Stereotaxis Inc (STXS) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen. My name is Cherita and I will be your conference operator today. At this time, I would like to welcome everyone to the Stereotaxis fourth-quarter year-end 2006 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). It is now my pleasure to turn the floor over to your host, Mr. Ben Carmichael. Sir, you may begin your conference.

Good morning and thank you for joining us today for the Stereotaxis fourth-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 call into the webcast, please call me, Ben Carmichael of Noonan Russo at 212-845-4242 and I'll be happy to assist you.

Speaking today we have the Company's Chief Executive Officer, Bevil Hogg and the Chief Financial Officer, Jim Stolze. Before we get started, we would like to remind you that this conference may contain forward-looking statements regarding future events or the future financial performance of the Company, including without limitation statements regarding operating results in calendar 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.

With regard to the Q&A following today's call, in the interest of time, we will allow two questions from each participant, but the Company would be happy to respond to additional questions after the call.

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

Thank you, Ben. Good morning and thank you to everyone for dialing in. On this call, I would like to update you on the sales momentum that we generated during the fourth quarter in terms of new orders and revenues and also update you on our backlog and pipeline trends in the U.S. and international markets, on our installed base and utilization and above all on the strong sales effort that we are engaged in to leverage these factors into accelerated growth. I will also provide you with an overview of our progress in evolving and expanding our technology and will then ask our CFO, Jim Stolze, to provide you with additional information on our financial results.

I am pleased to report a particularly strong performance in our fourth quarter. We secured a record order volume of $16.1 million and our net backlog has increased to $45.3 million. Importantly, our fourth-quarter revenues of $14 million also set a new record and compare very favorably with the $2.1 million of revenues generated in the fourth quarter of 2005. Finally, gross margins of roughly 59% also were at a record high for Stereotaxis.

Acceleration of order activity in the U.S. has proceeded as we anticipated and U.S. orders for the fourth quarter outpaced international orders by two to one. The conversion cycle from order to revenue recognition in the fourth quarter averaged about nine months for those systems taken to revenue.

As for the specifics of our ending order backlog of $45.3 million, this figure is of course net of shipments made and taken to revenue during the fourth quarter. Further, we elected to remove from backlog one prior order where a change in hospital management resulted in cancellation of a major imaging contract and a second prior international order that we were no longer confident we could place.

Our order volume for the quarter is further evidence of our building sales momentum, which is also reflected in the robustness of our sales pipeline or funnel. More specifically, Stereotaxis measures its sales pipeline in five stages. Stage one includes prospective customers who have expressed an interest in acquiring a NIOBE system. The last stage, stage five, is what we would call our backlog.

Besides the backlog itself, the most important indicators of future revenues are stages two through four of our sales pipeline where an order is moving through the budgeting and approval process within a hospital or institution. Setting aside stage one, which alone contains over 300 accounts, and focusing only on stages two through four, we notice that we have well over 200 accounts in this mid to late stage segment of our sales pipeline, which has experienced rapid growth.

We have not yet determined a precise conversion rate in translating prospective customers to sales, but our strong impression when we consider the activity level and volume within the our sales pipeline is that we have sufficient prospective customers to drive an increase in our 2007 revenues in the range of 90% to more than 100% over 2006 and a high rate of growth thereafter. Moreover, we have not noticed any impact on our pipeline at any stage from competitive activity.

Our sales effort is being vigorously implemented and supported by a staff of more than 50; half in direct selling and half in clinical support. And we intend to add sales positions as needed to further drive our growth.

Additionally, we are deepening our sales and market collaborations with our strategic partners. In the context of our operating performance, I am very pleased to announce the promotion of Mike Kaminski to the position of President of Stereotaxis, which complements his current role as COO. Mike and I have worked extremely well together over past years and he brings a wealth of management experience to the Company. I look forward to continuing in my own role as Chief Executive Officer. This promotion further solidifies a seasoned senior management team that we will continue to build.

I am also very pleased with the addition of Dr. Eric Prystowsky to our Board of Directors. Dr. Prystowsky is Director of the Clinical Electrophysiology Laboratory at St. Vincent Hospital in Indianapolis and a consulting Professor of Medicine at Duke University. He currently chairs the American Board of Internal Medicine's testing writing committee for the electrophysiology board certification examination. He is a past chairman of the American Heart Association's committee on electrocardiography and electrophysiology and a past president of the Heart Rhythm Society. We see his joining our Board as a significant endorsement of our technology and the value we bring to the EP market.

In common with other hospital equipment makers, we expect our revenues and orders to be somewhat back-end loaded in 2007, but much less so than in the prior year. There is a seasonality to our business that would indicate that our fourth quarter will tend to be our strongest. Our expectation is that roughly 60% to 65% of our revenues and orders for the year will occur in the second half and that a similar distribution will exist between the first and second quarters of the year. Of course, we continue to be cognizant of the potential for lumpiness in our quarterly revenues resulting from hospital construction and installation schedules.

In summary, we are very pleased with the increase in our sales pipeline and backlog, which we believe will provide the momentum necessary to achieve revenue growth in 2007 in the range of 90% to more than 100% and very significant rates of growth thereafter. Stereotaxis is pioneering a major, new industry; computer-aided interventional medicine. The markets that we are addressing are large and growing rapidly driven by demographics of aging populations and the desire of patients for less invasive treatments.

In electrophysiology, the need for treatment of complex arrhythmias such as atrial fibrillation can only be described as overwhelming. Likewise, the treatment for complex lesions such as CTOs and interventional cardiology and peripheral radiology.

Although apparently our principal focus is on electrophysiology, we note that a third of our procedures already involve guidewire-based navigation within blood vessels and we are making the investments necessary to expand our platform over the next two years to leverage this experience into whole body applications, including coronary, peripheral and ultimately neuro applications.

We believe that our strategy of driving incremental patient volume for hospitals with safe computer-guided approaches to complex treatment thereby enabling them to build and expand their interventional practices without imposing a burden on their operating budgets or per procedure property will enable us to build on our existing momentum and to dominate this new industry.

Stereotaxis' installed base stands at roughly 60 systems worldwide, of which the majority are in the U.S. Over the course of 2006, we trained over 130 EP clinicians and at least 170 hospital lab personnel through a robust training program, which is focused on hands-on system use. User feedback has rated these programs as good to excellent.

Usage rates, particularly for complex procedures such as atrial fibrillation, both chronic and paroxysmal, and ventricular tachycardia have been climbing and we successfully treated over 700 patients with these conditions in 2006. Stereotaxis expects its volume of complex cases to accelerate with the approval of higher energy catheters.

Our prior guidance for approval of the 8 millimeter and irrigated catheters remains unchanged. Although the filing date for the irrigated catheter is about 90 days behind our original expectations. And we remain confident that we will shortly have these new catheters in the hands of our clinicians and that they will drive an important point of inflection in the utilization of our systems in early 2008 or sooner.

The Stereotaxis Magnetic Navigation System is, we believe, uniquely able to provide our clinicians with safety, efficacy and efficiency. We believe that these are prerequisites for establishing a new standard of care for computer-controlled interventions.

With regard to safety, we continue our unbroken record of well over 4000 EP catheter cases, the vast majority of them ablations without any perforations attributable to our catheters. It is our intention to establish a registry with a view to obtaining labeling that would recognize the extraordinary level of safety inherent in our NIOBE system and our GentleTouch catheters.

Moreover, because our system uses magnetic adherence rather than force, there is little or no tenting of the endocardial surface, which in the area of the esophagus can have serious consequences.

Finally, because our catheters are able to navigate within the [left atrium] after the introducer sheath has been withdrawn, the formation of sheath-related thrombus noted by [Marshall Insky] et al poses less of a potential risk than manual or competitive devices, which are sheath-dependent.

Efficacy or treatment outcomes is a basic requirement and we note that our [A Track] FDA study of more than 150 patients delivered successful three-month outcomes after ablation treatment of more than 98%. To our knowledge, the highest success rate of any ablation catheter ever presented to the FDA. It is our intention to build on this clinical validation of our ablation technology by pursuing further clinical studies to demonstrate the efficacy of our system in complex left-sided cases, including atrial fibrillation and ventricular tachycardia.

We expect to launch major initiatives in this area over the course of 2007 once we have the appropriate catheter approvals in hand, including a multi-center post-market study and registry for the ablation of AF in Europe to evaluate acute and chronic efficacy, as well as efficiency and safety.

Our HEAL multi-center CRT study done in collaboration with Medtronic to evaluate lead placement optimization in improving response rates has had a slow start because of a complex IRB process, but we expect to enroll our first patient within the next few weeks and are hopeful at having initial results before year-end.

The efficiency of the Stereotaxis system in reducing treatment times has been noted in two recent CRT papers and is implied in our earlier A Track [2] studies. However, the time taken to treat complex arrhythmias, such as atrial fibrillation, can be linked to the type of catheter used. So we look forward to demonstrating time savings for these complex time-consuming ablations as noted already once we have the appropriate regulatory approvals for our high energy catheters.

What makes the Stereotaxis NIOBE system unique is the fact that it is an intelligent system using computer-controlled magnetic fields to remotely navigate interventional devices directly at their distal working tips. Its key attributes are its ability to integrate diagnostic and image guidance information and to automate treatment using highly flexible disposables. Because we don't use mechanical controls, we are able to continually evolve our software automation products to bring about unprecedented levels of system intelligence driving ease of use, performance and safety. Simply put, we believe the evolution of interventional medicine is all about information, integration and management and of course safety. And we believe our focus on this area will strengthen our existing strategic alliances and generate new ones.

In this regard, we are currently working on new integrated products with Siemens, Phillips, J&J and others directed at providing more advanced levels of image guidance and 3-D reconstruction. We will shortly introduce a comprehensively integrated and networked software product offering higher levels of automation and remote clinical support that we believe will provide us with the opportunity to generate meaningful incremental recurring revenues from software sales.

With the advent of this new software platform, with the anticipated near-term availability of a complete family of higher energy catheters and new vascular devices to follow, such as our RF crossing wire slated for introduction at TCT '07 with commercial release in the first half of 2008, we expect to be hitting on all cylinders with regard to our recurring revenue potential in 2008. We are very confident that these recurring revenues will grow significantly as a result of an increased installed base, increasing installed base and above all for greater utilization per system across a broader range of disposable devices, as well as some improving economics in our share of catheter revenues, all helping us to reach our goal of profitability by late 2008. Thank you.

I will now ask our CFO, Jim Stolze, to provide you with a detailed discussion of the quarter's results.

Thank you, Bevil. For the fourth quarter, Stereotaxis recorded total revenue of $14 million, including systems revenue of $12.4 million compared to total revenues of $2.1 million of which $1.5 millions was systems revenue in the comparable year-ago quarter. We delivered and recognized to revenue 12 systems this quarter.

Our disposable service and accessories revenue was $1.6 million this quarter compared to $602,000 in the prior year quarter. For the year ended December 31, 2006, Stereotaxis reported total revenues of $27.2 million versus $15.0 million for the 2005 year. The Company recognized revenue on 23 of its NIOBE advanced cardiology magnetic instrument control systems in 2006 as compared to 13 in 2005.

In addition to the increase in number of units recognized, we also realized an increase in our average selling price of approximately 11% compared to the 2005 year. Our current quarter gross margin was 59% compared to 39% for the prior year quarter. As we have discussed in our last quarter call, our margin realized this quarter approached the 60% level and we look forward to moving our margins into the mid-60% levels in 2007.

Fourth-quarter operating expenses were $14.7 million, an 8% increase compared to the year-ago quarter of spending of $13.6 million. The increase in expenses relate primarily to additional sales and marketing infrastructure consisting of personnel and personnel support costs, as well as additions to clinical support and clinical trial activities offset by a reduction in R&D costs related to the timing and expenditures for certain disposable device and integration costs.

During the year 2006, Stereotaxis incurred operating expenses of $61 million, an 18.8% increase over the $51.3 million in operating expenses for the year ended December 2005. Operating expense increases resulted primarily from costs associated with additional headcount most notably in the sales and marketing functions, as well as increased research and development costs in support of continued device development and system integration efforts, increased clinical activities and added resources in our training department.

Net loss for the 2006 fourth quarter was approximately $6.2 million or $0.18 per share based on 34 million weighted average common shares outstanding versus a loss of $13 million or $0.47 per share based on 27.4 million weighted average common shares outstanding for the 2005 quarter.

For the 2006 year, our net loss was $45.7 million or $1.39 per share on 33 million weighted average shares outstanding. We believe 2006 represents a solid baseline year from which we can manage our operating expense levels in order to leverage the significant revenue growth opportunities Bevil previously discussed.

We anticipate our 2007 operating expenses to be approximately 15% greater than 2006 levels laying the groundwork for breakeven by late 2008. The Company used approximately $4 million of cash and operations for the fourth quarter of 2006 and ended the year with $37 million of cash and investments. We have approximately $2 million borrowed under our term loan and working capital facility as of year-end 2006.

As noted in our press release, we have reached agreement on terms with our primary lending bank to increase our line of credit to $25 million, an increase of $15 million from the current line with a new maturity of February 2009. The Company has a shelf registration in place covering up to $75 million of equity and other securities. However, the Company believes that it has sufficient cash investments and availability under its working capital facility to reach cash flow breakeven. Any drawdown under the shelf would be based on analysis of the market conditions, the Company's liquidity position and future funding needs at that time.

I would now like to open the call to questions. Operator?

(OPERATOR INSTRUCTIONS). Rick Wise, Bear Stearns.

I guess I will start with the quarter and the number of systems in the quarter. They came in just a couple less than we looked for. The backlog alternatively seems to be a little stronger. Did some systems get pushed out or delayed or anything with installation or am I not understanding this correctly?

I am not sure what you were looking for, Rick, in terms of your particular prognostication for the fourth quarter, but the revenue guidance that we had given previously was $26 million to $30 million and the $27.-some million is just about the midpoint of the range. So we were not -- there was no change. There was nothing that disappointed us there. We were very happy with the buildup of our backlog, which obviously translates into very significant growth in 2007.

Not to beat this point to death, disposables, whether we got it right or wrong, you did better on the disposable side, slightly less -- it looked like a system or two less than we assumed, but I was also just surprised that gross margins weren't a little better given the excellent disposable strength.

Well, we --.

I think you had -- not to interrupt -- but I was just looking at the transcript. You had said 60% was what you were looking for and you got close. I'm again just trying to understand.

I think specifically we said approaching 60% and this 59% is a close enough approach. We will call it a flyby. But in reality, Rick, given the various elements that make up gross margin in a early-stage company in inventory write-offs and manufacturing costs, it is pretty hard to call that exactly. We are very confident that our gross margins in 2007 will be approaching the mid 60s and that we can go higher than that.

Mimi Pham, HSBC.

Congratulations, Mike, first of all. Could you tell us more -- do you have the actual backorder in numbers? How many systems that was and can you tell us more about these systems? Were they from high-volume, atrial fibrillation centers, a big J&J, Biosense Webster centers?

Mimi, to address the first part of your question, we have encountered difficulties with prospective customers who are able to divide our dollar volume of orders by the number of units and arrive at an ASP and then complain to us that they are overpaying because they are paying more than the average ASP. So that is why we are not disclosing specific number of units.

It causes us a lot of grief in our negotiations with hospitals and let's just say that I think historically we have averaged about $1.1 million per system, but going forward, we are going to try and concentrate on the dollars rather than the units because of the negotiating leverage that it costs us.

Now with regard to the specific placement of these systems, I think it is a pretty broad mix of placements that would not deviate from what we have sold historically, some major hospitals and some minor ones.

Tao Levy, Deutsche Bank.

This is actually Imran in for Tao. Just could you give us -- to talk about guidance for a minute, you talked about a backlog of $45 million and a guidance in the low 50s. Are you being conservative? Would you characterize that as being conservative given that most of the guidance is already reflected in the backlog?

I think that when we look at the backlog of $45 million and assume that we can -- first of all, we have to assume that not all of that is going to ship in 2007. Some of it is shippable in 2008, but obviously the vast majority of that backlog is going to ship in 2007 and clearly, we are going to write orders in the first quarter and the second quarter that are shippable this year. So I would characterize that guidance as prudent on our part. Clearly, there is upside and obviously there are recurring revenues that can occur.

Okay. And then with respect to the catheters, can you just remind us what the latest is with the filing of the irrigated catheter about Biosense Webster and then when we should expect approval of that and as well the 8 millimeter catheter?

Sure. Our guidance with regard to availability of these catheters was 8 millimeter in the U.S. by the midpoint of this year, irrigated in Europe by the midpoint of this year and irrigated in the U.S. by the end of this year. So that guidance hasn't changed. Although, I did note that the filing of the 8 millimeter, which we originally expected to happen in December, has been delayed about 90 days, not over anything serious, just last-minute testing and so on. We don't expect that to impact the approval dates or we would change our guidance. We believe that FDA has a much better understanding of our system and the attributes of our catheters and that approval will go faster and easier than it has done in the past.

Charles Chon, Goldman Sachs.

I just wanted to ask you a quick question on the ASPs. You indicated that that metric grew throughout 2006 and so I am kind of wondering could you speak to exactly what is contributing to that increase in ASPs and is that growth sustainable?

That's a very good question. We are very proud of the fact that we have been able to consistently increase ASPs in an environment where hospitals are obviously cognizant of other uses for their money and also of the potential for future competition. There is sort of an ultimate barrier and that is the return on a hospitals investment and we are very sensitive to the need to protect the hospitals' economics. So I think that we will see a leveling off, perhaps a very small increase, but probably a leveling off in our ASPs going forward.

Great. Thank you. And I just wanted to go touch on a point that you made earlier about competitor activity and how it hasn't had a real material impact on how the sales follows the building, but are the timelines for purchasing decisions being stretched in any way as accountants have to sift through the potential offsets for navigation systems?

First of all, I didn't say it hasn't had a material impact. I said it hasn't had any impact, meaning none. And with regard to the stretching of timelines, we see absolutely no stretching of timelines whatsoever.

David Zimbalist, Natexis.

Thank you very much. I wondered if you could talk a little bit about your high energy catheters, the 8 millimeter, the irrigated? What kind of labels you are expecting on the catheters and the post-approval registries and studies that you plan to do are targeted to actually label expansion?

Interesting question. The catheters are being approved by PMAs or PMA supplements because these are -- Biosense Webster, J&J catheters that already have PMAs and we are supplementing those PMAs through a PMA supplement and they will be approved I believe for what you might call general ablation and will not carry a specific label for atrial fibrillation.

To our knowledge, there is no currently available catheter that is labeled for AF, but I would note that these catheters from J&J are clearly targeted for AF labeling by J&J themselves and that we would benefit from that. The approval of that specific labeling designation is unlikely to occur in 2007.

Jan Wald, A.G. Edwards.

Congratulations on the quarter. A couple of questions. I hope they are easy. Could you talk a little bit about the usage per system? Are you finding that the systems in place are being used more and not sort of gathering dust? Maybe the second question I will ask right now. When you talk about the software platform and the improved revenue contribution that you might be able to provide going forward, could you talk a little bit about what that platform is and what the recurring revenue model for it might be?

Okay, with regard to usage, we don't disclose specific usage anymore because we have got too many systems that we would have to keep track of, too many different locations to know what was happening in each one. However, we do note that in terms of total number of procedures that they are continuing to climb particularly in the area of complex procedures and that this is also true when taken in the context of the size of our growing installed base.

But we would point to a likely point of inflection that would occur, as I said, in early 2008 or sooner when the higher powered type catheters become available because clearly there are a number of sites that are not doing complex arrhythmias with the current roster of catheters.

With regard to your question about software, that is a very interesting one and it is one that we are still considering, so I don't want to answer it specifically until we introduce our product. But let me say generally that we expect software to be a major component of our business and in the rapidly integrating networked world, the ability to provide service, clinical support, clinical backup has real value we believe to end-users and customers. And we believe that this has the potential to drive a software annuity, which could be paid monthly or yearly.

Steve Ogilvie, ThinkEquity.

Congratulations on your good quarter. Could you break out in terms of domestic and international this quarter and the backlog either the total backlog or the new systems and then maybe give us a little more color on R&D and what happened this quarter and how we should think about it going forward?

Okay. With regard to the total backlog, the domestic component of the total backlog as it stands today is about 70% reflecting the increase in U.S. orders that we have been generating. And the O.U.S. or rest of the world backlog is about 30%.

On the quarter with regard to revenues, the revenues were tilted the other way. About one-third were domestic and two-thirds were international and we would observe that revenues trailed backlog so that the revenue situation in the fourth quarter of last year was reflecting backlog from much earlier in that year. Likewise, we would expect revenues to tip in favor of the U.S. over the course of this year. Was there a second part to that question?

First, can I ask you a quick follow-up? Can you say if any of the international orders -- were they all installed or were some of them through a third part party? Then the second part of my question was on R&D. What should we look at R&D going forward?

I will answer the R&D question, then I will turn the other question over to Jim because he is much more familiar with installation cycles and revenue recognition than I am. The R&D expenditures that we expect to be deploying this year will, we believe, while showing some increase absolutely, begin to level off and we think that the bolus of our R&D spending is likely to be over by the midpoint of 2008.

We have some key projects that center on new software integration systems development and evolution and expansion of our interventional cardiology guidewire opportunity that we think will be accomplished during this timeframe but without a significant increase in R&D spending in absolute dollars and obviously a significant reduction in R&D spending from a percentage standpoint. And I will hand the mic over to Jim here.

In terms of the fourth quarter, about half and half was complete installation by the end of the quarter and the remaining systems are in process of installation during this quarter.

Charley Jones, Next Generation Equity.

Thank you for taking my questions. Excuse my cold. Can you discuss your clinical trials in a bit more detail, Bevil and discuss what you're hoping to learn from these studies and how large they are, a little bit more detail there?

Certainly. We have different kinds of objectives. Obviously we have regulatory objectives to obtain approval for various devices and I will set those aside and talk about post-market studies or registries.

Our first goal is to prove that our system is safer than alternative approaches to performing ablations for arrhythmias and to do this, we would like to establish a registry and to gather safety data so that we can convince FDA that we deserve a specific safety level. We are in discussions with FDA currently. This is not final, but this is our hope and our expectation. And we expect movement over the course of this year.

However, we also need to demonstrate efficacy for our system, meaning our outcomes in the area of complex left-sided treatment. We believe that we have very comprehensively demonstrated efficacy for right-sided treatment with our A Track study data that was submitted to FDA. But on the left side, we will institute a couple of studies over the course of the year in Europe when the higher energy catheters are available there to evaluate our outcomes and also efficiency in the treatment of atrial fibrillation and ventricular tachycardia and we will make some announcements about these clinical studies going forward once we have more detail around them.

Finally, we have the Medtronic study or the Medtronic Stereotaxis study, which is focused on measuring or gauging the benefits of optimizing lead placement in terms of improving response rates and this was a study that I mentioned had gotten off to a bit of a slow start, but we do expect results over the course of the year.

Thank you for some of that detail. Jim, on operating expenses, can you give us some detail about whether or not R&D is going to be lumpy and whether or not it is going to be more or less than your growth rate in operating expenses and then if you could, in thinking about your gross margin now and going forward, are you at a level of infrastructure -- how long can you hold this same level of infrastructure? Is it a year, is it a year and a half, how many systems before you really have to expand it? Can we just think about this incremental cost as being just a system cost? Thanks, guys. Good quarter.

The R&D spending will increase in 2007 somewhat probably in line with the overall OpEx spending or somewhat less. Actually the biggest increase will be in the sales and marketing side as we add support in that area, followed by the R&D and then the overall OpEx number should fall within a range we talked about plus 15%.

In terms of the infrastructure to support our production, we are basically in an outsourced mode. So the infrastructure that we have today really supports the outsourced functions that we have. So our production volume can increase markedly before we would have to add any infrastructure here in St. Louis.

At this time, I would like to turn the floor to Bevil Hogg for any closing remarks.

I would like to thank you all for your patience and for your questions and we look forward to following up with those of you who want us to follow up with you, answer additional questions and we will be talking to at our next earnings call. Thank you very much. Bye-bye.

Thank you. This does conclude today's Stereotaxis conference call. You may now disconnect and have a wonderful day.