CardioDynamics F2Q08 (Quarter End 5/31/08) Earnings Call Transcript

CardioDynamics (CDIC)

F2Q08 Earnings Call

July 1, 2008 4:30 pm ET

Executives

Michael K. Perry - Chief Executive Officer & Director

Rhonda F. Rhyne - President

Steve P. Loomis - Chief Financial Officer, Vice President – Finance & Corporate Secretary

Analysts

Mike Vermott

Bob Poole

Presentation

Operator

Welcome to the CardioDynamics second quarter earnings conference call. (Operator Instructions) It is now my pleasure to turn it over to your host, Mike Perry.

Michael K. Perry

I have with me our CFO, Steve Loomis, and also our President, Rhonda Rhyne. And before we get started, Steve let me turn it over to you.

Steve P. Loomis

We are of course precluded from disclosing any material non-public information but we're happy to discuss our progress to date. Our discussion today may contain predictions, estimates and other forward-looking information and we use the words estimate or expect, project and similar expressions to identify these statements.

Now these statements represent our current judgment on what the future holds as best as we know them and we think they are reasonable. However, these statements are subject to risks and uncertainty that could cause the actual results to differ materially from what we expect. Important factors relating to our business are described in the Risk Factor section of our annual report.

Michael K. Perry

We appreciate all of you joining us for today's call. We are very pleased to report our second quarter results with 15% top line growth in the quarter and 18% for the first half of 2008. And this marks our sixth consecutive quarter of year-over-year revenue growth and the growth that we experienced in the first half was the best we've seen in the past four years.

We were also very pleased with the continued progress we're making in reducing the operating loss. It was down 68% in the quarter and for the first half of 2008 down 53%. There is $247,000 of non-cash charges in the quarter for depreciation, amortization and equity compensation. That brings our EBITDA loss to just $229,000 in the quarter or an 82% improvement over second quarter 2007 and that is down 65% from the first half of 2007.

So as you can see we are tracking very nicely toward our goal of generating positive EBITDA and operating cash flow by the fourth quarter of this year. And this is a solid start to 2008. It gives us continued confidence that we have the business back on a growth path following the declining years that resulted from the Medicare Hypertension Reimbursement Restriction.

Sales growth in the second quarter was driven by a 20% increase in domestic ICG unit sales and 8% higher average domestic ICG monitor sales price and also an 11% improvement in our international and new market revenue streams. Our gross margin continued to expand nicely up to 71% in the quarter. That was up nearly 8 percentage points from the same period a year ago and up over 2 points over the first quarter, so good sequential improvement and year-over-year improvement.

Our margins benefited from higher average unit sales prices and also lower manufacturing expenses including reduced inventory expense and that related to potential excess slow-moving or obsolete inventory. We continue to keep a tight handle on our operating expenses. We held them flat through reductions in R&D with very modest growth in SG&A and the growth that we've experienced in those areas has been channeled into revenue-generating positions in our direct sales and clinical application specialist team.

Over the past 12 months we've reduced our non-revenue-generating headcount by approximately 19%. So it's very gratifying to see the continue progress that we're making in growing top line revenue and also reducing the operating loss. Our employees have worked exceptionally hard to transition through the setbacks that resulted from Medicare's Hypertension Reimbursement Restriction and we look forward to continuing these improving trends.

Also you probably read in the press release that during the quarter we were very pleased to report the Pri-Med study results that the American Society of Hypertension Conference in New Orleans back in May where three times the national average blood pressure control rates were achieved with our BioZ ICG technology versus standard clinical practice. And that's across 76,000 patient visits, almost three years of data. We'll have Rhonda provide you with some more details of that clinical work in just a few moments.

Finally, during my opening comments I'd like to acknowledge Russ Bergen, our Vice President of Operations who just retired yesterday after 10 years of outstanding service to the company. Russ and his wife, [Susie], are today already in Colorado and hopefully listening into this call and will be splitting their time between San Diego and Colorado to be with their grown children and also grandchildren. So we wish Russ and his family all the very best.

Also as a further step toward profitability we've elected to have existing staff on my team take the management responsibility for various segments of the operations group.

So let's dive into the numbers. Working down the P&L statement, you saw from the press release our sales were $6.2 million up 15% over second quarter of 07. 217 units sold in the quarter; that was up 11% in terms of units over the 196 in Q2 07. In terms of BioZ systems sold, that was up 20% in the quarter from the same period a year ago.

Module sales, a total of 80, were up 13% from the 71 units sold same period a year ago. We now have over 8,200 ICG systems sold cumulatively; that is up 11% from the same period a year ago Q207, and imbedded in that total are nearly 1,900 modules sold to date, primarily GE modules. The sensor business was up 1% in the quarter, 14% sequentially over the first quarter of 08. We've now shipped over 6.7 million ICG sensor sets since 1998.

In terms of our sales channels our direct US channel achieved $5.3 million in revenue in the quarter; that was up 19% over the same period a year ago. Our international business came in just shy of $800,000; that was up 10% from the same period a year ago. And we're seeing good progress in both of those channels.

In terms of market penetration cumulatively looking at our business we have approximately 89% of our stand-alone installed base in the domestic market, 11% internationally. Of our domestic system sales, 90% of those go to the physician office, 10% in the hospital, and cumulatively we are now 5.7% penetrated in the domestic outpatient physician office market. The largest penetration is in the [CHF] clinic, 19.5%, followed by the cardiology office market, 16.3%. Roughly 1 out of 6 cardiologists in the US have our product. Internal medicine is at 4.6% and the family practice market is just over 3%.

In our mix continues roughly a third to cardiology, a third to internal med, a third to family practice and general practice. That's pretty stable, moves plus or minus a few percentage points but that mix has continued over the last four or five years. In terms of the hospital market it's still very early in penetration there, about 0.5% in the domestic US hospital market. The mix of business goes about a third to the critical care area, a third to cardiac services, 6% to the emergency department, and then followed by a variety of areas throughout the hospital.

In terms of gross margin we were at 71% up from 63.5% in the second quarter of 07. I mentioned the department expenses and also obsolete inventory expenses were down. That really led to the overall margins being up coupled with average selling prices of course being up. Our operating expenses again were flat, principally driven by headcount.

Total employee headcount in the quarter was approximately 6% below the levels we experienced a year ago and as I mentioned earlier, differentially we've put more headcount into the sales and clinical team, reduced the non-revenue-generating headcount, so overall a little bit less than last year and as we mentioned sales are up nicely, 15% in the quarter, 18% in the year to date.

Sales and marketing expenses up 1%, our worldwide field sales headcount was up 3% over the same period a year ago, research and development down 19% in the quarter principally driven by fewer personnel, our G&A expenses down 6% in the quarter also driven by fewer personnel down 18% from the same period a year ago. So again we're feeling very good about the efficiencies that we've gained in our administrative areas keeping those expenses under control and plowing that money back into the sales side of the business.

Operating loss in the quarter $476,000; that was down nearly a million dollars from our Q2 loss of $1.5 million, also a very nice improvement over the first quarter loss of $853,000. Again it's our objective to continue to grow revenue and reduce the operating loss throughout the year. EBITDA was a loss of $229,000 in the second quarter down 82% from nearly $1.3 million in the second quarter of 07.

You'll recall we recently completed a 1 for 7 reverse split in May of this past year. That has caused the earnings per share numbers to look a little bit different than you might have remembered from the past. In the quarter we were down $0.10 per share on the reduced number of shares. That compares though with a $0.28 per share loss from our continuing operations or $1.86 if you reflect the full consolidated results a year ago which included the Vermed business and a special one-time charge that last quarter. But in terms of continuing ops 62% improvement in EPS, so again very good performance there.

Our cash balance is just under $7 million, $6.9 million, that's up 47% from the same period a year ago. So a good size cash balance to continue to execute the mission at hand.

Rhonda, I thought you could spend a few moments with us to provide some additional insights into the Pri-Med results and the work going on with our hypertension clinical research efforts.

Rhonda F. Rhyne

The Pri-Med results were significant for a number of reasons. First it was an independent ICG clinical study from a 65-physician primary care and cardiology group, and this practice has implemented over 25 BioZ systems into their practice. As Mike had mentioned there were over 76,000 patient visits which were included in the analysis. And the group demonstrated an impressive 102% improvement or more than double in blood pressure control rates.

So they took their control rates from a baseline of 42% to over 88% at the time of the presentation and most recently they reported a 90% control rate. Even more impressive is when one considers that our national hypertension control rates are in the 31% to 34% range, so Pri-Med's 88% to 90% control rate represents nearly three times the national average.

And if we look at how the group incorporated the BioZ into their process they used a CIGMA quality approach to develop a process for the treatment of patients diagnosed with hypertension and they incorporated the use of the BioZ to guide anti-hypertensive therapy in patients whose blood pressure was not at goal. It was very similar to the control in the Mayo Clinic studies and this group's analysis clearly and repeatedly showed that the use of ICG was a significant contributor to whether or not the patient achieved blood pressure control and allowed the 65-physician group to achieve the highest known hypertension control rate of all group practices in the United States. So we couldn't be more pleased with the results. Again it demonstrated as clearly if not more what we showed in control in the Mayo Clinic.

Michael K. Perry

I think these results are particularly impressive because it's a real world clinical practice. You've got 25 offices implementing the technology, 65 physicians seeing mainstream type of patients - primary care predominantly, and 90% control rate. It just doesn't get much better than that.

Why don't we turn now and spend a few moments to discuss our outlook for the remaining of fiscal 2008. As I mentioned our primary objective is to continue to make steady progress growing top line revenue and reducing our operating loss for the business. We've now grown six consecutive quarters and plan to continue the steady progress throughout 2008 and beyond. Our plan remains to grow revenue approximately 15% for the year, and we have made good progress in our international and new market efforts to obtain business that reduces our dependency on US physician office reimbursements.

Additionally we have recently hired 12 new employees in our US field sales and clinical staff to replace open positions and further expand our field sales force, and we would expect to see productivity from these investments toward the end of 2008 certainly into early 2009. So we're looking forward to those additions coming on line and fueling further growth for the company.

Full-year revenue for 2008 should be approximately $25 million. That's growing roughly 15% plus or minus a percentage point or two, and historically the third quarter revenue is fairly similar to the second quarter. You've got the summer months, vacation season both amongst our customer base, the physician offices and the doctors in those offices and also our personnel as well. Typically sales results are similar to the second quarter. The fourth quarter historically has been our strongest quarter and we would expect that to continue again this year.

We have made substantial efforts to accelerate our return to profitability and we're on track to improve our operating loss from continuing operations in 2008 by nearly 60% and reducing the EBITDA loss by over 70% for the year, so again, very commendable results. We still have the fourth quarter in our sights to return the business to positive EBITDA and positive operating cash flow. And I can definitely assure you that at the company we are intensely focused on achieving this goal. Our spirits are high. 2007 was a year of recovery for us. We're off to an excellent start in the first quarter of 2008 with improved growth in the business, and we're running very hard to restore profitability and increase shareholder value.

So let's take a moment to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Mike Vermott.

Mike Vermott

Quick question, what is the path now to approach CMS again and go for additional coverage? Are we talking another two years? What studies are being performed? Just what's the timeline?

Michael K. Perry

We have two major markets, Mike, that we're focused on with the physician office and how it's impacted by reimbursement. One is the heart failure market and what we're doing there is conducting a significant clinical trial, it's the prevent trial. We have enrolled a number of patients in that trial. That's probably a good 2+ years out to completing the trial. And really the focus to that particular clinical trial is to allow the heart failure community to place the BioZ technology into its treatment guidelines and that would be the point where CMS could see that this is a standard of care, it's an essential tool in the treatment of heart failure patients. So probably relative to heart failure you're looking at 3+ years to have CMS make a particular change.

In the hypertension world we are doing an observational trial right now, structuring a trial that we would then discuss with CMS probably some time middle of next year. That would allow us to conduct a hypertension trial that we would hope that the results would show enough improvement that CMS could grant additional coverage or additional indications to us. The published results probably for that trial, we're talking again 2+ years out. These are not things that are going to happen in the next six to 12 months but they're not five or 10 years away either.

Operator

Our next question comes from Bob Poole.

Bob Poole

The 14% sequential increase in sensor revenue, that's a pretty big number. Is that seasonality? What is it?

Michael K. Perry

Yes a good amount, Bob, is definitely seasonality. We typically find in the first quarter a bit of a dip in sensor revenue. We weren't perhaps expecting a 14% increase but year-over-year it still was a 1% increase. So we've got some more work to do to increase the sensor growth rate because we're really tracking toward a year-over-year metric. But nonetheless it was encouraging to see things rebound. First quarter was lighter than we anticipated.

Bob Poole

And Mike is there any update at all on your partnership in India?

Michael K. Perry

Nothing to report substantially although, I will tell the group that we have initiated the development of a joint product involving resources in India and involving resources here. In fact the design people are literally arriving at LAX within the next two hours and they are coming down to San Diego to meet with our design folks and going to spend time over the next four or five days together on that project. So it's still early to really talk about release dates or anything like that but we have initiated some joint product development work.

Bob Poole

Mike is that a new product or is it an update to an existing product?

Michael K. Perry

It's actually a new product, not an ICG product. It's a product that was on their product road map. We thought by combining some of our marketing and product specifications and design process that we could help them design a product that would not only meet the needs of the Indian marketplace but really it can be a worldwide product and that would allow us to be the sales and marketing force behind that outside of the country of India.

Bob Poole

And if you are successful with this one, do they have other products of this kind in their development pipeline that could follow if this program were successful?

Michael K. Perry

Yes. In fact they do. And really what they're looking for, Bob is access to markets beyond India. India is a very, very price sensitive. The cost of products there oftentimes is roughly one-tenth the level of Western standards. So our thought was to take their intensity and focus around low-cost product design and manufacturing, improve the technology content in those products that would make them worthy of selling around the world, but be able to provide them at a reduced cost. Clearly a strategy that a company like [Mind Gray] is pursuing, Chinese patient monitoring company looking to enter the US market right away.

Operator

There appear to be no further questions in queue.

Michael K. Perry

Well, if there are no further questions, I sincerely appreciate everyone's participation on the call today. We were very pleased with the 18% growth experienced in the first half, 15% growth in the second quarter, and our sixth consecutive quarter of growth. We're particularly satisfied with the 68% reduction in operating loss, the 82% improvement in EBITDA loss during the quarter, and our goal continues to drive to positive EBITDA and operating cash flow in the fourth quarter of this year. The presentation of the Pri-Med results demonstrating nearly three times the national average blood pressure control rate utilizing our technology really reinforces our belief it's a shot in the arm that we are offering substantial value and contribution to the healthcare system, and honestly our team has renewed energy, commitment to continue growing the business, getting back to profitability, and positive cash flow. So we sincerely appreciate all the support we receive from each of you, and if you have any additional questions, please feel free to give Steve Loomis, Rhonda Rhyne or myself a call 1-800-778-4825. And everyone have a great afternoon. Thank you.

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Comments

[buyforeclosures]

What was the reverse split 7 shares for 1? What was the stock price at the time? Is this a good 5 year hold or a BK waiting to happen?