Stereotaxis, Inc. (STXS) Q4 2011 Earnings Report, Transcript and Summary

Gregory Gin - Vice President, EVC Group Michael P. Kaminski – Chief Executive Officer Samuel W. Duggan II – Chief Financial Officer

Jose Haresco – JMP Securities Steve M. Lichtman – Oppenheimer Securities

Good day, ladies and gentlemen and welcome to the Fourth Quarter 2011 Stereotaxis Inc’s Earnings Conference Call. My name is Keith and I’ll be your operator for today. At this time, all participants are in a listen-only mode. Later on, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, today’s conference is being recorded for replay purposes. And I would now like to turn the conference over to your host for today Mr. Greg Gin of EVC Group. Please go ahead, sir.

Thank you, Keith, and good afternoon, everyone. Thank you for joining us for the Stereotaxis conference call and webcast to review the financial results for the fourth quarter and full-year 2011, which ended on December 31, 2011. Before we get started, we’d 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 that qualify the forward-looking statements made on this call, we refer you to the company’s periodic and other public filings filed with the SEC, including the Form 10-K for the fiscal year ended December 31, 2010 and the quarterly filings for 2011. 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 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 maybe revised, modified, or canceled either by their express 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.

Thank you, Greg. Good afternoon, everyone, and thank you for joining us for the review of our fourth quarter and full year 2011 performance. With me today is our Chief Financial Officer, Sam Duggan. Following our prepared remarks, we will open up the call for your questions. Before we begin a more detailed discussion of our 2011 performance and strategic priorities for 2012, I’d like to address some broader topics. Clearly, 2011 was a challenging year for us in which we experienced both successes and set backs. During 2011 as we recognized the impact of our robotic platform transition on our financial results, we took immediate actions including significantly reducing operating expenses, raising capital, and executing on the Epoch platform commercial launch, while we’re confident these actions will lead to improved operating performance beginning in 2012, we know we have much work to do. We’re determined to lead this company to profitability and we’ll continue to take the necessary steps to improve on our financial position as we execute on our current business plan and growth strategies. To that end, our immediate priority is to address the capital needs of the company. Specifically, we’re working to first extend our debt facility with Silicon Valley Bank, which we expect in the upcoming weeks and second, to secure additional capital through one of several options we’re considering. As Sam will discuss later, these steps are fundamental to our continuing to be able to drive our business model forward. We’re optimistic that we’ll be able to complete both of these in the relative near-term. However, we’re limited in what we can disclose at this time as to both the nature of these transactions for the specific timetable. We’ll keep everyone informed when we’re able to report more. Now, let me discuss our performance…

Thanks, Mike, and good afternoon, everyone. In the fourth quarter 2011, revenue was $11.6 million, compared to $14.5 million in the 2010 fourth quarter and $8.5 million in the third quarter 2011. We posted revenue of $2.3 million on two Niobe systems and Odyssey revenue was $1.8 million. With the release of Niobe ES, we realized sequential improvement in system revenue and new capital orders in the quarter. System revenue grew to $4.2 million in Q4 compared to $2 million in Q3 and new capital orders increased to $3.6 million versus $2.2 million in the prior quarter. Recurring revenue reached a record high $7.4 million in the fourth quarter, an 80% improvement over the prior year quarter. The rise in recurring revenue was attributable to an increase in utilization, which drove higher disposable revenue along with improved pricing and advanced purchases of disposables related to Niobe ES upgrades. We valued our active backlog to approximately $20 million, which included 10 Niobe system orders. This is a decrease of $9 million from our active backlog at the beginning of the fourth quarter, which we weighted at approximately $29 million and which included 60 Niobe systems. During the quarter, we added $3.6 million of new orders, converted $4.2 million in system revenues, reversed $0.9 million in deferral revenue and other adjustments, and removed five projects from active backlog valued at $7.3 million. While it is possible that one or more of these projects could convert to revenue in the next 18 months, we have not included them in our plans for 2012. Gross margin was $8.3 million, or 71.4% in Q4, compared to a margin of 73.4% in the year ago quarter. This was a result of higher cost absorption with fewer Niobe sales, as well as weaker Odyssey pricing. Excluding a…

Thanks, Sam. We have several positive trends on which to build in 2012. We’ve outlined the following milestones to achieve for the year. First, extend our credit facility with Silicon Valley Bank, as well as securing the necessary additional financing to ensure that we have adequate capital for our planned ongoing. Second, achieve at least ten new Niobe ES system sales. Third, complete 40 Epoch ES upgrades during the first half of the year. The demonstrated value of our technology solutions is further enhanced with the introduction of the Epoch platform. We’ll continue to innovate and advance our platform towards our vision that robotic interventional medicine becomes a standard of care by providing a consistent and superior approach to patient care, at the same taking the necessary steps to strengthen shareholder returns. Thank you for joining us on the call today and your continued support. With that operator, let’s open it up to any questions.

All right. (Operator instructions) And your first question is from the line of Jose Haresco with JMP Securities. Please proceed. Jose Haresco – JMP Securities: Hi, guys, good afternoon.

Hi, Jose.

Hi, Jose Jose Haresco – JMP Securities: Let’s see, let’s talk a little bit about the backlog, I think you mentioned a couple of moving parts or a $7 million taken off of the backlog last quarter and you added $3 million. Has anything changed, (inaudible) number, but does anything change in terms of how you just think about or qualify these large projects? And I guess, we’re just trying to figure out that $10 million you’ve got in the backlog, how the criteria by which you were judging those and you including them in the probability of that will be completed in 18 months changed over the last six months or so? In other words, should we have to look to see that number be about the more predictable as we had in the 2012?

Jose, let me, Sam, can address the puts and takes of the backlog. Let me address kind of the overurging question you asked first. The, if you look at the backlog today, there is ten systems in backlog, I think we believe eight of the ten should be in a position to go to revenue this year, two are sitting right on the beginning of next year in the 18-month window. We’ve taken everything outside of that out of the backlog and then the ten, we’re confident will go to be an Epoch system in that period of time, the next 18 months, all right? So and we think that we’re now in a position to make that a very predictable part of how we look at revenue go forward in the company’s business model.

Yeah, I would say Jose; we are attempting to make the backlog more predictable as we move forward. And by that I mean we are trying to make sure that as new items come into backlog that we have a very high level of confidence that they will turn to revenue. Some of which could turn to revenue relatively quickly depending upon whether it’s something with as building of a new hospital, which could take longer but some of them we may wait till later in the process to actually allow them to go in a backlog which will create more predictability for the investment community in terms of the ability of that backlog to turn to revenue, hopefully in a shorter period of time. Relative to the items that were taken out of backlog, there were five Niobe systems that came out. With them there was four Vision and three Cinema that came out along with them, because usually when we make a sale, they get bundled with part of our Odyssey products as well. Jose Haresco – JMP Securities: Okay. Was the removable of those items tied to hospitals pulling back on the project? And conversely, the senses that you have now, how much, how many of the systems coming I guess has at least quality of something new, the availability of Niobe ES?

The removal was generated because, Sam, and I were not confident that they would come to revenue in a predictable timeframe, that 18 months Sam mentioned. As far as systems coming in as Sam mentioned, we’re going to make sure that as we interim in there is a high level of confidence that they will translate to revenue in that window or else we want interim as a new capital order until they do have the ability to translate in that timeframe.

And to put it differently Jose, as I indicated in some of my remarks even though these items had been removed from backlog as we don’t have confidence, they’re going to term and then – and they’re going to convert to revenue in the near term that doesn’t mean that all these items have been removed from our sales pipeline these things may in fact come back in the backlog somewhere down the line where we’re more comfortable that its predictable that they will in fact convert to revenue.

Okay. Could you share some color on the straightening of the disposables in the fourth quarter, you mentioned to do a tied to a couple of upgrades into Niobe gas. So you said the Q1 was going to be, wasn’t going to reflect that again. Is that type of dynamic reflective, what might happen when we see other upgrades in Q3 and Q4?

As we look to our disposable revenue, we actually, we have a record quarter obviously for all recurring revenue. And we had a large increase in disposable sales we believe a lot of that was a pull forward for some initial high volume sites that uses disposables and anticipation of the ES upgrade and even if we had used a more normalized level, of what disposable of revenue it look like it still what been a record quarter in a record year for recurring revenue. So we do not believe that we would see the same level of recurring revenue when we did and want the investment community to use $7.4 million is the starting off point from which to look at Q1, 2012. We think that disposable revenue could be lower few $100,000 or so from where it was at this level. And that’s why we disappointed out, so that‘s Epoch if we received another Epoch from some of the other upgrades, that would be great but we're not anticipating at this time.

Yeah, let me add a little bit to do that, what Sam mentioned is, there is a normal increase, which would have made it a record quarter. There is a little bit of lumpiness due to the Epoch coming into the system, and that will even out as the year progresses. Jose Haresco – JMP Securities: Okay, how many sales people you have at this point, small changes in the organization and number two, with Niobe ES and Vdrive coming on later you just give a sense of a what clinical activities you will be working on track next 12 months to, so we kind restart the – that interest in the combined product.

Yeah, so to your first question as you know we break our sales group into account management, which is the sales force who drives clinical adoption into the installed based so after a site installed they take over and drive through in adoption process. And then a capital sales which is a different obviously, different process there is roughly worldwide 30 account management and 15 capital. They are in the sales force in the field, obviously in capital we use distributors as well, so if you start looking outside of Western Europe and the U.S we have a large number of distributors work with us is well. The second question on there was how the plan is for the year so the Epoch rollout, the strategy around the Epoch rollout was around upgrading the sites that we can leverage early in the year so you’ll see the first six or the sites we have three in Europe and three in the U.S which allowed us to, to get it up and running and some of the early real innovative sites and then the next wave of sites for the once we think, we can build the reference basis from. After that we start getting into – later in the year we’ll get into sites that we traditionally have called not all the way through the adoption process or stalled accounts, if you listen to it, common language were used and those will take us a longer period of time to get transformed into an adopted customer. So we’ll begin to work on those as we get to mid-year with the resources we have. So what we’re doing now is prioritizing obviously the first sites, so that we can create the most positive wave of excitement prior to HRS, which comes up in May. Jose Haresco – JMP Securities: Okay, great. Thank you very much.

Thank you, Jose.

Your next question comes from the line of Steven Lichtman with Oppenheimer. Please proceed. Steve M. Lichtman – Oppenheimer Securities: Thank you. Hi, guys.

Hi, Steve.

How are you doing Steve? Steve M. Lichtman – Oppenheimer Securities: Mike, I apologize if I missed this, but update on the U.S. timing for Vdrive is that still back half of this year?

Well, Steve, we’re going right now in the process with the FDA. We’re still optimistic we can get it by the end of this year and what is have to update everybody as the quarters unfold, because it’s a 510-K process, which will require some clinicals. And then as that emerges, we’ll keep everybody, we’ll inform of that, but we’re optimistic and working hard to get it released in the U.S. this year. Obviously I think Canada and Europe and we’ll get very positive Vdrive feedback so far. Steve M. Lichtman – Oppenheimer Securities: Okay, got it. And in terms of the total installed base out there today, the potential for upgrade, can you remind us what that is as you’re talking about midyear, hopefully 61 upgrades, what’s the denominator again?

It’s roughly a 162 in the install base as of year end and of that number, roughly a 152 of them are Niobe II’s that could be upgraded to Niobe ES. Steve M. Lichtman – Oppenheimer Securities: Okay. And your hit rate so far in terms of who you guys have approached from an upgrade has been very high obviously, is that right, has there been anybody who says no, and if so, I mean what kind of feedback you get on that front?

It’s been very positive, obviously with even better than our salesmen showing up as the word they’re hearing from other accounts that have been upgraded. So the references they are getting from their peers is making it easier for us to sell. But obviously the capital sale, it takes sometime to go through it. So, I think as you noted the mid-year goal is to upgrade 40 accounts by the end of the second quarter, we think we (inaudible) to get that done. I think that will create the real trajectory that we needed to drive both the utilization and the reference sites. Steve M. Lichtman – Oppenheimer Securities: Okay, got it. I guess we may had the first quarter call before HRS, I’m not sure, but just early look at HRS, will there be any sort of larger type of datasets that we can expect from you guys there?

I think our first call, right, we’ll try to do it at the right around HRS that... Steve M. Lichtman – Oppenheimer Securities: Right.

And then we’ll update everybody on the latest data and from all the sites. Steve M. Lichtman – Oppenheimer Securities: Okay. But will there any presentation at HRS that we should be looking forward too?

There we have several podiums and posters, I think the latest count was north of 20. So I know some of those will come from these sites, yes, and we’ll point those out as we get closer. Steve M. Lichtman – Oppenheimer Securities: Got it. And then lastly just I apologize I just want to make sure clear on the backlog. So in terms of how many system sales are or systems are in the backlog or Epoch are in the backlog, is it one at this point or how many are Epoch?

All of that will be Epoch, so there is 10 of them. Steve M. Lichtman – Oppenheimer Securities: Okay.

Okay. The backlog is all Epoch now. 10, there is 10 systems of which we believe eight will go to revenue this year. Steve M. Lichtman – Oppenheimer Securities: Okay, got it. Perfect, thanks guys.

Sure.

Your next question is from line of [Albores] with Deutsche Bank. Please proceed.

Hi, Mike.

Hi, Al.

A couple of questions, kind of back to the Epoch upgrade, can you give us an idea of what kind of time is involved to just update a Niobe II versus put a whole system in there, and back a little bit to the idea of that further update China coming, you got the more time it takes. How does that differ from, that time differ from us, whole system sale versus an upgrade? And sort of secondly, can you talk a little bit more about the shorter learning curve with the Epoch?

Sure. Al, the time for an upgrade, and that is from a Niobe II to an Epoch, it can take two to three days. We’re trying to do it, we’re trying to accommodate it obviously that some of challenges with juggling lab time. So in many cases, they want us to do in weekends.

And you are effectively upgrading software putting some new motors in and then putting some new covers over the magnet, so it’s not a very difficult process.

But it does take the lab down, and obviously that’s a conflict to them trying to do more procedures. So we are juggling schedules and that’s some of the pace of what we can get done. As far as a full new Epoch system, the time is the same as the Niobe II, so it traditionally has taken us about a week. So what we did is we installed for a week, then the x-ray partner would come in, install their system, and then we come back together and calibrate. So it was largely a little over two weeks to get all room up and running and that’s the same with Epoch as it was with Niobe II.

Okay.

All right. The capital sale cycle for the upgrade, now the upgrade itself, there was a couple of different forms out that were right now. There is obviously a capital upgrade that we’re marketing just to go from a Niobe II to an ES. That goes through the normal capital budgets can take. It usually doesn’t go through a whole budgeting process obviously because we’ve just released it, but and then there’s many sites doing it, but it can take months to quarters to get that done. We’re also looking at some flexibility and financing that we’re doing, just recognizing that there is an advantage of usage and utilization and reference sites if we can get them up and running faster. So we get some flexibility in how we put those packages together.

Yeah, we’ve clearly gone down several different models. One is of share capital sale, if that sale able to be done. If not, we’re looking for other forms of commitment for utilization and financial commitments either through a number of cases and or through our service contracts and things of that nature. It’s obviously more important for us to get the ES upgraded to develop the reference sites to drive utilization drive recurring revenue in terms of what that can bring. The capital loss nice to have, it’s not a huge amount of money we’re talking about so.

And what about the learning curve?

The – thank you, the learning curve, I don’t believe we have pure data on this because most of the people we’re upgrading are users, right? So they’re not going back through a learning curve from the start. But thus far we’ve got very, very positive feedback on a couple of features. One of them that I heard about continually is the, that called, it’s a feature called Click and Go on which you no longer have to learn how to move magnetic vectors, you just basically click on the screen and we take care of all that behind the scenes and take the capital direct to that spot. It’s very simple to navigate and it’s much more intuitive to how they want to move a catheter in a heart. So, we anticipate it’ll be a shorten learning curve. We haven’t measured that not as you had and we’ll do that as the quarters unfold.

Overall, the feedback has been very positive. User interface is much easier to use and the response time is what the biggest feature that we’re hearing from, an user takes six seconds for the catheter to move and not moves in about 125 milliseconds. So, the feedback we’re getting is very good in terms of the, how quickly it’s able to move and how much easier it is for the initial users to be able to learn on from.

Great. Okay. That’s it from me. Thank you.

Thanks, Al.

Thank you.

Ladies and gentlemen that’s all the time we have today for the question-and-answer portion. I would like to turn the call back over to management.

Well, thank you everybody for participation the call and we look forward to talking again in early May and showing you the results and talking about the results of the Epoch rollout. So thank you very much.

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. A replay of this conference will be available one hour after this. The replay dial number is 1-888-286-8010 with access code 14422617. And with that you may all disconnect the lines and have a great rest of your day.