Stereotaxis, Inc. (STXS) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to the Q2 2012 Stereotaxis Incorporated Earnings Conference Call. My name is Reggie and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Greg Gin of EVC. Please proceed, sir.

Thank you, Reggie. Good afternoon, everyone. Thank you for joining us for the Stereotaxis conference call and webcast to review the financial results for the second quarter, which ended on June 30, 2012. 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, 2011, and the quarterly filing for 2012. 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 for the review of our second quarter 2012 performance. With me today is our Chief Financial Officer, Sam Duggan. Following our prepared remarks, we'll open up the call for your questions. Let me briefly review the quarterly results then Sam will provide further details in his prepared remarks. As the year unfolds, we're seeing greater excitement around our Niobe Epic Systems, or Niobe ES, which is designed to significantly enhance complex electrophysiology procedures. In addition, we are continuing to build a strong referral base of Niobe ES users, which we believe will accelerate future capital sales. In the second quarter, we generated two new Niobe ES orders and two went to revenue, both in North America. We also upgraded 22 sites in the installed base to Niobe ES bringing the total upgraded sites to 41 in the first half of the year and surpassing our milestone of 40 installations. To-date, 47 sites or over 30% of our customer base in North America and EU have transitioned to the ES platform since its launch in December 2011. We are also seeing encouraging results from our focus on increasing clinical adoption. Among Niobe ES users, utilization grew 28% during the first half of 2012, while all sites grew 13% compared to a year ago period. For the same period atrial fib procedures increased 31% in ES sites and by 23% for all sites. According to these trends there's an extremely positive feedback from physicians, some of which have told us that they no longer will perform complex procedures without the advanced capabilities of the Niobe ES system. It has changed the way they approach EP procedures. At the same time, we continue to make substantial progress on reducing operating expenses, which…

Thanks, Mike. Good afternoon, everyone. Revenue in the second quarter was $10.5 million, compared to $11.6 million in the 2011 second quarter and $12.3 million in the first quarter 2012. The year-over-year decline resulted from lower system sale. This was primarily due to one less Niobe ES system sale, which contributed to overall Odyssey revenue being lower than $0.5 million. Odyssey standard lab revenue improved slightly. These declines were partially offset by $0.7 million of Niobe ES upgrade. Recurring revenue of $6.6 million was unchanged year-over-year as higher disposable sales were offset by lower royalty and service revenue. The decrease in royalty revenue was principally attributable to a contractually lower royalty rate of 14%, which went into effect on January 1st, compared to approximately 16% in the prior year period. Service revenue decreased slightly due to lower time material billings and to a lesser extent currency while a number of service contracts remained unchanged from the prior year period. Sequentially, top line growth was impacted by a lower Odyssey and Vdrive and lower recurring revenue. Odyssey revenue declined 900,000, split pretty evenly between sales into Niobe Labs and standard labs. Sequentially recurring revenue was down $0.5 million. As Mike already mentioned, this was due to stocking orders for disposables in Q1, in anticipation of ES upgrades and Vdrive utilization. Utilization in Niobe ES sites increased 25% in the quarter over the same period last year and overall utilization was up 10%. This should positively impact disposable and royalty revenue as we move forward and strengthen our reference base for capital sales. Gross margin was $7.3 million, or 69% of revenue in the second quarter compared to a margin of 69.7% in the year-ago quarter. The decrease in gross margin percentage is principally driven by lower production volumes. Operating expenses in…

Thanks, Sam. We have been and will always be a company driven by a vision to transform interventional medicine through robotic technology. Executing on this vision requires alignment and advice from respective industry leaders who believe in its value. Today, we announced the appointment of Dr. Gery Tomassoni as our new Chief Medical Officer for a three-year term. Dr. Tomassoni is the Director of Electrophysiology at Central Baptist Hospital in Lexington, Kentucky and was one of the earlier adopters of robotics. In fact, he and his team were the first in the world to complete in the Stereotaxis Niobe procedure. We look forward to a deep and valuable insight he will bring to leading our scientific product and clinical training. Dr. David Burkhardt who has served in this capacity for the past three years will continue in the role of Chief Development Officer, and we are grateful for his guidance over the past three years and he will continue to lead in this role deep product advancement of our platform. I want to thank both gentlemen for their commitment to our company. With that operator, I would like to open up the call for any questions.

(Operator Instructions). Your first question comes from the line of Steven Lichtman of Oppenheimer. Please proceed, sir.

Hi. This is actually [Rosemary] in for Steve. Can you guys here me okay?

Hi, Rosemary. How are you doing?

Good. Thanks. Thanks for taking my question. Quickly on the redesign of Vdrive disposables in Europe. Just trying to gauge how much demand do you expect this to generate due to the lower price point, and also longer term, how does this ducktail with the Vdrive process in the U.S.?

The way it will work is, the multi-use will be able to be used by customers and they can go through clinging process between obviously patients and we are targeting somewhere between 5 and 10 times, before they would be required to buy a new set of disposables or used product. With that in mind, that would drop the price more than 50%, around 50% from where it is now, depending on the pricing of the multi-use device, but that's where we're targeting. Then with that, what we've done in early testing is seen marked improvement in what their interest is to use it for the AF cases. So where we've seen price not as sensitive, and there are some markets in Europe where it's not as sensitive, they're almost using it one-to-one. Obviously, there's markets that are very sensitive and we want to address it through this means. Now in the U.S., we don't anticipate that the disposable prices are as sensitive, we'll go through a launching of that multi-use line early next year as it becomes available in the U.S.

Okay. Got it. Then also, I wanted to get a little more color on what you're hearing from the dealers in terms of Niobe ES system placements? You reiterated your end goal is to achieve at least 10 users in sales during the year, so I was just wondering what gives you this confidence to still hit that number.

Well, the pipeline continues to strengthen. We've seen a lot of activity that's going on. Q3 has a lot of activity that Sam and I get exposed to on a daily and weekly basis. Obviously, some will come out of backlog, others will come out of new order. Early in the year what we talked about was that the first wave would be the upgrades of site. Then would come an increasing utilization and a strengthening of the reference base. We think both of those have happened, and as a result of that the positive feedback from the market is continuing to strengthen our pipeline, and we think it will emerge into a stronger orders and revenue.

Yes. Definitely. Actually finally on that point, I was going to say that very nice improvement in utilization at Niobe ES site this quarter. Can you just elaborate a little more in that feedback that you are hearing and what you are thinking in terms of run rates for the rest of the year?

Obviously, the utilization, we're very happy within Niobe ES sites. It has taken a disproportional amount of our resources, which we believe is the right thing to do, to focus, to make sure that those sites go well. We anticipate the continuation of a clinical adoption pathway in Niobe ES sites. That's why we're putting so much emphasis on a continuation of the upgrades. I think it's a right thing to do to drive the business model. What we hear from those sites is very favorable response on the product improvements that the ES provides; the value it creates, so we continue to hear very favorable market responses on that. Obviously, with the one exception of the price for the Vdrive disposable, which we think we'll address later this year.

Great. Thanks so much, guys.

Thank you.

Thank you.

(Operator Instructions). You have no further questions at this time. I would now like to turn the call back over to Mr. Mike Kaminski for closing remarks.

Thank you everybody for attending the call today. We look forward to talking again in the November timeframe with our third quarter results. Thank you very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.