Stereotaxis Inc (STXS) 2010 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Stereotaxis second-quarter 2010 financial results conference call.

During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, Monday, August 2, 2010.

I would now like to turn the conference over to Doug Sherk.

Thank you operator. Good afternoon everyone. Thank you for joining us for the Stereotaxis conference call and webcast to review financial results for the second quarter of 2010, which ended on June 30, 2010.

Before we get started, we would like to remind you that, during the course of this conference call, the Company may make projections and other forward-looking statements regarding future events or the future financial performance of the Company, including without limitation statements regarding future operating results, growth opportunities, and other statements that reflect Stereotaxis' plans, prospects, expectations, strategies, intentions and beliefs. These statements are subject to many risks and uncertainties that could cause actual results to differ materially from expectations. For a detailed discussion of the risks and uncertainties that affect the Company's business and qualify the forward-looking statements made in this call, we refer you to the Company's recent public filings filed with the SEC, specifically the Form 10-K for the fiscal year ended December 31, 2009. The Company's projections and forward-looking statements are based on factors that are subject to change. Therefore, these statements speak only as of the date they are given. The Company assumes no obligation to update any projections or forward-looking statements.

In addition, regarding orders and backlog, there can be no assurance that the Company will recognize revenue related to its purchase orders and other commitments in any particular period or at all because some of these purchase orders and other commitments are subject to contingencies that are outside of our control. In addition, these orders and commitments may be revised, modified or canceled either by their expressed terms as a result of negotiations or by project changes or delays.

Now, I'd like to turn the call over to Mike Kaminski, President and Chief Executive Officer of Stereotaxis.

Good afternoon everyone. On the call with me today is Dan Johnston, our CFO.

We are pleased with the quarter but believe we are just beginning to achieve the full potential of the Company. While there is a lot of work ahead, this quarter reflects the initial results from the steps taken by the commercial team to install a disciplined approach to the daily execution of our processes and accelerate the commercial cadence of the Company.

The key focus continues to be, first, drive adoption of the NIOBE platform in the installed base; second, build reference sites and leverage them to accelerate NIOBE sales; third, utilize our NIOBE sales -- our Odyssey sales in NIOBE suites to enable penetration into the much larger standard lab market. In the second quarter, we made progress on each of these areas and continue to be confident about achieving our 2010 plan.

I'd like to touch on a few of the operational highlights for the quarter. Record revenue of $15 million represents a good balance between NIOBE capital revenue worldwide, Odyssey sales, and recurring revenue growth. The $5.6 million of recurring revenue is also another record quarter for the Company. Continued strong gross margins reached a quarterly record of over $10 million, which were 67.2% of revenue. Finally, the growth in new capital orders to $10.2 million demonstrates the increased interest in our platform for advanced EP ablation.

Execution was the key to our improved results for the quarter. For the past several quarters, the primary focus has been on driving adoption among our NIOBE customers. Our comprehensive effort has been centered on working with clients on a clearly defined clinical plan that encompasses continual learning, clinical and marketing support, and a mutual commitment to building Stereotaxis' magnetic interventional treatment program.

To achieve our goal, we've added staff in areas of training, site support and the management who are experienced in helping clients develop the level of confidence that it takes to move a new technology to the standard of care. Our plan has required new leadership, more robust processes, and revised internal and external training programs. Since we began reconstituting our efforts almost a year ago, we've made systematic progress in each of these areas, which is instrumental to support our overall objective of becoming the gold standard for less cited complex ablations.

It has taken several months, but we are beginning to see the results. For example, utilization continues to increase in North America, where top accounts are now consistently performing over three cases per week.

Worldwide, we've established the needed reference sites and training centers to provide a foundation for our capital sales process. Many of these sites can now host peer-to-peer advanced training for existing sites. Also in this quarter, the capital purchase orders for North America accelerated, which we believe is a direct correlation to the positive market momentum.

Since our last quarterly update, we've added significantly to the body of scientific evidence supporting our value propositions for cardiac electrophysiology. We've had our strongest scientific showing ever at the Heart Rhythm Society meeting in May and the Cardiostim meeting in June. In a session attended by over 600 physicians, Dr. Peter Weiss from Intermountain Medical Center in Salt Lake, performed a successful live ablation case on an 80-year-old gentleman who suffered from chronic afib.

In addition, the Stereotaxis value for the ablation of ventricular tachycardia was specifically highlighted in two presentations during the meeting. Dr. Hiroshi Nakagawa from the University of Oklahoma presented one-year follow-up results from 25 patients whose VT was caused by a previous heart attack or other heart condition. Using the magnetic navigation, Dr. Nakagawa was able to obtain 91% acute success and 72% freedom from VT at one year. These one-year results compare very favorably to the recently published very large European trial of similar patients whose chronic freedom from VT were closer to 50%. Remarkably, to obtain a detailed map of these patients, diseased ventricles, Dr. Nakagawa needed only 10 seconds of [fleural].

Also at the meeting, Dr. Peter [Noizel] from Prague presented early promising results of our prospective stop VT study that includes patients with similar arrhythmias to those presented by Dr. Nakagawa. There are now nearly 30 patients in the study and we anticipate finishing enrollment in time for the presentation at some of the fall VT meetings and submission to the HRS 2011 program.

In addition to the VT presentation, the group from -- lead by Dr. Thomas (inaudible) in Rotterdam reported on their chronic outcomes of patients with arrhythmias related to previous congenital heart disease surgery that had been treated with magnetic navigation. In this group of 25 patients, they were able to obtain an overall success rate of 85% at more than one-year follow up. The same group had previously reported a 65% chronic success rate in a similar patient group using manual techniques.

Finally, multiple groups presented successful outcome data for AF ablation at the HRS meeting, including a group led by Dr. Andrea Natale of Austin, Texas, who noted 100% acute success rate when using the preferred circular mapping guided ablation technique with magnetic navigation.

The scientific evidence, along with physician feedback, leads us to conclude that we have a superior technology to address the needs of the EP community. Specifically, we believe that the NIOBE system will become the gold standard of care for AF. We've proven that we can effectively and safely address the needs of the AF patient and as a result, we continue to gain market acceptance in this very large high-growth market. We are committed to making this a cornerstone of the usage and have several products due out in the balance of the year which will enhance the value, specifically the Vdrive, the CARTO 3 RMT and the new Navigant 3.2 software release, as well as a continuous movement feature, are all designed to improve the efficiency of the AF cases.

VT is a life-threatening condition that could lead to sudden cardiac death. We believe the NIOBE system has demonstrated an ability to treat VT at a level that is comparable to the best hands in the world. We achieved this through exceptional capability to generate very precise maps, important in their targeting and treatment of this complex arrhythmia.

At the same time, we believe there is overwhelming evidence to support our contention that NIOBE procedures can be safer than the best hands in the world for every ablation and enables ablation for some very difficult procedures. Our system can address these difficult and dangerous areas for a select patient population. For example, we have enabled treatment of very challenging pediatric patients as well as adult patients with arrhythmias in the heart that are difficult or potentially dangerous to reach.

The scientific body of evidence highlights a superior value of our technology in all four chambers of the heart, and we invite you to download our ever-growing bibliography from our website to check out any of these individual meetings for more information on the abstracts.

In regard to NIOBE sales, we are very encouraged by the uptick in activity in North America, continued progress in Europe as well as the opportunity for robotic adoption of EP in Asia-Pacific. In the first half of this year, we continue to see the growing interest in purchasing our platform for advanced EP procedures. We've added several positions in Asia in our infrastructure with a specific focus on clinical support and capital sales in China. The number of new EP labs and the treatment of complex ablations are rapidly expanding, and we believe they will continue to do so for years to come.

In Japan, which is currently the third-largest ablation market behind the US and Europe, we will finish enrollment of our trial this year and submit for approval in the first half of 2011. Between both China and Japan, we are positioned to capitalize on these emerging growth opportunities and are investing on pace with the regulatory timing.

The EP complex ablation market represents an attractive opportunity of approximately 150,000 patients per year and is growing at a rate of close to 20%. With close to 3000 labs worldwide performing these ablations, we have just begun to penetrate this high-growth opportunity.

We continue to be encouraged by the penetration in the midsize North American community-based hospitals. These hospitals represent the majority of the healthcare delivery market and a large growth opportunity for EP.

In the past quarter, we have launched four sites in community-based hospitals. These hospitals share the common vision of utilizing our technology as the foundation needed for them to capitalize on the EP ablation market opportunity. They recognize the benefit of providing a safe platform for their patient base to secure market share. We are excited about these trends and believe it bodes well for accelerated growth in the future.

Now, let me turn to the Odyssey platform, which experienced 100% increase in both orders and revenue in Q2 over Q1. As reference sites build market interest, the Odyssey business is expanding rapidly beyond NIOBE suites. This is evidenced by the growth in orders to over $2 million in the second quarter as well as the shift we see in the sales funnel. In the second quarter release, we released the ability to link labs into the Cinema information backbone without having to replace all of their screens. This now enables us the capability to add labs to the network with minimal construction and to link in with our imaging partners on new x-ray labs.

There are roughly 20,000 interventional labs worldwide. We, therefore, have seen and have been gratified with interest and believe it will continue to be a significant leg of our growth going forward.

So to summarize, in EP, we're well-positioned in a large growing market and recognize that execution is the key. We have a sound strategy around what it will take to become a standard of care for complex EP ablation. We are focused on driving daily execution and we now believe we have the leadership in the field that can make this happen.

Many of you have asked about the relationship with Biosense Webster, and I'd like to provide a quick update on the agreement this afternoon. Last Friday, we announced an extension of the 4 and 8 mm agreement through December. As you may know, our agreement on irrigated catheters are through December 2011.

We have been in negotiations with Biosense Webster regarding the expansion of our relationship, which includes the Odyssey platform. The expansion includes leveraging the Odyssey network for broad clinical opportunities. The negotiations have taken longer but the topics are broader than in our current relationship. We expect to conclude negotiations this year.

Finally, this afternoon, I'd like to acknowledge the significant contributions of Abhijeet Lele who's been a member of our Board of Directors for a number of years. Abhijeet has elected to leave the Board due to the challenging job requirements of his new venture firm. We began the search for new board members who can demonstrate a strong track record of leading commercial success in medical technology companies.

Now, I'd like to turn the call over to Dan for a more detailed look at our second-quarter financials. Dan?

Good afternoon. Revenue for the second quarter was a record $15 million, an increase of 19% from the $12.6 million of revenue in the prior year. Systems revenue increased 16% to $9.4 million compared with $8.2 million a year ago, reflecting a significant increase in the sale of Odyssey systems.

We recognized revenue on seven NIOBE systems, one less than a year ago. Odyssey and Cinema systems revenue was $2.5 million compared with $400,000 in the prior year. Deferred revenue on the balance sheet was $7.6 million at June 30, 2010, an increase of $400,000 from December 31, 2009.

Recurring revenue grew 24% to set another record of $5.6 million. The growth was principally due to an increase in procedures as well as strong pricing.

New capital orders in the second quarter totaled $10.2 million, including $7.6 million for seven NIOBE systems. The seven new systems in the backlog break down geographically as three to the US, two into Europe, and two in the rest of the world. The balance of our new orders relates to Odyssey.

Backlog at the end of June increased to $39 million from $38 million at the end of March and $36 million at December 31, 2009. While modest, we now have posted two sequential quarters of increased backlog.

Gross margin continues to grow faster than revenue. For the second quarter, gross margin was $10.1 million, an increase of 26% from last year. As a percentage of revenue, the second-quarter gross margin percent of 67.2% was substantially improved from the 63.1% reported in the second quarter a year ago. The increase was attributed to strong recurring revenue volume growth, which is helping our overall mix. Recurring revenue pricing also combined with improved cost of goods, also favorably impacted gross margins.

Operating expenses in the recent second quarter were $15.8 million, an increase of 8% compared to the $14.6 million in the second quarter of last year. Bridging the $1.2 million increase, almost $600,000 of the increase is related to higher headcount and driving the clinical adoption efforts Mike just referred to.

We also saw a $400,000 increase in losses on foreign exchange with the strong dollar. The balance primarily relates to higher severance costs driven by some of the changes we've made to the organization. The net result was continued improvement in the reduction of our operating loss to $5.7 million compared to $6.3 million in the first quarter and $6.7 million in the second quarter last year.

Other income includes a mark-to-market gain related to the outstanding warrants we have, which must be adjusted quarterly under derivative accounting rules.

We reported a net loss of $3.9 million, or $0.08 per share, versus a net loss of $7.4 million or $0.18 per share in the second quarter a year ago. Average shares outstanding for the second quarter were 49.9 million compared to 41.7 million in the same quarter last year, reflecting the issuance of 7.5 million shares as part of our follow-on stock offering completed in October of 2009.

For the first six months of 2010, revenue increased 8% to $25.6 million. Gross margins grew 14% to $17.8 million or 69.4% of revenue, compared to $15.7 million or 65.8% in the first half of 2009.

Operating expenses are up about $300,000 and the operating loss declined $11.9 million from $13.8 million last year. The net loss for the first six months of 2010 was $12.3 million compared to $15 million in 2009 on a per-share basis. The loss per share was $0.25 per share in the recent six months versus $0.36 per share in the same six months of 2009.

On a year-to-date basis, we continue to make good progress in reducing our cash burn, which includes cash used in operations, capital expenditures and repayment of Biosense advances. For the first six months, we used $14.2 million in cash compared with $17.3 million to the comparable period last year. This represents an 18% decrease in the year-to-date cash burn. So with a cash burn for the quarter of $17.9 million and the year-to-date of $14.2 million, we expect second-half year cash burn to be mostly driven by working capital and less by operating losses.

Turning to the balance sheet, cash totaled $22 million at June 30, 2010, total debt was $26.7 million at June 30. Last year at this time, we had cash of $12.8 million and total debt of $28.4 million. As such, our net liquidity position is about $11 million better than a year ago. Our borrowings include $15.5 million drawn against the $30 million working capital line we have with Silicon Valley Bank during the quarter.

Finally, I'd like to reiterate our goals for 2010 as we expect the traction we are gaining to drive improved revenue and order growth in the second half of the year. We expect the following -- 2010 new capital order growth in dollars greater than 40%; 2010 revenue growth in the mid-20% range; Odyssey revenue growth greater than 75% for 2010; and operating expenses of approximately $60 million to $65 million for the full year. We expect gross margins to remain above 65% for the balance of the year.

With that, I'll turn it back to Mike.

Thank you Dan. We are now ready for questions.

(Operator Instructions). Mimi Pham, Soleil Securities.

Good afternoon. Regarding the seven NIOBE system new orders for the quarter, are these from sites that are currently doing afib procedures, or are they buying NIOBE to sort of build out their afib programs?

I believe most of them have an afib practice, but we have had sites that -- I am not sure about this quarter, maybe we have had sites in the past that have bought it to build a whole broad line EP program. So the history would say we've had both, but this quarter, I don't know the specifics. I'll have to dig into it and I'll follow up with you on the exact quarter.

Related to that, do you get a sense of what got them over the hump to place the order during the quarter? Was it something at HRS, the (inaudible) reference center, budgets opening up, any kind of clarity?

Yes, I think, in general, our feeling is the US market budgets are opening up. I think there is a general feeling that there is more activity, more decisions going on. I believe our strong recovery in the US in particular in utilization has made people more comfortable that the value is there. So I think that has driven more activity around those looking to buy to go and call the sites that have already bought. So we're getting a more favorable momentum in the funnel as a result of that.

(multiple speakers)

Then -- (inaudible)

I was just going to say both contributed to it.

Then I know you did reiterate your guidance for the full year, but can you help us with your expectations for third quarter? Do you expect new orders to increase sequentially from second quarter and the same for recognized system sales?

This is Dan. We always said the year was back-half loaded. The exact call between Q3 and Q4 we don't -- I don't think we're going to give specific guidance on that. But we do expect it to build through the fourth quarter.

Build through fourth. Thank you very much.

Sameer Harish, Needham and Company.

Thanks guys. Good afternoon. I was wondering if you could talk a little bit about Odyssey in terms of configuration. I know it has several configurations and a wide ASP. Maybe talk a little bit about what you're seeing in terms of placements and pipeline.

Yes, certainly. The Odyssey has two basic vision products. [The first one] is a Quad HD which has more pixels, and then the HD. Then this last quarter, we have released the ability to hook -- it's called [link and partner] interface where we can take, without replacing the screens, and be able to hook it to the Odyssey backbone.

Then of course we have the Cinema, which is the ability to video record and compress and send the signals to the network, the data. So all those make up the Odyssey product as we talk about it. That's why there's a wide range of ASPs, because the combination of those you have to look at.

But what we've seen is a high interest in networking across labs. That's why we came out with link and partner interface. If customers don't have in their budget or currently aren't expecting to replace the labs -- or the screens in the lab, then we can offer them a solution to hook to the backbone without doing that. So it has been very complementary.

Now, what we've seen in the quarter, which was interesting, is the people -- there's a customer or two who were going to buy NIOBE, but preceded that with an Odyssey order in the quarter. That was the first time that's happened in the Company. So we actually think it can be -- it can help us open doors on NIOBE. So they bought the Odyssey and they put it in a room adjacent to where they're going to buy the NIOBE, which we anticipate will be in the next 12 months. So the construction on the NIOBE hasn't began, but they went ahead and bought the Odyssey. So we are seeing the dynamics of how Odyssey can help us also be successful in NIOBE labs because it gives us more opportunities to talk to the EP environment.

Just in terms of what's going on competitively in that space for Odyssey, just maybe talk about the barriers of entry for another company or product to come in there, product generally designed for general surgery or EP as a whole, not necessarily tied to magnetic.

Well, I think we're very well-suited of course in robotic suites, because we have a unique capability of integrating control all the same keyboard and mouse. As you start looking at other EP suites, it really leverages the Cinema backbone. We are pretty unique in that in the sense that the ability to compress video and send high-bandwidth video across Internet, I believe, is pretty unique. So doing intra-network capability, and even inter, depending if you're connecting the doctor office to the lab, is relatively unique as far as I've seen. So we've seen other solutions, but none have the feature set we believe we offer. That's why people keep coming asking us to expand the offering beyond what we are currently selling in.

If I could ask one more question in terms of any change in the J&J partnership. I think, before, you had talk about some acceleration possibly coming back half of the year as the new negotiated partnership goes into place. It seems like that could be pushed towards the end of the year. Any change in your thoughts on the contribution the new renegotiation might have for the year?

No, I don't think -- we don't anticipate the J&J negotiation will impact our year at all.

Thank you.

(Operator Instructions). Jose Haresco, JMP Securities.

Hi guys, good afternoon. Just a housekeeping item -- how many procedures do you guys have under your belt at this point, or as of end of the June quarter?

I believe we are over 30,000. I don't know the exact number. Do you?

No. As a matter of fact, I think what we've adopted as a practice is releasing big milestones like that. We've told the Street basically we would tell people procedures on an annual basis.

Thank you. What update or news or (inaudible) perhaps this is almost on the borderline of speculation. Can you talk to us about St. Jude or some of the other folks out there in the AF space manufacturing magnetic catheters for their lines of equipment that could be compatible with your systems? There was some chatter about that over at HRS a few months back, and I just want to know if there's anything that's developed since then.

I'm not aware of anything new that's developed. Obviously I think there's -- St. Jude has discussed a line. As far as I'm aware, they haven't commercially made it available. Biotronic does market a line in Europe but it's not available in the US or any other market that I'm aware of.

Thank you very much.

Mimi Pham, Soleil Securities.

Hi, just two quick follow-ups. First, for this quarter, you had put out a press release prior to the results with your new orders. Will you be doing that every quarter going forward?

Actually, we put that out because we got quite a few questions in the past at HRS and even the last call about when is the US market, when do we anticipate the US market will begin to show signs of recovery. So we put that out. We're going to look at that as we go forward and determine whether we are going to make that a practice or not. But right now, we thought that was relevant for all the discussions around the second quarter kind of trends.

Then in terms of general AF procedures being done, whether they are NIOBE or non-NIOBE-based, are you hearing any kind of impact from the economy? I guess they are considered semi-elective.

I continue to hear pretty bullish numbers out there on AF. From what I hear and gather from the industry, it is still in the high double -- or in the double digits, low end of the double-digit number as far as growth of AF.

Thank you very much.

Charles Jones, Barrington Research.

Good afternoon. Thanks for taking my questions. Kind of piggy-backing that last question a little bit, disposals came in a little bit lower than what we were expecting. I don't know if we were just a little bit high or if they are tracking to your expectations. I kind of looked at the sequential performance we have seen over the last three or so quarters. It's starting to trend down a little bit. Do you think we should continue to see these lower sequential improvements in disposables? How did it come in, in the quarter, and what kind of growth rate do you think we can expect on that line over the foreseeable future here?

Q3 has always got a little bit of noise in it because of the summer months. You got a lot of vacations, particularly in Europe. So you get a lot of the European effect in Q3. We did have a little bit of transitioning to the CARTO 3 that hit us in Q2. But I think we anticipate Q4 you'll see a full effect of having that behind us and ramping pretty steady from then on. So Q3 will have a little bit of the noise of the summer vacation, and Q2 had a little bit of aberration in there because of that.

So can we expect a double-digit growth rate in that line, do you think, the royalty line, or are there some ASP issues that maybe you're --?

We actually, when we did our forecast and our guidance last quarter and actually I think last year, we actually pegged capital and recurring really both at around 25%. Mid-20s% is how we characterize in growth rate, so pretty even.

Then sales and marketing was a little bit higher than what we were expecting. Is that due to commissions for the increased number of systems sold, or did you do something in the quarter, add reps or do something that (multiple speakers)?

I think actually the transition of the salesforce, what Dan mentioned on --

Yes.

We have added a few people. We have probably a bolus of the severance that you talked about was moving that through, so changing out, as well as some amount of commissions, although I think most of it was the shifting of manpower.

It was mostly manpower, headcount.

Great, that's it for me. Thanks a lot.

(Operator Instructions). Jose Haresco, JMP Securities.

I had a follow-up question on the gross margins. They were, as you mentioned, kind of a real milestone for you guys. Could you just walk us through again as to how we get there, and how much of that improvement is I guess a permanent improvement in either manufacturing or volume or whatever else rather than kind of the one-time artifacts that we see on any given quarter?

Yes, I think, from a mix perspective, again with the growth from the systems and the procedures both pegged at about the same growth level, I don't think you will see much of a change in mix. I think it is fair to say that Q2 this year had some very good cogs associated with it on the software and service side, just really good experience. That can come in a little bit lumpy as we, from time to time, install new software and release new software. We service and have major repairs on systems, which we just really haven't had a lot of that since last year. Actually in Q2 of last year, we did have one major service on a system that kind of drove the cost up. So I think they're going to continue to grow at about the same rate. I don't think you're going to see a lot of mix impact.

I think you do have the chance of seeing better margins on the system side, because pricing on the new NIOBEs continues to hold. I think, as the Odyssey platform matures and some of these newer product lines that were talked about earlier mature, I think our cogs will be a little more reliable. We'll find avenues that take cost out. So I actually think, if anything, there's more upward pressure on margins because we'll get better margins in the system side.

Thank you very much.

There are no further questions in the queue. I would like to turn the call back to management for any closing remarks at this time.

Thank you, everybody, for joining us on the call. We certainly look forward to talking to you again in a few months, and having a very good back half of the year. So thank you.

Ladies and gentlemen, this concludes the Stereotaxis second-quarter 2010 financial results conference call. To listen to a replay of today's call, please dial 303-590-3030 or 1-800-406-7325 and enter the access code of 4329312#. We thank you for your participation. You may now disconnect.