on our last call that we would look to the metric of recurring revenues rather than utilization going forward in order to assess adoption of our technology at installed sites, as well as the progress of our business model. During the third quarter, our recurring revenue was 18% of revenues on an annualized run-rate basis.

Some highlights of the data we have available shows continued healthy utilization trends and increasing and substantial use of systems for AF, and of particular note, for VT, a procedure that is so complex, it is rarely undertaken manually.

At a limited number of US sites, we are now treating above 80% of available cases in our procedure [inaudible].

Regarding clinical adoption, we find that there are three key drivers for successful adoption of the Stereotaxis System by physicians -- training, approved devices, particularly, electrophysiology catheters, and a versatile, fully-integrated user interface.

In terms of our training, we have qualified more than 180 physicians representing roughly 35 of our clinical sites, the majority of which have performed well over 30 procedures with the system.

Such usage in electrophysiology has been primarily with 4-millimeter-tip ablation catheters. The 4-millimeter tip magnetic catheter has been accepted as a standard for care for SVT ablation procedures, as well as for precise mapping of the heart chambers including the left atrium.

We anticipate that the approvals of higher-power catheters such as the 8-millimeter tip and irrigated-tip catheters will make Stereotaxis the standard of care for all cardiac ablation procedures. And we maintain our prior guidance with regard to availability of those catheters.

This adoption of our technology has been aided recently with the release this past August of our NAVIGANT 2007 software. This product has greatly simplified our user interface by customized scripts, advanced image integration of 3-D CT, MRI, vessel reconstructions, and electro-anatomic information.

As we continue to develop more integrated and simplified user interface solutions with increasing levels of automation, we expect adoption to accelerate even further. We're already developing our next-generation software release that will bring an entirely new level of integration to the electrophysiology cath lab and even greater capabilities for automated therapy delivery.

To illustrate the power of our software, one of our hospitals has now dispensed with a laser catheter and is doing pulmonary vein isolation using a virtual laser technique developed by Stereotaxis. They have thereby eliminated a $1,300 device as well as the need for a second transseptal puncture, not to mention the second transseptal sheath.

With regard to the other components of our recurring revenues, I note also that we have started shipping software and generating standalone software sales. Further, our service contract participation is excellent for this stage of our growth with more than 75% of our sites having service contracts, the balance having time and material service arrangements with us.

It's very important to note in terms of our technology adoption that we continue our unbroken record of zero perforations attributable to our EP catheters, for the more than 4,500 EP procedures that we have performed to date. The soft-touch and essentially achromatic nature of these devices means that we meet a threshold issue of safety that is unlikely to be achieved by either conventional manual techniques or competitive technology.

It is hard to overstate the importance of this issue, as patient safety is of paramount importance to hospitals and clinicians. When a safer technology becomes available, safety starts to become a threshold issue in purchase decisions.

I note that we believe our safety profile has multiple important elements in addition to soft-touch technology, and includes catheter stability, which reduces potentially the risk of accidental ablation of sensitive areas, a lower risk of thromboembolism, because according to [Marshall Linsky] et al. thrombus or clots invariably form on the sheath or static diagnostic catheters, not on the ablation catheter.

Stereotaxis can immediately retract its sheath from the left atrium following transseptal puncture and navigate without a sheath. Further, because we apply less pressure and softer touch to the posterior left atrium, we are hopeful that our catheters will have less risk of inducing esophageal fistula.

An important additional element is that we believe we have reduced risks to both the patient and the physician due to more precise and efficient remote navigation. Stereotaxis' magnetic navigation technology is also uniquely suited to navigating guidewires of extremely fine diameter anywhere in the vasculature.

And year-to-date, 17% of our total procedures were for PCI, and this number is growing. Combined with CRT, the number would be 28%. We are consequently increasing our investment in our guidewirehe-based activities, which include CRT, where we are hoping to show that optimizing lead placement can improve outcomes, and the CTO recanalization, an important new potential application for our system in interventional cardiology.

We recently received FDA clearance for use of various magnetic wires in our Niobe system for peripheral and neurovascular applications, which opened substantial new markets for us.

Regarding CRT, we have commenced enrollment in our partner trial with Medtronic, and anticipate approximately 8 to 10 patients of a likely 50 to be enrolled by yearend or shortly thereafter. However, the pace of enrollment is always difficult to predict, and we are assuming that we will have enrolled 50 patients by the fourth quarter of 2007.

It's important to note that this trial relates to therapeutic rather than efficiency endpoints for our CRT platform by measuring hemodynamic response to multiple alternate placements of pacing leads over the wire. Demonstrating improved outcomes from use of our technology in CRT would clearly be a major turning point for the program.

In the interventional cardiology arena, we've made some significant progress in the third quarter towards reaching our goal of establishing our technology as a potential leader in the recanalization of CTOs.

As you know, we've entered into an agreement with Baylis Medical to develop and commercialize an RF coronary and peripheral guidewire [procedure] crossing applications. As we stated at the recent PCT conference, we believe this RF technology, combined with our capability of registering, and most importantly, integrating CT imaging, will allow physicians to accurately navigate a path for CTOs, an otherwise difficult challenge for interventionalists using conventional manual techniques.

Our initial focus will be on peripheral applications, and we would expect to commercialize our first product offering in this arena in mid-2008. However, over time, we also expect to bring real value to the treatment coronary CTOs.

In summary, we are expanding the range of our clinical applications to eventually include guidewire navigation throughout the body while deepening our penetration of the EP opportunity.

I'd now like to ask our CFO Jim Stolze to provide a detailed discussion of the quarter's results.

Thank you, Bevil. Stereotaxis recorded a total revenue of $7.6 million, including systems revenue of $6.4 million in the current quarter, compared to total revenue of $1.7 million, including $1.2 million of systems revenue in the comparable year-ago quarter.

We recognized seven systems this quarter compared to one system in the prior-year quarter. Our disposables, service, and accessories revenue increased to $1.3 million this quarter, compared to $524,000 in the prior-year quarter, driven by the increased installed base as well as the impact on disposable revenue of the FDA approvals for two catheters for use with our Niobe system in late 2005 and early 2006.

For the 9 months ended September 30, our revenues amounted to $13.2 million, including $10.2 million of system revenue, compared to total revenue of $12.9 million, including $11.3 million of system revenue in the comparable year-ago period. The Company recognized revenue from the sale of 11 systems in the current period versus 12 systems in the prior-year period.

Average selling prices of the systems recognized increased approximately 12% and 5% for the quarter and year-to-date period respectively, compared to the prior-year periods.

During the 9 months ended September 30, 2006, disposables, service, and accessories revenue increased to $3 million, compared to $1.7 million recorded in the prior-year period, driven by increased disposable revenue and service fees related to systems in place for more than one year.

Our gross margins for this quarter amounted to approximately $4 million or 52% compared to $897,000 or 53% in the prior-year quarter.

Margin for the current quarter was impacted by unabsorbed overhead in our manufacturing and service departments, as well as a charge for obsolete parts as we finalized the transition to outsource production of our devices. Total impact of these charges amounted to approximately 6 margin percentage points during the period.

For the 9 months ended September 30, 2006, gross margin amounted to $6.1 million, or 46%, compared to $6.5 million or 50% in the prior-year period.

The margin percentage for the 9 months in the current year was also impacted by these overhead charges, as well as an unusual warranty charge experienced in the second quarter. We expect our margins in subsequent quarters to move towards 60%, as our operating overheads costs are absorbed in a more normalized production and installation environment.

Third quarter operating expenses of $15.7 million were approximately $2.7 million higher than the year-ago quarter. The increased year-over-year costs related primarily to added research and development costs, incremental training costs, and added headcount, most notably in the sales and marketing functions; and to the impact of the additional stock compensation expense required under the newly-implemented accounting standard

With respect to our R&D activities, while we have expended approximately $677,000 more in the -- than the prior-year quarter, our costs remain consistent with the second quarter of this year. We continue to focus our resources on software and user interface improvements, disposable device development, including integration of the new [Cardal] software, and to continue our overall platform development.

Compensation expense recorded under Statement 123R amounted to $1.1 million in the current year to recognize the cost of stock-based compensation issued to employees and directors, compared to approximately $250,000 in the prior-year quarter.

Operating expenses for the 9 months ended September 30, 2006, amounted to $46.3 million, an increase of approximately $11.5 million compared to the $34.8 million in expenses, excluding the one-time royalty settlement recorded in the 9 months ended September 2005.

Net loss for the 2006 third quarter was $11.4 million or $0.34 per share, based on 33.5 million weighted average common shares outstanding versus a net loss of $11.9 million or $0.44 per share, based on 27.4 million weighted average common shares outstanding for the 2005 quarter.

Net loss for the 9 months ended September 30 was $39.6 million or a $1.21 per share, compared to the loss of $30.6 million or $1.12 per share for the prior-year period. Weighted average shares for the two 9-month periods were approximately 32.6 million and 27.3 million respectively.

The change in weighted average shares for both the quarter and the 9-month period primarily relate to the issuance of 5.5 million shares, and the Company's follow-on offering completed on February 2006, as well as the exercise of 500,000 warrants during the current quarter.

The Company used approximately $8.6 million of cash in operations in the third quarter of 2006, and generated approximately $3.5 million this quarter from the exercise of the warrants discussed above.

We entered the quarter with $39.8 million dollars in cash investments, as compared to approximately $10.7 million at yearend 2005.

Total debt at September 30, 2006, amounted to approximately $2.2 million. We have a $10-million line of credit available through April 2007, which we have $1 million drawn against at this time.

Looking forward, the Company has a backlog of purchase orders and other commitments for its systems of approximately $44 million. We received orders for $10.3 million during this quarter.

Please note the Company does not include orders for disposables, service, or accessories in its backlog data. As we indicated in our release, we remain comfortable with the previously-communicated annual revenue guidance of $26 million to $30 million.

To reiterate, Stereotaxis' sales cycle, similar to other companies selling capital equipment to hospitals, is relatively long and can be subject to lumpiness from quarter to quarter as hospital budget decisions and equipment installation schedules are often subject to last-minute delays.

Prudence dictates that we should anticipate the occasional impact on our quarterly results of such unexpected delays. We continue to expect that we have sufficient liquidity to fund our operating and capital requirements through cash flow breakeven.

I'd now like to open the call for questions. Operator?

Certainly, sir. [OPERATOR INSTRUCTIONS] We'll pause for just a moment to compile the q-and-a roster.

Our first question comes from Tao Levy from Deutsche Bank. Please go ahead.

Hey. Good afternoon, everyone.

Hi, Tao.

Hi. A couple of quick questions here. In terms of the hospital that purchased the two systems, can you give us a little bit of background, what motivated I guess the CEO, the CFO of that hospital, maybe the EP as well, to decide to buy two systems rather than just maybe start off with one? Just some insight there would be great.

Well, first of all, we were very gratified to get an order for two systems from this particular hospital. We don't wish to identify specific hospitals, but this is a large practice hospital on the East Coast. And they purchased from us a Niobe II system and a Niobe I system, and they will be using those to further develop their practice in ablation and also by the lead placement.

Thank you. But in terms of what do they specifically -- I don't know if you can provide any insight as to what type of discussions surrounded them wanting to buy two rather than one. And obviously it's a big development for the Company and the technology.

And I'm just trying to figure out are there other hospitals that are going to start doing the same, if any of the potential orders that are going to come in next year, if we are going to see hospitals buy a second or maybe a third system for EP.

Tao, the key deciding factor that we can discern is that this hospital wants to position their institution for the future, with an eye to atrial fibrillation treatment.

Okay.

They see Stereotaxis as the coming standard of care for EP practice, and they were willing to make the investment now so as to position themselves as a leading competitive institution. We believe that there are other potential hospitals in our pipeline who may take this stance also.

Got you. The -- moving on into the Siemens hospital -- the Siemens trade-in, any of those three that came in the quarter, were they all to hospitals that were just sort of replacing a Siemens lab with upgraded Siemens equipment or were any to sites where -- who weren't partners to you? For example, like a GE site.

I think that these were primarily Siemens accounts. I don't know, Tao, that any one of them involved a GE replacement.

Okay. And just last --

However, Tao, I would also just observe in continuation of my response that in the funnel of potential leads that we have, there are many that would fit the GE description.

Perfect. And just a last question, when we start to look at next year, what do you think are going to be some of the big highlights in 2007 as it relates to just AFib in general, EP, and obviously remote navigation? Thanks.

I think, Tao, that the big deal next year is going to be advent of high-powered catheters. Let me just illustrate the impact they can have. A 4-millimeter ablation catheter, according to some of our leading clinicians, can oftentimes take as long as two times longer to do a case than a high-powered catheter, because of the need to keep it moving and to keep the temperature down.

So the advent of the 8-millimeter catheter and the advent of the irrigated catheter first in Europe and then in the United States we think will drive accelerated usage of our systems, and accelerate our recurring revenues accordingly.

Okay.

We think that this will drive also increased AF applications where they are permissible by law and we think that this will be the dominant theme next year, although in the interventional cardiology arena, we would expect to see some significant progress via navigation for CTOs by the time of TCT.

Perfect, great. Thanks a lot, and good quarter. Thanks.

Thank you.

Our next caller is Mimi Pham from HSBC. Please go ahead.

Hi, good evening. First, can you just break those seven systems down US, OUS, and does the $10.3 million equal 10 new system orders?

The revenues recognized in the quarter were primarily OUS six out of seven.

Okay.

However, on the orders side, you asked whether the $10.3 million, how many systems that represented. That represented six US and four OUS. Hence, the 60-40.

Okay, and this is not in the second quarter where you have double-digit new orders and that's -- I think you implied another fourth quarter would be around 10 units because you mentioned going from 90 to 100 placements by yearend.

Is this something where we can sort of start modeling comfortably out double-digit new order numbers over the next -- for 2007?

Well, Mimi, that would be backdoor guidance to next year.

First of all, we said that our sort of total sales so far are in excess of 90. So if we add 10 to an excess of 90, we'll end up with more than 100.

We do expect our yearend backlog to be in the range of $40 million, and we think that that will drive revenues and we also expect orders to accrete next year that would clearly be well ahead of this year.

But we should note that the first and the second quarters of the year tend to be slower than the back half of the year. And this is true for just about all companies in this space. So we couldn't necessarily prognosticate at this point that first quarter would be equal to either the third quarter or fourth quarter this year.

However, we do have a very strong funnel. We are very optimistic about our growth and penetration in EP. We believe we have achieved a point of inflexion, sort of, in a maturation as a viable player in the EP space, if not dominant in this space. And we are very optimistic about next year and look forward to giving you our prognostication in February.

And just to clarify your comments, you said that you see well beyond the next 200 sites. Are you saying that you have already received interests from 200 sites or you've --

We [multiple speakers].

-- identified.

We have a pipeline, Mimi, that leads up to our backlog. So really, the stages to selling a system are number one, to generate an order. And as that order moves along towards becoming an order, we measure it in various buckets or stages in our pipeline. We have early-stage pipeline, a late-stage pipeline.

If we look at our total pipeline of interested customers, that total pipeline runs to several hundred. So the 200 that I mentioned is a prudent fraction of the total pipeline that we have.

Okay, that's very helpful. Thank you so much.

Our next question comes from [Sebastian Tucket] from Goldman Sachs. Please go ahead.

Hi guys, it's Larry Keusch.

Hi, Larry.

Hi.

So Bevil, two questions for you. Coming back to the institution that purchased the two systems simultaneously, why a Niobe II and a Niobe I? I would have anticipated that if somebody was coming in today they might go for the more -- the smaller footprint Niobe II presumably a little bit more advanced than the Niobe I system.

Larry, the footprints are relatively similar, but the principal advantage of the Niobe II is that it lends itself to vascular navigation. And the Niobe I doesn't, and the Niobe I also doesn't lend itself to CRT because the magnets tend to be in the way of the positioning of the device.

So this hospital clearly separated its needs into an ablation bucket and a CRT bucket and decided that they didn't need for one of the systems to have the CRT capabilities and the wire navigation capabilities.

Okay, thank you for that. And can you help us understand, as you think about the ASP, the difference between Niobe II and Niobe I, how much did they save by going with the Niobe I?

We did say that if they're buying two systems obviously, we are going to give them a deal. But -- and they would certainly negotiate using the full leverage that they can from multiple system purchases. But setting that aside, a Niobe I would be on the order of 40% lower than a Niobe II.

Got it, okay, great. And then last question, so if I have done the math correctly you did roughly $12 million in new order activity in the second quarter, sort of $10 million in the third quarter. If I use the $40 million of backlog that you're talking about, for the fourth quarter I would be somewhere between $8 million and call it $12-ish million of new order activity, so let's just call it 10 to hit the mid-point of the range, which is terrific, but also not seeing much movement in increasing new order activity.

So I am wondering if you could talk a little bit, what gets that new order activity moving up in what's kind of been three sequential, kind of, flattish quarters if you will.

We see ourselves sort of stair-stepping our way to accelerated revenues. And this year we noted the point of inflexion that occurred in the second quarter and that point of inflexion was driven by the availability of catheters for the first time.

But there's been a significant lag in the U.S. response to those catheter approvals and we had indicated the time that the US would respond with a 6- to 9-month lag. And that's exactly what has happened.

So if you consider the fact that Europe has essentially carried the burden for the past two to three quarters, in the fourth quarter, we believe for the first time we will see a major input from the US, meaning significantly greater than that of Europe. And we think that this, sort of, the US awakening and resurgent activity will drive higher levels of revenues in the year to come. So that's one point that's very important.

We have been handicapped in the US by the late regulatory approval, and we think that this is a very important factor. But secondly, going forward into next year, we will obviously be driving new orders, (a), as a function of our expanding installed base, which brings about competitive pressures on hospitals but, (b), the arrival of new energy catheters, higher energy catheters, which will bring, we think, greater functionality and usefulness to our systems.

Okay. And Bevil, I am sorry, just one last one as I heard you speak here. So obviously the US, you believe, will become a bigger mix on a go-forward basis. One advantage of selling into the overseas market was that you could basically recognize your revenue right away as it went to the distributor.

So as you think about if the US is going to become a bigger mix of installations, could that actually push out, theoretically, some of your placements as you think about next year. I know you haven't given a specific guidance, but is that at least a logical way to think about this?

It's not illogical, Larry, but I don't think it's what's going to happen, because the lengths of our sort of revenue recognition cycle has really been driven by legacy units sort of pre-approval days, some of which had some really pretty long lead times to installation.

We are noting a shortening even in the US of lead times to likely recognition. And we would expect that trend to be favorable.

Okay, great, thanks very much.

Thanks.

[OPERATOR INSTRUCTIONS] Our next question is from Rick Wise of Bear Stearns. Please go ahead.

Good afternoon, Bevil.

Hi, Rick.

Just going back to the greater than 200 or even more sites, maybe just help us understand the challenges of persuading these 200 or 300 or who knows how many, to make a decision. I appreciate that there's a physical component, but what's holding them back? Is there an issue, is it dollars, is it technology, is it cash availability, just what are the hot button issues that you're wrestling with?

I would say that the -- clearly the single most important gating item is their budget cycle and the sales cycle. In other words, it doesn't matter what you're selling to a hospital, it takes a year. And so -- and also we have to take a specific year because they have a specific budget cycle to the year, which might not be January through December. So fitting within the budget cycle and being able to persuade them to acquire a system is going to take a year anyway.

Beyond that, they have to be, at least in this stage of our growth and development, replacing a lab. So these hospitals all have typically replacement cycles for their labs and they are planning on replacing one this year and two next year and one the following year. So we have to conform ourselves to their cath lab replacement cycle.

And then, finally, we have to present to them our clinical and financial value proposition, which becomes more robust over time and which is accelerated by competitive pressures.

And I think one cannot underestimate, rather, one cannot overestimate, let me say, Larry -- let me say, Rick, one cannot overestimate the importance of the competitive dynamic. So when you have a budget cycle that has been followed, you have a replacement that is scheduled, you have a sales force that is experienced and qualified enough and trained enough to present the financial case to the administration and the clinical case to the clinician, you get a sale.

And we are at the point where we pretty much feel that we can begin to predict when sales will occur, and where we look at our pipeline to begin to anticipate how that pipeline will convert to backlog.

Okay. And are there competitive issues at all disrupting the process at this point?

I would like to say absolutely none whatsoever. But I don't know whether there might be hospitals somewhere that is considering a competitive system. It might not come to my attention, but I would say that it is not even a blip on the radar screen yet.

Okay. The -- and just to make sure I understand, is it theoretically possible, even in the fourth quarter, to go back to Larry's question, that we could be positively surprised on the upside that suddenly -- and I am just picking out, that suddenly another five orders that you're able to suddenly install faster than you expected or that kind of upside is unlikely on a short-term basis, given the complexity of the decision and the installation process?

You are talking about the fourth quarter --

Fourth quarter this year, yes.

I think, Larry, that I would be hesitant to prescribe upside or conjecture on upside, simply because of the lumpiness. It's not because we couldn't potentially ship more systems, but when you get into December -- late December timeframe, there's always a hospital that has an electrician's group that doesn't show up to complete the installation. And so we want to be very prudent here in making sure that we hit at minimum the low end hopefully to do better, but I wouldn't be willing to prognosticate another year because I don't think our powers of prediction are that accurate yet.

Yes. And the -- just a reminder. It sounds like the 8 millimeter and the NAVISTAR are on track, but we assumed the 8 millimeter at first quarter and for the irrigation first quarter OUS and second quarter US. Is that -- when you say on track, is that what your --?

No. Let me clarify that. And first of all, as a preamble, given the vagaries of FDA approval, sort of any date could slip by a quarter in relatively sort order. But we're maintaining our original expectations and those are that the -- first of all, the 8-millimeter catheters have already been approved in Europe and is --

Right.

-- on the cost of commercialization by our partners J&J.

I am sorry, I didn't mean to say approve -- I meant launch actually, I apologize. Yes.

Okay. No problem. We expect it to be launched in the US or to receive approval in the US in the first quarter, and be launched probably in the second quarter, certainly in the first half. And I think the prior guidance for approval was first quarter.

And then with regard to the irrigated catheter, I believe we have said first half in the European arena and second half of next year, probably towards the back end of the second half in the US.

I see. So in terms of -- maybe you can help us think through -- I am not actually asking for '07 guidance, although I'll gratefully accept it. But how do we think about the impact from a revenue perspective and a margin perspective on the business, once these products are launched? Do we see the effect immediately and dramatically to go back to your step function image, Bevil?

No, I don't think so. I think, Larry, that we are on a roll as far as equipment sales are concerned. And these equipment sales are not directly connected to catheter availability. They are connected to basic regulatory approval. In other words, if you don't have approval to do ablation, people are not going to want to get your system, and we saw that happen to us last year.

But once you have basic ablation approval and you have a basic collection of catheters, hospital CEOs become less concerned about catheter availability and more concerned about their replacement cycle for their labs and building electrophysiology practices and expanding their practice and so on.

So we do not see a connection between the systems sales even in the medium-term -- mid-term, related to catheter approvals. But of course, those catheter approvals would drive the usage rates and recurring revenues accordingly.

Okay, two last questions, Bevil. You made a point of highlighting that you're now seeing standalone software sales. Maybe you can help us quantify what that was or what that might mean and how you think of that going forward? And the last question, again given the latitude you have, any update on the timing of breakeven?

Let me say that with regard to software it's notable that we started selling it, because it means that we have sort of standalone products that people are willing to buy.

Right.

We're not looking here at significant software revenues, but we do have a number of software options that we are selling in, and particularly, one of them is what we call our NaviView or Paieon reconstruction software for vascular reconstruction.

And we've sold a number of these options, which brings sort of sophisticated 3-D reconstruction to vascular pathways. And your final question --

On breakeven, Bevil.

Breakeven -- we can safely assume that the guidance we gave last year, that we would breakeven in 2007, will not occur. And I don't think that we would be prepared to prognosticate breakeven with any level of accuracy probably until our February guidance call.

But we think that the conditions for breakeven would certainly be, we believe, favorably in place by the latter half of '08.

Okay, thanks.

Thank you.

Our next question comes from David Zimbalist from Natexis Bleichroeder. Please go ahead.

Thank you, it was a nice quarter. Could you talk a little bit about what your plans are in terms of launching a neurovascular product offering, if you're going to be doing trial studies and if you expect to be doing it yourselves or mostly through existing users?

We see the vascular program as a body-wide use of guidewires to deliver therapies through the peripheral vasculature and the coronaries. So it is a pretty broad program and we would like to complete our activities in the coronary arena initially before branching out into peripheral vasculature.

However, because of regulatory constraints in the coronaries that might pertain to an ablation device for CTO applications, it would probably become desirable to pursue the fastest regulatory pathway that would bring us into a market of some size.

And that would be a peripheral vasculature, probably limb salvage and the lower extremities. And we think that that would be a lower hanging fruit than neurovasculature. However, we are prepared to go in to the neurovascular arena as soon as we have x-ray integration activities that would bring us into compatibility with neuro x-ray systems.

This is something we're looking at but we are not there yet.

Okay. Any sense of timing on that?

I would -- well, it would be certainly 2008 or 2009.

Okay.

But we will be very active in vascular navigation in 2007.

Okay.

As I pointed out, 28% of our clinical activities this past year were wire-based and not catheter-based.

Right, that's true. Can you talk a little bit about your approach to hospital reimbursement for atrial fibrillation using the Niobe system, if you're finding that that's either an impediment or a justification of the orders that you've received over the past --?

I can only speak anecdotally to the performance of atrial fibrillation procedures in the United States because we do not have regulatory allowance to do AF procedures in this country, nor does anyone else. However, I have noted that some clinicians in the past have done AF procedures and have sought reimbursement from sort of standard ablation [DRGs]. And I don't know how legitimate that is and I don't think that is an area where Stereotaxis would like to go.

Okay, all right, thank you. And are any of these systems ordered this quarter or more recently coming outside of a more broadly planned lab expansion or renovation? Have they been a trigger, for example, for the lab renovation as opposed to just -- as hospitals looking to upgrade a whole lab or whole lab space?

I am not sure if I am going to answer your question specifically in line with your expectations. But we do -- first of all, we see replacement of labs in hospitals as driven by, (a), a standard replacement cycle, and, (b), by accelerating new technology that is coming from sophisticated flat plate x-ray systems, which is persuading the hospitals, particularly in the electrophysiology arena, to accelerate replacement of their labs.

We add a catalyst to that with our Siemens replacement program, which is an opportunity for hospitals to sell into the trading arena their existing labs without waiting for the normal replacement cycle to occur and to replace them with state-of-the-art equipment. And that was the replacement cycle that I referred to previously.

So in combination, when we look at normal replacement cycles, the acceleration of hospital replacement cycles by new x-ray technology and the additional catalytic effect of Siemens replacement program, which hopefully might extend to some of our other partners over time, we think that that is going to drive all the business that we will need in the next few years.

Great, thank you.

Thank you.

[OPERATOR INSTRUCTIONS] Our next question comes from Steve Ogilvie from Thinkequity. Please go ahead.

Hi guys.

Hi, Steve.

A question on the OUS systems. Were all of those installed or were some of those shipped through third parties so the revenue was recognized before installation?

Typically, overseas -- if the system is in the principal countries of Europe, we install the systems and recognize them when they are installed. In other words, for the most part, our European systems tend to be recognized when installed.

However, there are a number of countries in Europe and in the rest of the world where we use distributors, our principal distributor being Siemens. And I don't specifically know the percentage of those systems in the third quarter that was sold through Siemens, but I would be happy to answer that if you get back to me.

Okay. And then, I was wondering if you could characterize in the total backlog, I know there's 40 or 45 systems, how many are domestic versus OUS?

In the total backlog it's roughly 60-40 US versus OUS. Jim has just indicated to me that in the third quarter three of the systems were distributed systems acquired for resale by Siemens.

Okay. Is it safe to say that for your OUS backlog systems you have more visibility as to when that revenue will be recognized because it doesn't require installation in all of them?

Yes, I'd say it's not so much OUS, it's when there is a distributor involved. And the distributor, (a), is a reliable one and we are -- we have to go through a number of hurdles to be sure that they have a customer. In other words, we don't recognize the system that is randomly shipped to a distributor for which they don't have a customer.

And -- but if we meet those criteria -- and of course, with Siemens we were very pretty confident we were going to be paid, then we would recognize much sooner than if we had to install the systems ourselves. But there is a slight penalty to be paid in terms of the margin that we give up.

All right, okay. And then you said you recognized your first software sales this quarter. Could you maybe characterize what the ASPs were and how you see software sales now going forward?

I would prefer not to start breaking down our recurring revenues because it could be broken down into infinite detail. I think the dollars involved were less than $1 million but certainly more than $100,000. And we would expect our software sales to be quite lumpy for the next couple of quarters, but then as new software products come to market and take hold, we would expect software to become a much more significant portion of our overall business, built around automation and vessel reconstruction and integration, probably by the midpoint of next year.

Okay.

Until then it might be a bit random and a bit lumpy, because we are just getting started.

All right. And two more questions. Could you characterize what you think your revenue for installed system annually needs to be in order to reach breakeven?

Well, that's a sort of business model question, and we have modeled our revenue per system at about $1 million or just over $1 million.

I guess -- excuse me, on the recurring revenue per system to reach profitability?

That's not how we look at it. I mean, I know that's sort of an intuitive model, but it's not necessarily our model. We do not have a specific level of recurring revenue that would be associated with breakeven, but in the past I have opined that we would need to reach about 30% of our total revenues to be in a mode to break even.

What's much more important is the gross margins on our systems, and we expect these to be very attractive and we think that with system gross margins that could approach the high 60s over time, although recurring revenues could contribute appreciably to profitability, they are not necessarily going to be a significant component as for, say, a company like [Intuit].

Okay. And then just one last question. Do you guys know of anyone doing any sort of clinical research as to improved outcomes using your system versus traditional catheter ablation, either an AFib or some other treatment? And if not, do you intend to undertake some sort of study proving the efficacy or improved efficacy with your device?

Well, the first and easiest part of that question to answer is that in our submission to FDA for our PMA, because we're running a catheter submission through FDA, we did about 185 of patients and that data was submitted to FDA.

As I recollect, the outcomes -- and these are acute outcomes -- were higher than any other catheter that has been submitted to FDA. Not by huge percentages, but measurably better. Secondly, we do have a multicenter CRT study that we're conducting with Medtronic, that I referred to earlier, which has as its endpoint improvement in outcomes through more accurate lead placement.

We are also looking at a number of studies in the AF and VT arena, and pursuing an additional number -- I'll say looking at, we haven't finalized them yet. And we're looking at a number of studies that we expect to launch over the course of the next year in the safety arena.

Gentlemen, there appear to be no more questions at this time. I would like to turn the floor over to Mr. Hogg for any closing comments.

I would like to thank you all for your time and attention, and appreciate the opportunity to talk to you. Good night.

Thank you, everyone. This concludes tonight's conference call. You may now disconnect, and please have a wonderful day.