Urologix Inc. F3Q09 (Qtr End 3/31/09) Earnings Call Transcript

Apr.23.09 | About: Urologix, Inc. (ULGX)

Urologix Inc. (NASDAQ:ULGX)

F3Q09 (Qtr End 3/31/09) Earnings Call

April 23, 2009 5:00 pm ET


Stryker Warren, Jr. – Chief Executive Officer

Rebecca J. Weber – Controller & Director of Finance


Ernest Andberg – Feltl and Company


Good day ladies and gentlemen and welcome to the Urologix, Inc. Fiscal 2009 Third Quarter Conference Call. My name is Erika and I’ll be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

Statements made at this presentation may contain forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected in any forward-looking statements due to the risks and uncertainties. A detailed discussion of risks and uncertainties maybe found in our most recent Annual Report on Form 10-K for the year ended June 30, 2008, and other documents filed with the Securities & Exchange Commission.

At this time, I would like to turn the call over to Mr. Stryker Warren, Jr., Chief Executive Officer. Please proceed sir.

Stryker Warren, Jr.

Good afternoon. This is Stryker Warren. I'm the Chief Executive Officer of Urologix. Joining me today are Rebecca Weber, Urologix’s Director of Finance and Controller and Greg Fluet, Urologix’s Chief Operating Officer. Before I share my perspective on the third quarter of fiscal 2009 I will ask Rebecca to review the financial results.

Rebecca J. Weber

Thank you, Stryker. Revenue for the third quarter were $3.3 million, an 8% increase when compared to the $3.1 million reported in the third quarter of fiscal 2008. Sequentially, revenue was 2% less than the $3.4 million reported in the second quarter of fiscal 2009. As discussed in today's press release, the 8% revenue increase from the third quarter of the prior fiscal year is a result of increased orders of our procedure kits. The 2% decrease in revenue from the second quarter of fiscal 2009 is a result of a decrease in orders for procedure kits, partially offset by an increase in revenue from the Urologix mobile service.

This is the second consecutive quarter with an increase in revenue by the Urologix mobile service. The decrease in orders for procedure kits from the second quarter of fiscal 2009 is due to smaller average order sizes from our direct and third party mobile customers. Encouragingly the number of direct accounts that ordered kits grew quarter-over-quarter and the number of third-party mobile customers remained stable. The increase in revenue in the Urologix mobile channel from the second quarter of fiscal 2009 is primarily the result of an increase in the number of treatments performed by customers utilizing Urologix's Cooled ThermoTherapy mobile service.

Revenue from the Urologix mobile service increased 8% from that reported in the second quarter of fiscal 2009 and constituted 48% of overall revenue. While revenue from catheter sales to direct accounts decreased 8% from that reported in the second quarter of fiscal 2008 and constituted 35% of overall revenue in the third quarter of fiscal 2009. Third-party mobile revenue represented approximately 14% of overall revenue in the third quarter of fiscal 2009. The net loss for the third quarter was $1.2 million or $0.08 per diluted share.

This is a reduction of 44%, when compared to the net loss of $2.1 million or $0.15 per diluted share reported in the third quarter of fiscal 2008. The net loss for the second quarter of fiscal 2009 was $1.1 million or $0.07 per diluted share. Gross profit for the third quarter of fiscal 2009 was $1.7 million or 50% of revenue, a 4-percentage point increase when compared to the third quarter of fiscal 2008. The increase in the gross profit percentage when compared to the prior year quarter is due to a decrease in unabsorbed manufacturing expenses.

Gross profit, when compared to the second quarter of fiscal 2009 decreased by 4 percentage points. The decrease in the gross profit percentage when compared to the prior quarter is due to an increase in our inventory obsolescence reserve and increase in the Urologix mobile service as a percentage of revenue as well as an increase in unabsorbed manufacturing expenses. As a result of reduced production due to a planned streamlining of our manufacturing line at the end of the quarter.

Third quarter operating expenses totaled $2.9 million, which were lower than the prior year period by $773,000 or 21%. The decrease in operating expenses from the third quarter of fiscal 2008 is a result of decreased operating expenses for the business as we continue to manage expenses. Selling, general, and administrative expenses decreased by approximately 23% due to decreases in compensation expense as a result of the severance accruals recorded in the prior year period as well as decreases in legal, audit, and consulting fees and other selling expenses.

Research and development expenses also decreased due to decreases in product testing and project materials and compensation and benefit partially offset by increases in consulting and clinical study expenses. Operating expenses were comparable to the second quarter of fiscal 2009, decreasing $17,000 or less than 1% quarter-over-quarter.

We ended the third quarter with cash and cash equivalents of $7.6 million representing approximately $897,000 of cash utilization during the quarter. This compares to approximately $665,000 of cash utilized in the second quarter of fiscal 2009, the increase in our cash utilization quarter-over-quarter is a result of a pay-down in our accounts payable balance of approximately $202,000, as well as an increase in our days' sales outstanding. Our days' sales outstanding at the end of the third quarter were 42 days, up two days when compared to 40 days for the quarter ending December 31, 2008. I will now turn the call back over to Stryker.

Stryker Warren, Jr.

Thank you, Becky. The results for the third quarter of fiscal 2009 provides some encouraging elements, but the revenue results did not satisfy our expectations. The encouraging aspects of the quarter sales activity were the growth in revenue generated by customers utilizing Urologix mobile service and the growth in the number of direct accounts ordering kits.

This is the second consecutive quarter where we have had success in both these areas. While we are in the midst of a challenging economic environment, I believe the number of active direct accounts, which has grown for the second quarter in a row is the result of a focused sales effort to generate new accounts, to recover lost accounts and to ensure through frequent and meaningful contact that accounts remained satisfied with product and service. These efforts are part of our back to basics strategy and within these direct accounts we are seeing traction with this strategy. We intend to leverage these relationships with the objective of increased case volumes per account, per month, the hallmark of our mobile business.

Turning to the company owned mobile channel. This combination of a technology and relationship driven business model is working as the sequential increase in the past two quarters procedure volumes indicate. The Urologix application specialist, our microwave technician has been taught, he is incentivised to ensure the urology office is trained not only in the use of our technology, but also in patient education and pre-treatment protocols. The technician makes a standard part of his or her day talking to the treating urologist and others in the office about contemporary clinical information and topics relevant to our therapy such as our five-year durability data.

The focal point of this relationship is increasing the awareness of the breath of BPH patients, who were candidates for our therapy as well as creating structure around treatment days and schedules to minimize cancellations and no shows. The application specialist, who has also played a key role in the marketing campaigns we've conducted with our mobile customers. My litmus test for the mobile business has been introducing myself to an Office Manager, a Lead Physician or a Nursing Supervisor for the first time and being told immediately how valuable our Tech is. This has happened with great frequency as I spent time with our customers and it is attributable in large part to the commitment and knowledge of the Mobile Technician, which is often appreciated by all in the urologist's office.

Well I'm mostly interested in the efficacy of our technology and it's appropriate use, the collegial relationship and accolades toward our application specialist are especially gratifying and from a competitive standpoint, they are reassuring. It is this customer interaction around treatment days in the mobile account that we are attempting to emulate in the direct channel to penetrate accounts more deeply, while also strengthening the customer relationship with Urologix.

In particular it will be our itinerant clinical specialist, who will play this role something we have begun on a targeted basis. With our office based Cooled ThermoTherapy, our sales force has the opportunity to get beyond the waiting room and interact in the procedure room with the clinical staff, very fertile ground for meaningful interaction and the establishment of long lasting mutually respectful relationships. Company wide there continues to be an emphasis on selling discipline, appropriate financial incentives for the sales force and the mobile technicians, focused marketing efforts and a comprehensive customer relationship management process.

The company continues to make the clinical specialist a part of this process to ensure adequate training, technology implementation, and discussion of best practices all of which provide a basis for confidence in the therapy, the technology and most especially patient safety and comfort. We continue to place some emphasis on the collaborative opportunities for the sales representatives and the mobile technicians. Our objective is to abbreviate the sales cycle and to demonstrate an efficient means of delivering therapy in the urologist's office. We see the mobile business model as one that permits greater ease and implementation with the opportunity to transition larger accounts to the direct account status, when that preference exists and utilization rates justify it.

The mobile model permits implementation and treatment initiation, without the lengthy decision making process often inherent in capital equipment sales, a major plus. The sales force in mobile technicians continue to be armed with contemporary comparative information to support a consultative sale. The over arching theme is that not all microwaves are alike.

More specifically emphasize that the Urologix Cool ThermoTherapy option is labeled for the broadest segment of BPH patients. The Urologix system can treat symptomatic patients with smaller glands, it can treat the obstructive component of BPH and has good results in treating urinary retention. We believe this indication for treating the obstructive component of BPH is the key element our competitors lack.

In addition, our treatment is preformed in urologist’s office and it has a low serious complication profile, when compared to lasers and it is durable as proven in several journal articles showing four and five year data. Durability of treatment is something we will report on again at the 2009 American Urological Association Annual Meeting. This will mark our third published study demonstrating strong five-year durability.

Our lower energy competitors have yet to publish more than one peer-reviewed journal article with data beyond one-year. Our focus marketing initiatives reined at raising patient awareness BPH therapies and the capabilities of that urologist’s office. We are also devoting research there that's educating the primary care physicians, who serve as a primary source of referrals and who exist as the principal prescribers of BPH medication. We have devoted resources to the Urologix's website as source of information about BPH and therapeutic choices, which is intended for both urologist and patient.

Finally, we have implemented a complete contact resource management tool to provide our sales force with complete territory and account history to ensure they have the necessary customer information to properly service our accounts and to provide sales management with more visibility into field activity and call volume. We are also targeting patients on BPH medication, the message we have heard from committed customers is that the Urologix system can be used not only as salvage treatment for medical failure, but also as the primary therapy in lieu of medication. Thereby, given the high incidence of side effects and the failure of a significant percentage of patients that derive satisfactory outcomes for medical management, their patients are open to considering alternative therapies with proven outcomes.

We have been told by these urologists that they will present the patients with the Cooled ThermoTherapy treatment as a viable option to enjoy continued relief from their BPH, while avoiding chronic meds their expense and the associated side effects. And finally, lasers remain a target of our consultative selling. Microwave is a very attractive alternative to lasers especially when one examines the comparative complication rates and direct visit general anesthesia for lasers. The Annual Meeting of AUA begins Saturday in Chicago. Urologix will use this form to emphasize the benefits of our proprietary high-energy Cooled ThermoTherapy and the ability to customize the treatment for each patient.

The Urologix systems ability to tailor the treatment to fit the patient has resonated with clients and with prospects. They recognize that one size does not fit all and we're presenting a moderated poster at the AUA with a one-year clinical data on the effects of urethral temperature on patient outcomes that supports the effectiveness of multiple high-energy temperature settings.

In addition, the AUA accepted a second scientific poster on the Urologix CTC catheter for presentation. This will share the complete five-year data from the pivotal CTC study, showing the durability of the Cooled ThermoTherapy treatment. Last year, introduced the interim five-year data this year completes that presentation. Both these topics durability and customized high-energy protocols differentiate Urologix’s from its microwave competitors and position us to substantiate the claim that all microwave technologies are not the same.

The AUA form will also be the site where CTC advanced short is formally introduced, the first cases were initiated earlier this month as a part of a per launch market survey and the preliminary feedback has been very positive. This catheter accomplishes two objectives. It completes the CTC advanced family permitting the urologists to now choose from three antenna for customization of treatment based upon the patients intraprostatic urethral length with the proven CTC advanced design introduced a year ago, which was since generated customer feedback of improved overall easy of use and patient comfort.

Secondly, the CTC advance of the 60-watt power setting with a goal to tailor the catheter for optimized comfort and effectiveness for the short prostates supporting our claim of responsiveness to the urologist and the demand for customized treatment. I believe it is very fair to the urologist that Urologix has fulfilled its pledge to continue to enhance its product line with an emphasis on safety, durable effectiveness, comfort and easy of use.

In sum, our objective remains one of revenue growth resulting from adding new clients, reactivating inactive or lost accounts, growing account utilization in all channels and then protecting the account base Urologix has gained. Beyond fundamental sales goals, Urologix continues to provide the sales force and the mobile technician with a product knowledge and clinical evidence to differentiate Urologix from other microwave technologies from lasers and from medication. We believe the AUA Annual Meeting will serve to again raise our visibility promote our credibility and differentiate us to the urologist as the provider of a durable customized treatment with superior clinical outcomes along with a keen focus on safety and patient comfort.

Disciplined selling with a particular emphasis on growing case volume in existing customers and expense control are corporate priorities. The economic environment is challenging and the competitive landscape complex. However, Urologix's senior management continues to be confident in our technologies efficacy, in our sales force, in our mobile technicians, in our manufacturing capabilities and in our ability to document clinical outcomes that support our claims of superiority. I thank our shareholders for their interest, for their support, and for their patients. And I will now do my best to answer any questions that participants in this call may wish to ask.

Question-and-Answer Session


(Operator Instructions). And our first question comes from the line of Ernest Andberg with (Feltl and Company. Please proceed.

Ernest Andberg – Feltl and Company

Hello, Stryker.

Stryker Warren, Jr.


Ernest Andberg – Feltl and Company

Hey. You've put a lot of emphasis on the sales force, sales force training, the mobile guys out there, talking to the docs and helping their offices. Can you talk at this point about coverage, have you added new salesmen, new reps, lost anybody over the last quarter?

Stryker Warren, Jr.

There have been changes, but they are not material, there is great stability in the sales force coast-to-coast and I would emphasize what you pointed out and that is the role is ever increasing relative to the mobile technicians, so we are quite pleased with not only the geographical coverage, but the ability for those individuals to actually spend time in the urologists office.

Ernest Andberg – Feltl and Company

Relative to the mobile, you have had a couple of quarters in a row of increased revenue there Stryker, but you’re really kind of constant over the last seven or eight quarters in the mobile channel. What's the optimism in the last two quarters versus where you have been over the last two years in that channel in terms of the way you’re looking at it right now?

Stryker Warren, Jr.

There are several things, first of all, in the last two quarters the new leadership over that portion of the business has really taken a whole. Second of all, there has been a preoccupation with the business etiquette that's never existed before, which I think not only has provided more of a collegial relationship with the practice, but it’s really provided a great deal of predictability for us in terms of case volumes and what I mean by that is, we think we have been able to impact our ability to see well into the future, the cases per day and at the same time really doing an excellent job, working with the practice too minimize the extent possible of cancellations and no shows. And finally the third thing is these mobile technicians are armed far differently today then they were even six months ago in terms of contemporary clinical information and they are being encouraged to spend time in clinical discussions with the urologists and this is a great opportunity as anybody its ever been in a hospital, knows to spend time during a case talking about clinical issues with a treating surgeon and pointing out some of the things that are very important to us and that is continuing with the messaging around the breadth of patients that our technology can address, as well as having the opportunity to plum for issues that that practice may have around competitive technologies, medication and how the referral patterns were built. So, there are a number of things that if you look programmatically and directionally what's being done in the mobile channel today are substantially different and if you ask me to still that down, I would say it is structure, discipline and incentives.

Ernest Andberg – Feltl and Company

So, you would say, it's the trend so far this year rather than where you were relative to last year that's important?

Stryker Warren, Jr.

Well, I think this year there is much more of a sensibility in terms of the way in which the business is being run and we have every reason to believe that this model is going to continue to be able to demonstrate the kind of stickiness with the account and the ability to identify cases. We are much closer obviously to these accounts then we historically have been to the direct accounts and that's why I mentioned in my comments that one of the initiatives that is underway now is to cross-pollinate many of these activities to the extent possible under the direct channel.

Ernest Andberg – Feltl and Company

Okay. On the direct channel, your press release and Becky talked about the increase in accounts, can you either talk about it in terms of absolutes or percentage change relative to where you were in Q2. Stryker?

Stryker Warren, Jr.

I can talk to either one of those, but I’d like to highlight a couple of things, that I think are quite impressive to me. Number one is that, in terms of our sales force, we deliberately went out and found people that it had significant tenure with the company and somewhat storied background that it left and we brought several of those people back as you’ve heard me comment previously. In the accounts that are talked to in terms of growth what I am particularly gratified by are the accounts that have come back that had gone to competitive technologies that that we’ve been able to bring back and also that again with a consultative sale we’ve been able to take accounts that have been in an inactive status and reactivated those if you will. And then of course there have been accounts that are simply brand new accounts that we’ve identified, qualified as prospects and then closed, but there is no one region. There is one approach, but what I want to point out is that what I’m encouraged by is the fact that in the direct channel we are seeing people move off of competitive technologies and people that have known the company and left, coming home again.

Ernest Andberg – Feltl and Company

Okay. One more, Becky talked a couple of times about unabsorbed overhead and the impact that has on margins. Do you have any inside or can share where you need to get to be towards break-even sales volume Stryker?

Stryker Warren, Jr.

Well I suspect you’ve already built that model and I am not.

Ernest Andberg – Feltl and Company

Well, I thought about it, but I just want to hear what you have to say.

Stryker Warren, Jr.

We internally are preoccupied with that, but I am not prepared to share that publically.

Ernest Andberg – Feltl and Company

Can you, I leave it with that. Thank you.

Stryker Warren, Jr.



(Operator Instructions). There are no further audio questions.

Stryker Warren, Jr.

No, other questions. I’d like to thank everybody on the call and look forward to speaking with you in another quarter.


Thank you for your participation on today's conference. This concludes the presentation. Everyone have a great day.

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