Stereotaxis, Inc. (STXS) Q2 2011 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Stereotaxis second quarter 2011 conference call. During today’s presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions) Today’s conference is being recorded, August 8, 2011. I would now like to turn the conference over to Greg Gin. Please go ahead.

Thank you, operator. And good afternoon, everyone. Thank you for joining us for the Stereotaxis conference call and webcast to review the financial results for the second quarter of 2011, which ended on June 30, 2011. 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, 2010. The company’s projections and forward-looking statements are based on factors that are subject to change, and 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 backlogs, 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 express terms as a result of negotiations or by project changes or delays. Now I’d turn the call over to Mike Kaminski, President and Chief Executive Officer of Stereotaxis.

Thank you, Greg. Good afternoon, everyone. Thank you for joining us today on our second quarter 2011 conference call. We have a lot of important information to review today. So I’d like to spend a few moments going over the agenda. I will start with prepared remarks with a review of the factors that impacted our second quarter performance. Then I’ll discuss the company’s transition plan, as outlined in the afternoon’s press release that is designed to build rapid adoption of our new Epoch robotic platform, capitalize on the Odyssey opportunity, and substantially conserve financial resources. We will then review the financial results and provide details of the financial impact of the restructuring before open it up to calls. Let me get started. Second quarter was a challenging quarter for Stereotaxis and reflects the beginning of a period of significant transition for the company. Revenue was down 22.7% from the second quarter of 2010. Gross margin in the second quarter was 69.7%, up 250 basis points from a year ago. Global new capital orders were $4.4 million and were comprised of two Niobe systems as well as $1.7 million in orders related to Odyssey. Operating expenses increased due to the impact of marketing expenses for two major medical meetings associated with the release of our Epoch platform. The bright spot for the quarter were marked momentum and interest in Epoch, which is designed to significantly enhance the efficiency for all robotic EP procedures and whose market adoption will significantly contribute to the growth and profitability in the future. The second was the 17.9% growth in recurring revenue, which reflects the continued growth in the clinical procedures and the pipeline momentum for the Odyssey system in the standard EP lines. While we are disappointed with our systems revenue and new capital…

Thanks, Mike, and good afternoon. As Mike stated, revenue for this year’s second quarter was $11.6 million, a decrease of 23% from the $15 million of revenue in the prior year. Systems revenue at $5 million was down 47% compared with $9.4 million a year ago. Systems revenue for both Niobe and Odyssey businesses was weak versus last year. We recognized revenue on three Niobe systems versus seven systems a year ago. Odyssey systems revenue was $1.6 million, down 39% from a year ago. All Niobe systems taken to revenue this quarter were placed in North America. Recurring revenue grew 18% versus the second quarter of last year to set another record of $6.6 million. The growth was driven by an increase in procedures as well as strong pricing. Sequentially, total revenue increased by $1.4 million or 13% from the first quarter of 2011. New capital orders for the second quarter totaled $4.4 million. We booked one Niobe in Europe and one Niobe in the US. New Odyssey capital orders were about $1.7 million with a lion’s share of these new orders within Niobe lab. Moving on to backlog, in 2009, we began the process of reporting the backlog that was active and could be seen as moving into revenue in the foreseeable future. We have generally viewed this as an 18-month forward-looking window. With lots of momentum around the Niobe II platform, we have challenged each product in backlog and its ability to hit this 18-month window. As a result of this evaluation, we have identified certain projects which have either stalled or for which circumstances have changed the point that the certainty is now too low to include these projects in this metric. As such, we are removing seven Niobes from our active backlog. The value of these…

Thank you, Dan. Regarding financial guidance, we announced on our press release that we’ve withdrawn previous financial guidance for 2011 and are temporarily suspending providing financial guidance until we have predictability to the ramp in our magnetic platform business. We believe this is a prudent course of action given the corporate development that we discussed today in an uncertain timeframe that impacted – the Epoch will impact our business. With that, operator, I’d like to open it up to questions.

Thank you, sir. (Operator instructions) Our first question comes from the line of Tao Levy with Collins Stewart. Please go ahead. Tao Levy – Collins Stewart: Hey, good afternoon.

Good afternoon, Tao. Tao Levy – Collins Stewart: First off – first of all, Epoch, you mentioned that now you’re not expecting that until the fourth quarter. I thought installations were going to start in the third quarter. Any reason for the delay?

The full rollout won’t be until the fourth quarter. I think we were anticipating we’d get some hardware out in the third quarter, but the software will come out in the fourth quarter, so then we’ll see the full clinical benefits of them. I think it’s actually in December. So it’s sitting right in the last month. Tao Levy – Collins Stewart: So there’s nothing in terms of being able to install if that’s necessarily been delayed?

No. I think it’s just the timing of getting all the software validated and out into the market. It will push us right to the December timeframe.

Yes, Tao, I think this is not a change. This is how we’ve always characterized. We may have not been clear, but there is always the physical elements that we thought can move in the third quarter. The programming elements would not be available till the fourth quarter.

Yes. Part of that, Tao, too the Vdrive of course, I went through the different schedule for that. So that will come out in Europe at the end of this year and the LASSO and dual-head and then the US will be staggered based on the approval through the 510(k) process. Tao Levy – Collins Stewart: Got you. Okay. And the cost to operate from Niobe II to Epoch from, say, one of your higher volume customers?

The list price is 290. The Vdrive list price in Europe, which is only released, is 200,000. Tao Levy – Collins Stewart: That’s upgrade from Niobe II to the Epoch, the software and all of that stuff, is 290?

That’s the first element. That’s just the platform upgrade and then the Vdrive is in addition to that. Tao Levy – Collins Stewart: Got you. And then just the last question, I guess in – with the Biosense Webster relationship, you indicated that you took in a couple orders here in July. Who is focused on selling that primarily now? Is it – obviously they are doing their part, but you also have reps selling the Odyssey or supervising and making share that they are selling the Odyssey or supervising, making sure that they are selling that? Are they transitioning – are your reps transitioning to a different part of the selling effort?

They are – for lack of better words, we train the trainer. We’ve taken their lead, kind of key salespeople, trained them, they are going to be responsible to help provide the interface to the rest of the sales force, or we have a group of what I would call regional managers. They work with those lead trainers, and then our people use the opportunity to sell in the interventional labs and IR labs. So we expand the sale beyond the EP. Again our relationship with Biosense is they are right to sell it with an EP and we are obviously maintaining the right jobs out of EP. Tao Levy – Collins Stewart: Have you sold any outside of EP yet?

Yes, we have sold a few. Those are – most of standard lab deals obviously include EPIC and some cases IR. They’re going to across multiple –

Do larger deals –

And do larger deal, as I talked about. That’s what is causing – it's exciting in one aspect, but it’s causing them to have more decision makers involved, bigger deals and it takes a longer period of time to close that. So we will see – we anticipate seeing some of those come to fruition in the last half of the year. There will be a big momentum gain. Tao Levy – Collins Stewart: Okay, great. Thanks.

Thank you. Our next question comes from the line of Steven Lichtman with Oppenheimer. Please go ahead. Steven Lichtman – Oppenheimer: Thanks. Hi, guys.

Hi, Steven. Steven Lichtman – Oppenheimer: So just following up on the last question, in terms of this past quarter with Odyssey being light, was it the transition that caused it, because you also mentioned the slower Niobe placements, but that’s been occurring for the last couple quarters and Odyssey has been strong. What over the last couple of months has caused the Odyssey slow down?

So I think two things. I do think that the Niobe slowdown has caused some pull on the Odyssey business. But I think the bigger issue is these big deals haven’t transpired, and I think we’ll see those in the last half of the year. So you’re going to start seeing the deal size go up, I believe, and you’ll see sales outside of this EP suite. Obviously, Biosense wasn’t in the original plan and that will be an upside for our business as well. And we think that will kick in in the last half of the year as well. We’ll begin to see some momentum – really see most of the momentum I think with the Biosense relationship in 2012, but we should see some this year. Steven Lichtman – Oppenheimer: And what’s the difference in terms of deal size? Why would it be a bigger deal through the Biosense versus with a Niobe? What’s the delta there?

I don’t know that we know the answer between Biosense and us. I think I’d anticipate the same size. The deal that’s bigger, the standard lab deals, just are – and our pipeline of standard lab deals because they are going outside of EP. They include EP and IC in most cases. Steven Lichtman – Oppenheimer: Okay, got it. And then in terms of – this is my follow-up question, second question, in terms of the cost savings, you obviously said not R&D, so where exactly will you be targeting the cost saves and over what period of time should we be assuming that in our model?

Yes. We’re going to go through a kick of the process, Steve. We’re going to go through that in the next 30 days. It will have to be all facets. We’re going to obviously protect those growth drivers and then the value creators. But it will require every department as we go through that. Now I fully anticipate having this completed by the beginning of fourth quarter so that we’re running at a reduced rate in Q4. Steven Lichtman – Oppenheimer: Okay. Great. Thanks, guys.

Thanks, Steve.

Thank you. Our next question comes from the line of Spencer Nam with Madison Williams. Please go ahead. Spencer Nam – Madison Williams: Hey, thanks for taking my questions. How are you guys doing?

Hey, Spencer. Spencer Nam – Madison Williams: Great. So, question I have on this Epoch rollout, is that the relationship between Epoch and the Vdrive and whether there could be sort of a tendency for the customers to wait for the Vdrive to be approved before they jump on board with Epoch upgrade, I mean, how should I think about that? How critical is the Vdrive to the success of Epoch and the full potential realization of Epoch here?

Well, I think there’s two parts to Epoch, right – three parts, right? One is the basic system improvements make it much more responses. So it moves faster. It’s a more efficient movement of the catheter. The software is simpler. So the basic interface in the responsiveness of the system is better. The Vdrive definitely provides a lot of capability. And what it does is if you think about a day’s environment, a physician doing AF is different than a physician doing VT. If they are doing VT – performing a VT case, they are sitting remotely, largely don’t use other devices. They position a sheath, use one catheter to map and ablate. And now conversely, if they are doing AF, they have a LASSO catheter, they may have an ICE catheter, they may have other devices that they are manipulating at that time they are doing the AF procedure. So in that case, the physician has to get up when he’s at that point, glove, go back in a room, reposition the LASSO, come back, sit down and do the remote case. So I think the whole workflow is much more simplified with Vdrive. Now, the interesting part is – and that’s the LASSO and the ability to move the diagnostic devices. The sheath actually I think will provide an efficiency of how they move the catheter and an ability to have more variable contact force, which in certain cases has a lot of capabilities to the system. So I think that component obviously will bring some substantial as well. So obviously Europe will see the benefit of that. There will be a marked improvement with just the Epoch system upgrade this fall in the US, but the full capabilities won’t be seen in the US till mid-to-late 2012.

Spencer, I’d add to that that I think you’d be able to see the order rates in the US pick up based upon the strength and performance in Europe. So while the regulatory environment may lag, you’d still have the opportunity to see at least Niobe pick up, maybe not the whole Epoch suite, but I think people would gain some confidence over the next 12 months in North America as well.

Spencer, one other thing too is that’s one of the reasons that the site visits at St. Louis are so telling that is people are taking time to come here because they can experience the whole system and use. I mean, obviously if it’s not released, the only place to see it is in St. Louis. So people we had from Europe, we’ve had a lot from the US who had enough interest to take time out to come see us to look at the full release and the value of the full release. It’s been very positive.

And I think you could measure that, the excitement on the floor of HRS. I didn’t go to Europace, but I probably had a visit with probably 15 physicians in the last month and a half myself, and we’ve really struck a chord with efficiency. I mean, this is really what they have been looking for. Spencer Nam – Madison Williams:

Yes. So let me answer that in a couple different ways. One is definitely interest is there. We’re seeing proposals go up. The timing of the decisions, it’s early and we – it's too early to prognosticate how soon that inflection will happen. Right? But I do obviously believe that bringing people here will answer many of the questions that they have on is the value there. It would be a better reassurance if they saw it in clinical use, but as Dan pointed out, I think you will first see that in Europe. I think they will see that as they emerge into late this year, they will have the European physicians discussing the value that they have, obviously the benefit of Odyssey as we can begin to discuss in a network with pretty low cost. Spencer Nam – Madison Williams: Got it. And my second question is – well, I guess that was the first part of the question. The second question part of the question is the – your burn rate right now, and with this – with cut in spending and where the current cash reserve is, how much – how far can you guys go with the current cash reserve?

We’re looking at the cash right now, Spencer. And that’s why I made a statement. The first step is let’s get our burn in line with our – where we think the top line has come out. We’re going to do that very quickly. And then we’re going to look at the cash and look at the options for non-dilutive cash raise. And we’re going through those – Dan and I are initiating those right now, and there is several that we’re pursuing. And it’s still early to talk about those, but as we transpire here, we’ll keep everybody abreast with what that amounts to. Spencer Nam – Madison Williams: Great. Thanks much.

Thank you, Spencer.

Thank you. Our next question comes from the line of Sameer Harish with ThinkEquity. Please go ahead. Sameer Harish – ThinkEquity: Hi, guys. Good afternoon.

Hi, Sameer.

Hi, Sameer. Sameer Harish – ThinkEquity: Yes. I just wanted to follow up on the line that Spencer was asking about. Just in terms of – it seems like Vdrive has a couple of different iterations. Can you – if we are talking about really sort of addressing the bigger market with AF with Vdrive, is the LASSO catheter, I think, is the first version of the Vdrive that’s coming out going to be enough to gain some of that, your confidence in building that market, or is the dual – I think what you’re telling is the dual-drive version of it the more important one for driving AF? What are the thoughts around that?

The LASSO will jumpstart it. Dual drive will come out in the fourth quarter in Europe. So it’s almost simultaneous. Dual drive won’t be able till later in the year in the US, which will be closer to when we – or later in 2012, sorry, when we anticipate the approval of the deflectable sheath, which would really be the product that’s using the dual drive. So I think at times while with just the ability to have the disposables available in the US. Obviously it would be beneficial to have them both, but they will get – today what they do is, mainly in the US, use the LASSO as to reposition. And in Europe, there are some sites that have LASSO, but more often then use the sheath. So I think the single can be advantageous in either market. The dual obviously gives them the option to have a little more variable to that. Sameer Harish – ThinkEquity: Okay. And in terms of software behind the Vdrive, is the software upgrades that you are putting in place for Epoch to be launched fourth quarter, will that include the automation for Vdrive, or will there be additional software needed for that?

No, that includes – and that includes some other feature enhancements for both platforms. So it gives you the modularity to put a Vdrive on the Epoch system and the software is already embedded. Sameer Harish – ThinkEquity: Okay. And just a quick question about Odyssey. So, it sounded like the rest on the J&J side have been trained and you are getting the startup in traction there. Any feedback from the J&J reps in terms of what they are getting from clients, what their feelings are around Odyssey, and kind of where in their pitch process is Odyssey coming about? Is that early in their discussions, or is it considered an add-on to like a CARTO system, or kind of just where are they positioning it? Thanks.

I think it’s early in the sales process with Biosense. I can tell you there is a lot of excitement between our sales force and theirs. Obviously, for 30 people to show up in St. Louis to be trained, there is obviously a commitment and an excitement behind it. I think we’re working with them kind of site-by-site, and it’s a little bit right now every site is a little different. But the first order was – I think there was one – I believe there was one CARTO – new CARTO, and one room without that. But there is a standard lab and a CARTO lab. But I think it will emerge that. Obviously they have a strong presence in any CARTO lab. They can leverage that presence to expand it beyond that. And I think that’s the real benefit. We think they can drive us into having a sheath for Odyssey Visions and many of labs than we can do individually and then we can connect the backbones together to the Odyssey Cinema, really create a network. Sameer Harish – ThinkEquity: Great. And forgive me if you’ve mentioned this. I just wanted to ask a question on the Phillips side. Are there still some systems that remain deferred due to the Phillips delay, or are those resolved at this point?

Yes, it’s resolved. We installed our Phillips system that we talked about, I believe, in May. I think it was in that timeframe that we discussed. It was in the second quarter. Sameer Harish – ThinkEquity: Okay. Thank you.

Thank you. (Operator instructions) Our question comes from the line of Jose Haresco with JMP Securities. Please go ahead. Jose Haresco – JMP Securities: Hi, guys, good afternoon.

Hi, Jose. Jose Haresco – JMP Securities: More on the Niobe to Epoch transition. Should we expect the 20 units in backlog to eventually all move to Epoch? Is that essentially what you are going to be trying to do over the next few quarters or so?

That’s the intention. We’re – Jose Haresco – JMP Securities: Okay. And I guess if you just qualitatively, are those – does everybody who is using in the backlog are what you’ve seen and promote the Epoch or is it 50% or 75% of them?

Yes. I don’t know that I have a number –

I didn’t follow the question, Jose. Say it again.

Of the 20 in backlog, how many have seen the Epoch?

I don’t know.

I don’t know the answer to that, Jose. I know that the sales process is going to them and saying, hey, before you get this installed, let’s talk about the new platform that’s coming on. Jose Haresco – JMP Securities: Okay. Should we – I guess as you guys have removed seven of that backlog from the current – from the current number, is that – if you guys could just give more color as some of the reasons for that. Is this an economically driven decision? Was this because of all the headlines, you have obviously been exposed to in the last few months? Was it you really didn’t want to wait that long for the Epoch? (inaudible) What are your customers actually saying that what impacted decision that seven of these units were not going to turn into revenue in 18 months?

Yes. I think there is a multitude of reasons in there. One, there’s a couple of the systems have just delayed the buildings outside of that 18-month window. I think some of them lost physicians, couple of them I think the CEO has left to kind of the capital.

That really does – the sales team has – they feel like resell the opportunity, and at that point in time, I think just there’s too much uncertainty for us to call it active.

Yes. So we didn’t move it to inactive. Obviously if it comes back in, we won’t count it as a new order.

That’s a good point, Mike. We don’t – that's one of the – we have this status of inactive when things do – and they do pop back and forth from time to time, we don’t count it as new order. Jose Haresco – JMP Securities: Okay. All right. Thanks, guys.

Thank you, Jose.

Thank you. Our next question comes from the line of Tao Levy with Collins Stewart. Please go ahead. Tao Levy – Collins Stewart: Hey, guys, just a couple more follow-ups. You kind blamed Epoch a little bit for some of the order delays. But how about the overall capital equipment environment? Have you seen any changes of late, or the EP department, the hospitals, still engaged in looking to construct different rooms, refurbish, et cetera?

I’d have to say that our experience in Q2 is pretty positive because of what we’re seeing in site visits. I mean, people are really coming in here to make purchase decisions. I don’t know that I stay close to the total capital market, but I think in EP, it’s still very positive trend. CEOs still look at it as a major piece of cardiology growth. They are still spending money. Obviously sites visits are picked up for. So we see a microeconomic trend that’s very positive. Tao Levy – Collins Stewart: Okay. But within the EP, it’s not like a couple years ago where they weren’t – your sales guys pretty much weren’t going into the hospitals because they weren’t ordering or buying anything?

No, ours sales guys – in fact, if you would ask them today, their funnel is strengthening quite a bit from the beginning of the year to today, that the amount of real active discussions around purchase decisions is getting better. Tao Levy – Collins Stewart: And if a hospital is going to place an order for the Epoch or upgrade it, how does that get recognized? Is that something that goes into the order right now and then when you get it installed it becomes revenue, or you’re not taking orders for Epoch?

No, it will go into order. It would just go into backlog and then when we install it, it would –

It is an upgrade; we won’t count it as a new system. It’s just counted as an incremental piece of the overall profile, but we’ll recognize revenue when it shifts. Tao Levy – Collins Stewart: But it’s not in the –

We’ll put it in the backlog as the order comes in.

Yes. It will go in – yes, that’s a good point, Dan. It won’t go into the system sale. It will go in almost as an accessory. It will have counted as more dollars and we’ll call those out. Tao Levy – Collins Stewart: But it will go into that backlog number?

Yes, it will. Tao Levy – Collins Stewart: So, were there any in the backlog number for the quarter?

We had one Epoch upgrade that came in in Q2. Tao Levy – Collins Stewart: Great, thanks.

Thank you. At this time, I’d like to turn the conference back to management for closing remarks.

Well, thank you, everybody. Obviously it’s an important time for our company where we believe we’re on the right month, where we’ve generated a lot of market momentum with Epoch. Odyssey, we think, is almost an untapped potential, but we have some hard work to do here in the next few months and for the balance of the year to reposition the company. And we’re passionately committed to get that done. So we look forward to the next call and to talking to you in the future. Thank you.

Ladies and gentlemen, this concludes the Stereotaxis second quarter 2011 conference call. Thank you for your participation. You may now disconnect.