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Executives

Stryker Warren Jr.- CEO

Rebecca Weber - Director of Finance and Controller

Greg Fluet - EVP & COO

Analysts

Larry Hemowich [ph] - HMPC [ph]

Ernest Andberg - Feltl and Company, Inc.

Presentation

Urologix, Inc. (ULGX) Q4 2009 Earnings Call January 21, 2010 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Urologix Inc. Fiscal 2010 Second Quarter Conference Call. My name is Kiana and I will 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 towards the end of the conference. (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. Statements made in 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 risk and uncertainties. A detailed discussion of risks and uncertainties may be found in Urologix’s recent annual report on Form 10-K for the year ended June 30, 2009 and other documents filed with the Securities and 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 and as Chief Executive Officer of Urologix, I welcome you to this earnings call. We're pleased you could join us, joining me are Rebecca Weber, Director of Finance and Controller and Greg Fluet, Executive Vice President and Chief Operating Officer. Before I share my perspective on the second quarter of fiscal 2010, I will ask Rebecca to review the financial results.

Rebecca Weber

Thank you, Stryker. Revenue for the second quarter increased 20% to $4.1 million compared to $3.4 million reported in the second quarter of fiscal 2009. In addition, revenue increased 5% from the $3.9 million reported in the first quarter of fiscal 2010. The 20% increase in revenue over the prior year quarter is due to increased sales in our distribution channels, Urologix Mobile service direct and third party mobile service. The increase in revenue over the first quarter of fiscal 2010 is due to increased sales in our direct and Urologix's mobile service distribution channel. Revenue derived from the Urologix Mobile service contributed 48% of overall revenue in the second quarter of fiscal 2010 compared to 45% in the first quarter of fiscal 2010. As mentioned in today’s press release the Urologix Mobile service revenue grew sequentially for the fifth consecutive quarter.

Revenue from catheter sales to direct accounts contributed 35% of overall revenue in the second quarter of this fiscal year, compared with 33% of revenue in the prior quarter. And finally, third party mobile revenue contributed 15% of overall revenue in the second quarter of fiscal 2010 compared to 19% in the prior quarter.

Cash and cash equivalents were $6 million as of December 31, 2009. We generated approximately $22,000 of cash in the current quarter. This is a change from the $1 million cash utilization in the first quarter of fiscal 2010. The decrease in our cash utilization from the prior quarter is the result of the improvement in our gross margins, a decrease in operating expenses as well as an improvement in our days sales outstanding. Our days sales outstanding at the end of the second quarter were 40 days, down seven days when compared to 47 days for the quarter ended September 30, 2009.

In addition, as has been previously mentioned, cash utilization in the first quarter of fiscal 2009 was higher due to the timing of annual expenses such as insurance premiums, year end audit fees and fiscal 2009 bonus payments. Management believes that the $6 million cash balance at December 31, 2009 will be sufficient to fund our working capital needs beyond the next 12 months. The net loss for the second quarter was $273,000 or $0.02 per diluted share, a reduction of 74% when compared to the net loss of $1.1 million or $0.07 per diluted share recorded in the second quarter of the prior fiscal year and reduction of 60% when compared to the net loss for the first quarter of fiscal 2010 of $677,000 or $0.05 per diluted share.

Gross profit for the second quarter of fiscal 2010 was $2.3 million or 57% of revenue, a 3 percentage point increase when compared to growth profit of $1.8 million or 54% of revenue reported in the second quarter of fiscal 2009. Gross profit as a percentage of revenue increased by 2 percentage points when compared to the prior quarter. The increase in the gross margin over the prior year period and first quarter of fiscal 2010 is primarily due to increased production volumes in response to increased sales.

Operating expenses decreased over both the second quarter of the prior fiscal year and the first quarter of fiscal 2010. Second quarter fiscal year 2010 operating expenses totaled $2.6 million, a decrease of $265,000 or 9% when compared to the prior year quarter and by $208,000 or 7% when compared to the first quarter of fiscal 2010. This continued reduction of operating expenses is reflective of our careful management of the business. We are planning to increase our investment in certain areas of the business going forward but only in those areas where we have identified clear resource needs to support the growth of the business in both the near-term and long-term.

I will now turn the call back over to Stryker.

Stryker Warren Jr.

Thank you, Becky. Once again well a quarter does not a year make, this one certainly builds upon the most recent quarter in what has become evident, a fundamental shift within the company is underway in producing results, product, sales and marketing, customer service and comparative effectiveness discussions. The second quarter results demonstrate the continuation of hard work across the company to grow the business through our focused sales efforts, targeted marketing programs, improved production efforts and through the thoughtful management of operating expenses.

Senior management is again pleased but certainly not satisfied with the financial results and the continued progress as we have built upon the previous two quarters we recognized we must continue to build upon this momentum for the third consecutive quarter of sequential revenue growth.

For Q2 of fiscal year 2010, revenues of approximately $4.1 million were encouraging. The sales efforts continue to be complemented by aggressive and thoughtful expense management with our focus on using our resources to responsibly invest in and grow the business.

While the cash generated in this recent quarter was nominal, this is an accomplishment I consider meaningful. This result is a validation of the disciplines I have previously shared as a part of the past year plus corporate restoration process. Across the organization, we are recognizing the continuous improvement in our clinical sales capabilities or improved mobile efficiencies. The market's resonance with our differentiable clinical data the markets enthusiasm for CTC advanced catheter family. The appreciation of our targeted partnership programs with practices to reach BPH patients and our demonstration that high energy microwave therapy is the gold standard for office based BPH therapies.

We continued in our second quarter to build upon the competitive advantage provided by the supply interruption of a competitor's product. They have returned to the market during the second half of the quarter.

We will continue to focus on converting competitive accounts as we are hearing from the marketplace a continued appreciation for the clinical effectiveness, product enhancements and proven durability of outcomes associated with Urologix's Cooled ThermoTherapy. We have spent considerable effort in ensuring recognition of the differences between high and low energy microwave and we have supported this with our five year durability data and customizable treatment protocol. The data has been well received and I believe that presents an exceptionally strong message.

As I previously stated, we’ve been successful converting customers from this low energy competitor in the past, but the supply interruption became an accelerant to this process in a clear opportunity to leverage our CRM software platform. It has enabled identifying, targeting and tracking competitive account conversions and we planned to continue to build on these capabilities.

Aside from the competitive conversions in the first and now second quarter, we continue to realize the increased strength of our business from our current customers as we continue to discuss patient selection and patient tolerability to broaden the patient population.

Our goal is to continue to build on this base of business and expand the view of the urologists who are using Cooled ThermoTherapy to the broadest of capabilities, the system offers in addressing the growing population of men, many of whom do not want chronic medication or are unhappy with cost, side effects and/or the clinical benefit for BPH drugs they are taking. These patients are often unwilling to become surgical candidates that are seeking definitive treatment. Cooled ThermoTherapy provides a meaningful solution.

During the last year and a half, we have transformed the sales force of Urologix. This has included changing from independent sales representatives in many territories to investing at a predominantly direct sales model. We have achieved this with only marginal increases in our selling costs. We have made the investment in a direct sales force with the expectation of near term growth through the ability to singularly focus on the patient and physician benefits enabled by our Cooled ThermoTherapy product line. The territory sales managers combined with the application specialist as I shared in the past are a synergistic and powerful team, well versed, properly incentivized and armed with sales tools, improved statements to separate Urologix. How? Tout the clinical data, demonstrate the new technology, discuss the treatment algorithm for customization on a patient-by-patient basis, deliver service and support that is tangibly distinguishable from the competition and then tout the data again, and remind the medical community that BPH drugs are not for every man. In fact the AUA guidelines state that for the average patient, transurethral microwave heat is more effective than medical therapy.

The failure rate with BPH medication is high despite the TV ads, glamorization of this therapeutic choice. Why the failures? Contributing factors, side effects, lack of efficacy and the cost of the chronic medication, sometime two medications being taken in combination. Our objective is to compete with drugs, not surgery, it is a very large market and one we are confident in competing with in. We intend to grow the market, but we will also aggressively compete for market share in the process.

As you've heard from me and others, Urologix is good technology and good people. It has never been about our technology, it is about execution and daily we gain confidence in our execution capabilities and our overall resolve. Why? Because we are confident urologists and their staff appreciate the demonstrable quality in both the Urologix technology and the Urologix service.

Moreover, quality, reliability and trust remain the currency upon which we trade and we are thoughtfully but aggressively working to continually demonstrate this commitment to our customers. I believe the strength and quality of our leadership, our product benefits, academically grounded in the five year durability data presented to AUA annual meeting, our operational excellence and our intense clinical focus will allow us to establish and maintain strong relationships with urologists. This is our political capital and an asset we guard carefully.

No change in our focus. I assured one quarter ago, our highest priority was the patient outcome. Our next highest priority was achieving positive cash flow. I am pleased to report, we continue to strive towards these objectives and we think the progress is becoming visible. The second quarter of fiscal 2010 marks the third consecutive quarter sequential revenue growth, a quarter of cash generation, another quarter of the basics showing signs of operational and relationship dividends being paid.

In closing, I remind all of us what we as a company have reminded the urology market. Urologix is the reliable choice, reliable product, reliable people and most especially reliable outcomes. And that along with reliability, our other terms, two in particular of equal importance to all of us involved with Urologix, quality and trust. Concluding Rebecca's and my comments, we will now do our best to answers any questions you might have.

Question-And- Answer Session

Operator

(Operators Instructions). Our first question comes from the line of Larry Hemowich [ph] of HMPC [ph], you may proceed.

Larry Hemowich - HMPC

Congratulations, nominal cash flow is better than losing cash isn’t it?

Stryker Warren Jr.

Certainly feels that way.

Larry Hemowich - HMPC

It is, it's great. I'm sure you're very pleased with progress and I know there is more good coming. I don’t think I heard anything on your prepared remarks on reimbursement and of course it's I'm sure the ground is moving daily on that with all the things that are going on with healthcare reform and everything else. There was some concern, may be it was the last conference call or the call before regarding potentially negative reimbursement changes, so I was just touching base with you on that just to see what your updated thoughts were.

Stryker Warren Jr.

We only have visibility on January and February and for our code it’s a 7% reduction. What we don’t know yet is what the impact of the Massachusetts's election results are and what this means from the standpoint of health care reform because we received this 7% reduction with unknown fees March through the end of the year as a part of reimbursement language being tagged onto a defense appropriation bill. At this point, Larry ,we don’t know anything more beyond what sits in front of us. Now the other thing that I would say is that in the past we have discussed the fact that we have an active reimbursement strategy and consequently there are really two tiers to fully answering your question. One is, we will wait what comes hopefully in the next 30 days with respect to what the reimbursement will be March 1 through the end of the year but we are also actively working with our reimbursement consultants and the AUA on broader issues. So it's an area that’s receiving considerable attention, that’s the extent of the details that I can share in terms of the reimbursement today.

Larry Hemowich - HMPC

And the reimbursement for other's, competitors, not so much obviously microwave, but other technologies, do you see them facing potential price cuts as well. Have you seen anything on that?

Stryker Warren Jr.

Let me ask Greg Fluet who actually as COO, Larry, has really spearheaded the entire reimbursement effort for the last year.

Greg Fluet

Hi Larry. (inaudible) reduction in our RVUs is fixed for 2010, what’s the floating factor in March is what’s going to happen to the conversion factor, which as I am sure you know, it really applies to every procedure that any physician does. And so that piece is what we are, everyone I think is kind of waiting to see what the impact of that will be. So that has kind of equal impact relatively, it's about 20% to -- 20%, 21% net impact, every procedure that is being done. So you know I think aside from that on the RVU basis, for instance the RF needle ablations saw similar reductions in the RVUs, so -- and then the microwave technologies are under the same code. So that’s kind of on us even footing.

Larry Hemowich - HMPC

Yeah. I am sure others would like to ask questions but the question I am going to ask I think now Stryker probably would be a question many of us would be interested in and that is the competitive landscape, can you update us on Prolieve and any other competitive information that would be helpful to us.

Stryker Warren Jr.

As you know, Larry, it's very, very difficult to assemble accurate information in terms of market share given how people are reporting as well as one major competitor being out of the market for a period of time due to the recall. What I can tell you is that we know that we have grown at the expense of some of our competitors and that’s really about as much as color as I can share, not because I know something that I am not going to share, but we do not have significant detail in terms of hard market share data.

Larry Hemowich - HMPC

Great, thanks. I'll jump back in the queue. Thank you.

Operator

Our next question comes from the line of Ernest Andberg. You may proceed

Ernest Andberg - Feltl and Company, Inc.

The pricing or the reimbursement has held relatively steady, down a little bit over the first two months of the year. And we got the issue of the sustainable growth formula to deal with still but has there been any change in pricing out there competitively, Stryker? Or your ASP has been relatively stable?

Stryker Warren Jr.

Ernie, I am not going to speak to this quarter, but what I would point out is that, a year ago, when there was a reduction in the CMS physician fee schedule, we did not adjust pricing.

Ernest Andberg - Feltl and Company, Inc.

Okay. We'll leave it at a somewhat murky answer. Rebecca mentioned some investments in the business to sustain your growth, you did too, does that mean that we could see some upward biased operating expenses over the balance of the year?

Rebecca Weber

I can answer that, Ernie. While we are not providing any guidance at this time, just to kind of may be give you a little more clarity there, some of the reductions in our operating expenses this quarter, it’s really due to deferred expenses, they are not permanent reductions. So for example, we had some R&D projects that had really been pushed out from Q2 but weren’t a permanent reduction, if that helps.

Ernest Andberg - Feltl and Company, Inc.

Okay. That was a modest decline sequentially, Rebecca, but a bigger decline in the SG&A line, was that strictly due to the lower annual accounting insurance bonus kind of issues?

Rebecca Weber

Yes. Quarter-over-quarter, some of the biggest decreases in that SG&A line are due from more of the annual expenses that are incurred in the first quarter of the fiscal year related to legal and audit fees and things such as that.

Ernest Andberg - Feltl and Company, Inc.

Okay. Then were your comments about judicious investments in growth expenses related to things like the push-out in R&D. Is that what you are referring to?

Rebecca Weber

Yes. I would say that is more what we're referring to.

Ernest Andberg - Feltl and Company, Inc.

Okay. Stryker, you mentioned a couple of times and also last quarter that you've been able to do some competitive conversions, pick ups, particularly as the Prolieve was out of the market. Can you give us any feel for how that’s helped your revenue stream?

Stryker Warren Jr.

Ernie, I appreciate the question, and for competitive reasons would simply say that we've been a beneficiary of their being out of the market, and it is our expectation given the way we're positioning ourselves that that benefit, we expect to accrue for a period of time. These are now, we don’t refer to them as conversions any longer. We refer to them as our customer. But in terms of giving total revenue figures from that, I prefer for competitive reasons not to do that. The other thing that I would point out is that it was not just the competitor that had a recall that we continue to pursue and with success.

Ernest Andberg - Feltl and Company, Inc.

Historically, the March quarter has seen some seasonal decline in revenues and I have had admittedly a tough time pinning the top line down. Do you see the benefits of the competitive market share gains continuing and could that possibly offset what has historically been a slow down in business in the March quarter without forecasting.

Stryker Warren Jr.

As you know, we prefer at this stage in the company's transformation not to share any guidance. And consequently what I will simply say is, we have what I think is a sales force that continues to undergo a significant maturation process. I am very comfortable with the people that we have in the field, both the application specialist and the TSMs and I think we will be as aggressive in the future as we have been in the past.

Ernest Andberg - Feltl and Company, Inc.

The one part of your business that was down sequentially was the third party mobile. Stryker, is there anything that was out of the ordinary in that business or how would you describe what's going on there? And I am talking sequentially this quarter from the first quarter, third party mobile.

Stryker Warren Jr.

Yeah, Ernie, all I can say is we have a number of third party mobiles, and quite frankly, while we provide the sales side of that relationship, we do not have the operational kind of relationship that we do with the customer and the company owned. So, one of the challenges that we have is the very significant efficiencies that we’ve built in and a scheduling process that has made our business I think predictable in comparison to the third party mobile. So, I cannot provide any specific color on that other than to say we continue as we have in the past to work as closely as possible as third party mobiles. But obviously, they are independent to our organization and therefore the ability to real-time control their activities is much more of a challenge than it is for the company owned side of the business.

Ernest Andberg - Feltl and Company, Inc.

Okay, besides a strong performance by your CFO in managing the receivables, was there anything unusual in the receivables DSOs going down in the quarter that might reverse itself and chew up a little cash going forward?

Stryker Warren Jr.

I think the only thing that we have seen and this has been a historical issue in terms of seasonality, Ernie, is that we have a customer base, and we're certainly not the only company that experiences this for tax planning purposes. It tends to be much more aggressive in responding to our invoices at the end of the year than they might at other times. So, I think that this is not anything unusual. In fact it was predictable. We tend to work it especially hard knowing that, but this is something that is really an endemic issue surrounding tax planning.

Ernest Andberg - Feltl and Company, Inc.

Okay, fair enough. Thank you, Stryker.

Stryker Warren Jr.

Thank you, Ernie, and I apologize for the murkiness.

Operator

(Operator Instructions). With no further questions in the queue, I would like to turn the call back over to Mr. Stryker Warren Jr. for closing remarks. You may proceed.

Stryker Warren Jr.

Thanks very much. Again, I would like to thank everybody that have shown interest and participated in this call. On behalf of the board of directors, senior management, all employees at Urologix, I thank our loyal shareholders for your continued interest in the company. I want to assure you that it is our daily intent to create shareholder value and with that I wish you good health and good day.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a great day.

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Source: Urologix Inc. Q4 2009 Earnings Call Transcript
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